In the UK, a severance agreement is usually called a settlement agreement. This article provides general information only and is not a substitute for advice on your circumstances.

What is a severance or settlement agreement?

A settlement agreement is a legally binding contract between an employer and an employee. It may settle a workplace dispute, bring employment to an agreed end, or both. In return for compensation or another benefit, the employee normally agrees not to pursue specified claims against the employer.

Employers use settlement agreements to achieve certainty, manage legal and reputational risk, avoid lengthy procedures or litigation, and record an orderly departure. For an employee, an agreement can provide a negotiated payment, an agreed reference, clarity about notice and benefits, and a quicker, more private resolution than a contested process.

Those advantages do not mean every offer should be accepted. Signing usually involves giving up potentially valuable legal claims and accepting continuing obligations. An employee should pause where the terms are unclear, the process is rushed, the payment does not fairly reflect their position, or important rights and benefits have not been protected.

Does an employee have to accept a severance agreement when it is given to them?

No. A settlement agreement is voluntary. An employee is not obliged to accept the first offer, or any offer, and an employer should not treat a proposal as a foregone conclusion. The employee may reject it, ask questions or propose different terms.

Negotiation may cover the compensation payment, notice pay, accrued holiday, bonus or commission, pension contributions, share incentives, benefits, the termination date, tax wording, confidentiality, post-termination restrictions, an agreed reference and the employer’s contribution to legal fees. The strength and value of any potential claims will often influence what is reasonable.

If no agreement is reached, the employment relationship and the parties’ ordinary rights and obligations continue unless and until the employer takes another lawful step. Depending on the circumstances, that might mean continuing employment, a redundancy, disciplinary or capability process, dismissal, an internal grievance or litigation. Refusal does not itself determine whether any later dismissal is fair or lawful.

Not every right can simply be signed away. A valid statutory settlement agreement must satisfy legal conditions, identify the complaints being settled and follow independent-advice requirements. Some obligations and rights remain outside the waiver, including the ability to make a protected disclosure to an appropriate person or body, report suspected criminal conduct, cooperate with regulators or law enforcement, and enforce the agreement itself. The precise exceptions depend on the wording and the law, so they should be checked carefully.

Why can it be useful for employees to get legal oversight when reviewing severance agreements?

Independent advice is not merely a useful precaution. For the statutory waiver of employment claims to be effective, the employee must receive advice from a relevant independent adviser on the terms and effect of the agreement, particularly its effect on the ability to pursue claims. The agreement should identify the adviser, who must have appropriate insurance or indemnity cover.

A solicitor or other qualified lawyer can explain the document in plain English, assess possible claims and their value, compare the offer with contractual and statutory entitlements, and identify practical risks that may only emerge after termination. They can also negotiate amendments and ensure that important terms are recorded accurately rather than left to informal assurances.

Common provisions include:

• the termination date and arrangements for working notice or garden leave;
• salary, notice pay, holiday pay and an additional compensation payment;
• tax treatment and tax indemnities;
• bonus, commission, pension, insurance and other benefits;
• shares, options and long-term incentive plans;
• confidentiality and non-derogatory statements;
• post-termination restrictions and return of company property;
• an agreed reference and internal or external announcements;
• the claims being waived and any exclusions from the waiver; and
• a contribution towards the employee’s legal fees.

Potentially unfavourable terms include an unusually broad waiver, one-sided confidentiality obligations, excessive warranties, wide tax indemnities, repayment or clawback clauses, new or extended restrictive covenants, and wording that unintentionally sacrifices pension rights, bonus entitlements or share options. A lawyer can check the governing scheme rules and employment documents, seek suitable carve-outs, correct inaccurate assumptions and negotiate a payment or other protection where a benefit will be lost.

In what circumstances should an employee not sign a severance agreement?

An employee should not sign a severance agreement until they understand the document and are satisfied that it reflects an informed decision. Specific reasons to pause on signing any agreement include:

• they have not received independent advice;
• the wording is incomplete, inaccurate, ambiguous or different from what was agreed;
• they are being rushed, threatened or otherwise placed under undue pressure;
• the offer fails to cover contractual sums or fairly reflect credible claims;
• discrimination, harassment, victimisation, whistleblowing, family-leave or health-related issues may be involved;
• pension, bonus, commission, benefits, shares or options have not been properly addressed;
• confidentiality, warranties, indemnities or restrictions are too broad;
• the reference or announcement has not been agreed in final form;
• tax consequences are unclear; or
• the employee wishes to preserve the option of pursuing proceedings and has not assessed applicable time limits.

What should I do if I feel under pressure to sign an agreement?

Do not sign simply to meet an artificial deadline. Ask for the complete draft, request reasonable time to consider it and obtain independent advice. The ACAS Code recommends allowing at least 10 calendar days to consider the formal written terms and receive advice, although this is guidance rather than an automatic legal entitlement in every case. Keep a written record of deadlines, threats or pressure and tell your legal representative about this immediately.

What should I do if I think discrimination is involved?

Seek advice before signing and preserve relevant documents, messages and a factual chronology. Consider whether an internal grievance is appropriate. Discrimination issues may affect both the value of the claim and whether supposedly confidential negotiations can be referred to later. Strict tribunal time limits can apply, and an internal process does not usually stop time running.

What do I do if the severance payment is not what I believe I am entitled to?

Separate sums already owed, such as salary, notice and accrued holiday should be distinguished from the additional payment being offered in exchange for waiving claims. A lawyer can assess potential claims, likely compensation, litigation risk, mitigation and non-financial terms, then make a reasoned counterproposal. A larger headline figure is not always better if valuable benefits are lost or liabilities are shifted to the employee.

What should I do if I intend to bring a claim against my employer?

Do not sign until you have advice on precisely which claims would be waived and whether settlement is preferable to pursuing them. Signing a valid agreement will usually prevent an employee from bringing the claims identified in it. Obtain advice urgently on limitation dates and any need to begin ACAS Early Conciliation. Negotiations alone should not be assumed to protect a deadline.

Conclusion

A Girlings employment solicitor or other qualified lawyer can review the proposed agreement, explain the rights you would be giving up, assess whether the financial and non-financial terms meet your needs, identify hidden risks and advise on the alternatives. Where appropriate, we may also be able to negotiate improved compensation, clearer protections, an agreed reference and workable terms for your departure.

The important point is not to sign any agreement until you understand it, have received independent advice and are comfortable that the overall package protects your interests. If you have been offered a severance or settlement agreement and would like to discuss your options, please get in touch with our employment lawyers today.