Understanding Settlement Agreements
What Employees and Employers Need to Know
Settlement agreements are a common way to resolve workplace disputes. They bring an employment relationship to an end on agreed terms and should give both parties certainty. But with significant legal changes approaching, particularly around the use of non-disclosure agreements (NDAs), it has never been more important to understand what these agreements do, how they work and what the law requires.
What is a settlement agreement?
A settlement agreement is a written, legally binding contract between an employer and employee (or former employee). It is used to settle claims arising out of someone’s employment or its termination.
For a settlement agreement to be valid in law, it must:
- be in writing
- relate to specific complaints or claims
- confirm that the employee has received independent legal advice
- name the adviser and confirm their insurance status
- state that all statutory conditions have been satisfied
Claims commonly settled include:
- unfair dismissal
- constructive dismissal
- redundancy pay
- breach of contract
Settlement agreements are voluntary. No employee can be forced to sign one, and an employer cannot lawfully threaten dismissal or detriment if a worker refuses.
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Are settlement agreements legally binding?
Yes. Once both parties have signed, the agreement becomes a legally binding contract. It is one of the few ways recognised by law that an individual can waive the right to bring an employment tribunal claim.
Do employees need legal advice before signing?
Yes. An employee’s signature only becomes valid if they have received independent legal advice from:
- a solicitor, or
- a certified trade union representative
This ensures the employee understands:
- the rights they are giving up
- whether the compensation offered is fair
- whether terms such as references, confidentiality and post-termination restrictions are appropriate
Most employers contribute to the cost of legal advice.
References, restrictions and future employment
Settlement agreements often include:
References
There is no legal requirement for a reference. If you want one, its wording should be agreed and attached to the agreement. Your solicitor can negotiate this.
Non-Disclosure Agreements (NDAs) / confidentiality clauses / gagging clauses
The phrases NDA, settlement agreement, gagging clauses and confidentiality clause are often used interchangeably. However, they are not the same and it is important to understand what they are and what their role is:
- NDAs are commonly used in commercial settings to protect confidential information.
- NDAs are also commonly used within a settlement agreement. When used in this context, they are often designed to stop employees disclosing certain information about their employment particularly around harassment and discrimination. They are also sometimes referred to as confidentiality clauses or gagging clauses. These types of NDAs have caused concern and led to major legal reforms. It is this type of NDA we are referring to in this article.
Forthcoming changes
The Government has announced significant reforms that will reshape how confidentiality works in employment settlements.
The Employment Rights Bill
The Bill proposes to ban NDAs in settlement agreements that prevent workers from discussing workplace harassment or discrimination.
Key points:
- NDAs or confidentiality clauses that attempt to silence workers will be void.
- They will be permitted in narrow “excepted agreements”, expected to be tightly defined.
- Employers may still agree confidentiality at the request of the worker but how this will operate in practice is unclear.
The Government acknowledges the reforms may lead to fewer issues being resolved through settlement agreements.
Higher Education (Freedom of Speech) Act 2023
Since August 2025, universities in England have been prohibited from using NDAs to silence students, staff or speakers reporting harassment or bullying, a sign of the direction of travel more broadly.
Restrictive covenants
Some settlement agreements include post-employment restrictions, for example, preventing a former employee from:
- joining a competitor
- working with clients
- poaching colleagues
These must be reasonable and enforceable, and tailored to the individual’s role.
Restrictive covenants Vs NDAs
Restrictive covenants are very different from NDAs or confidentiality clauses. While NDAs typically prevent the disclosure of certain information, restrictive covenants deal with post-employment conduct.
They are designed to protect an employer’s legitimate business interests, not to silence concerns or prevent discussion of workplace treatment. As and when NDAs are banned, restrictive covenants will remain an important tool for employers but only when used lawfully and proportionately.
Types of restrictive covenant
Employers may include several forms of restriction in employment contracts or settlement agreements:
1. Non-compete clauses
Preventing an employee from joining a competitor or setting up a competing business, often within a defined geographical area and for a limited period.
2. Non-solicitation & non-dealing clauses
Stopping an employee from approaching or working with:
- customers
- clients
- suppliers
but only those they had contact with during their employment, unless “potential clients” are clearly and narrowly defined.
3. Non-poaching clauses
Prevent an employee from encouraging former colleagues to join them at a new organisation.
4. Confidentiality clauses
Also confusing sometimes referred to as NDAs see above), these stop an employee from sharing sensitive business information such as pricing, strategy or client data. They protect commercial information, not the reporting of harassment, discrimination or wrongdoing.
When are restrictive covenants enforceable?
Restrictive covenants are only enforceable if they are reasonable, meaning:
- they protect a legitimate business interest, and
- they go no further than necessary to protect that interest.
Common business interests include:
- Customer connections – ensuring valuable relationships aren’t taken to a competitor.
- Confidential information – preventing misuse of data that gives a commercial advantage.
- Stability of the workforce – protecting against teams being poached.
If a restriction is too broad, too long, or unrelated to the actual job role, it may be unenforceable.
Restrictive covenants in settlement agreements
Settlement agreements often require an employee to reaffirm the restrictive covenants already in their employment contract. Because the employee receives legal advice as part of the process, this makes the covenants more likely to be enforceable.
Employers may also seek to add new post-termination restrictions. If existing covenants are outdated or inadequate, the employer may try to introduce new ones as part of the settlement. This is a matter for negotiation and legal advice is essential.
Next steps
With reforms to the use of NDAs approaching, employers should now review any existing settlement agreement templates they use as well as their employment contracts, confidentiality clauses and restrictive covenants.
Best practice now is to clearly set out when disclosures are permitted, ensuring no ambiguity around protected conversations. Employers relying on outdated templates risk creating unenforceable or unlawful clauses.
If you would like to discuss any of the issues raised in this article, please get in touch.
The legal content provided by RSW Law Limited is for information purposes only and should not be relied on in any specific case without legal or other professional advice.
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