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You’re being made redundant, or leaving under a cloud. The employer hands you a “Settlement Agreement” (formerly called a “Compromise Agreement”). They offer you £10,000 tax-free to go quietly, in exchange for waiving your rights to bring claims against them.

By law, you must see a solicitor before signing—otherwise, the agreement isn’t valid. But here’s the catch: the solicitor’s fee (usually paid by your employer) only covers a basic check that you understand what you’re signing. Unless you pay extra, they rarely negotiate the commercial terms for you.

That means you need to know if the deal is fair—and what to ask for—before you even get to the lawyer’s office.

Who This Is For

• Employees facing redundancy or dismissal

• Anyone negotiating an exit, whether amicable or contentious

• Senior managers, long-serving staff, and junior employees alike

If you’re being asked to sign a settlement agreement, these are the pitfalls to watch for.

The Clauses That Can Cost You (and How to Protect Yourself)

1. The “Tax Indemnity” Risk

The Scenario:
Your employer pays you £30,000 “tax-free.” The agreement says: “Employee indemnifies Employer against any tax demands from HMRC.” A year later, HMRC decides the payment was actually taxable salary (e.g., Payment in Lieu of Notice—PILON), not redundancy. They bill your employer, who then uses the indemnity to recover the tax and interest from you.

Why It’s a Trap:
This is a standard clause, but it can leave you on the hook for thousands if the payment was structured incorrectly. PILON and holiday pay are always taxable, even if labelled “ex gratia.” Only genuine redundancy payments (up to £30,000) are tax-free.

What to Do:

• Check what each payment is for. Ask for a breakdown: redundancy, PILON, holiday pay, ex gratia.

• Don’t let the employer inflate the “headline” number by mislabelling taxable pay as “ex gratia.”

• If in doubt, ask for the employer to cover any tax risk, or at least limit your indemnity to tax on the genuine ex gratia element.

2. The “Bad Reference” Fear

The Scenario:
You leave, then apply for a new job. The new employer asks for a reference. Your old HR writes: “XX worked here from 2020 to 2024. During this time there were performance concerns.” You lose the job. The settlement agreement didn’t mention references.

Why It’s a Trap:
Without an agreed reference, your old employer can give a “factual” reference or even hint at issues, damaging your future prospects.

What to Do:

• Insist on an “Agreed Reference” attached to the agreement (as a schedule).

• The agreement should state: “Employer will provide the reference attached at Schedule 1 and will not provide further information.”

• This guarantees a neutral or positive reference and stops the employer from answering follow-up questions.

3. The “Clawback” Clause

The Scenario:
You receive your payout. Later, you breach a minor confidentiality term (e.g., you mention your payout to a colleague). The employer invokes a “clawback” clause, demanding the entire £10,000 back.

Why It’s a Trap:
Some agreements allow clawback for any breach, no matter how minor.

What to Do:

• Clawback should only apply to material breaches (e.g., disclosing trade secrets or disparaging the company publicly), not trivial slips.

• Ask for the clause to be limited to “material and wilful” breaches, and for a right to remedy any accidental breach before clawback is triggered.

4. Waiving “Personal Injury” Claims

The Scenario:
You sign a waiver “in full and final settlement of all claims.” Six months later, you’re diagnosed with a work-related injury (e.g., RSI or stress). You can’t sue—your waiver covered all claims, even those you didn’t know about.

Why It’s a Trap:
Many agreements try to waive all claims, including for personal injury or pension rights.

What to Do:

• Ensure the waiver carves out “personal injury claims of which the employee is not aware at the date of this agreement” and “accrued pension rights.”

• You cannot lawfully waive claims for injuries you don’t know about—make sure the agreement reflects this.

Other Common Pitfalls

• Confidentiality: Some agreements are so broad you can’t even tell your family you got a payout. Ask for the right to disclose to close family, legal, and financial advisers.

• Non-Disparagement: Watch for clauses that prevent you from ever criticising the company, even if you’re asked for a reference by a regulator.

• Outplacement Support: If you’re a senior employee, ask for outplacement or career coaching as part of the deal.

Why AI Contract Review Helps

You have to pay a lawyer anyway, so why use AI? Because the lawyer’s fee (usually £350–£500, paid by your employer) covers only the legal sign-off, not a commercial negotiation. AI contract review acts as your personal checklist, flagging missing or risky clauses—“No agreed reference,” “Tax indemnity is too broad,” “No carve-out for latent injuries.”

It gives you a shopping list of improvements to hand to your solicitor:

• “I want an agreed reference.”

• “Please add a carve-out for unknown personal injury claims.”

• “Limit the clawback to material breaches only.”

With clear instructions, your solicitor can negotiate a better deal—often at no extra cost to you.

Final Thought

A settlement agreement is your last chance to protect your reputation, your finances, and your future. With the right knowledge and tools, you can leave on your own terms—not just quietly, but confidently.

Disclaimer: This content is for general information only and does not constitute legal, financial, or tax advice. Outcomes may vary depending on your individual circumstances.