Five Warning Signs to Watch for in a Settlement Agreement
Settlement agreements are legally binding contracts used to formally end the employment relationship on mutually agreed terms. When properly drafted, they can offer closure and financial reassurance for both parties. However, some agreements may contain clauses that unfairly disadvantage the employee or fail to reflect the true value of what is being waived. Here are five warning signs to watch for before signing a settlement agreement — and why securing specialist legal advice is critical to protecting your position.
1. Ambiguous or Poorly Defined Terms
Settlement agreements should clearly define the obligations of both employer and employee. Clauses that are vague — for example, referencing “standard entitlements” or “future cooperation” without explanation — can create uncertainty and risk. Unclear language around payments, tax treatment, post-termination restrictions, or future liabilities can result in misunderstandings or disputes after the agreement is signed. Terms relating to confidentiality, references, or waiver of claims should be precise and leave no room for multiple interpretations. Always seek clarification or revisions where terms are broad or open-ended. Ambiguity rarely benefits the employee.
2. Inadequate Compensation for Waived Rights
A settlement agreement typically involves the employee waiving their right to bring statutory and contractual claims — including for unfair dismissal, discrimination, breach of contract, unpaid wages, or holiday pay. If the compensation offered (often referred to as an “ex gratia payment”) is disproportionately low compared to what you might expect to receive via tribunal proceedings or redundancy, that’s a serious red flag. Factors to consider include length of service, notice pay (contractual vs statutory), statutory redundancy entitlement, potential claims under the Equality Act 2010 or Employment Rights Act 1996, and ACAS early conciliation outcomes in comparable cases. A solicitor can assess whether the financial terms reflect the real value of your legal rights — and negotiate for a better outcome if not.
3. Excessive or Unreasonable Restrictive Covenants
Many settlement agreements include post-termination restrictions such as non-compete clauses, non-solicitation terms, or confidentiality obligations. While these are legitimate in many contexts, overly broad restrictions can be unenforceable and harmful to your ability to work. Watch for long timeframes (e.g. 12+ months), wide geographic scope, broad definitions of “competition” or “client,” and lack of financial consideration for new or extended restrictions. Unless such clauses are properly limited in scope and justified by a legitimate business interest, they may be considered restraints of trade and could be challenged. Legal advice is essential when restrictive covenants are included or altered in a settlement agreement.
4. No Reference or an Unhelpful One
A reference isn’t always guaranteed, but where it is included, it must be accurate and consistent with any internal records. Settlement agreements often attach an agreed reference as a schedule — usually a brief, factual statement of employment dates and role. However, some agreements leave this entirely out, or contain wording that allows for a “neutral” or “discretionary” reference — which may not benefit you. An agreed reference provides protection and consistency during future job applications. If it’s not included, ask for it.
5. Pressure to Sign Quickly or Waive Legal Advice
Under the Employment Rights Act 1996, a settlement agreement is only legally valid if the employee receives independent legal advice from a qualified adviser (usually a solicitor). You must also be given a reasonable period to consider the terms — typically at least 10 calendar days, as per ACAS guidance. Being asked to sign “on the spot” or being discouraged from seeking legal advice are major red flags. Some employers may attempt to fast-track the process by downplaying the importance of legal review or implying the offer will be withdrawn. Do not sign under pressure. You have a legal right to independent legal advice — and your employer will usually contribute to the cost.
Conclusion: Protecting Your Interests
A well-prepared settlement agreement can provide closure, certainty, and compensation. But signing one without proper legal scrutiny can lead to regret, financial loss, or long-term career limitations. At Pembridge Solicitors, we specialise in reviewing and advising on settlement agreements across a wide range of industries and employment levels. We provide clear, practical advice, explain your rights in full, and help you negotiate better terms when needed — all with transparent, fixed-fee pricing. If you’ve been offered a settlement agreement, don’t sign it until we’ve reviewed it.
Contact Pembridge Solicitors for expert legal advice:
Pembridge Solicitors
Cheltenham, Gloucestershire
0330 900 0377
info@pembridgesolicitors.co.uk
