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A proposed exit can look financially attractive until you reach the clauses restricting what happens after you leave. This guide to settlement agreement restrictive covenants explained sets out what these terms can mean in practice, whether they remain binding, and what to check before you sign away rights or limit your next career move.

What are restrictive covenants in a settlement agreement?

Restrictive covenants are contractual promises that limit certain activities after employment ends. They are often called post-termination restrictions. Their usual purpose is to protect an employer’s legitimate business interests, such as confidential information, client relationships and the stability of its workforce.

A settlement agreement may refer back to restrictions already contained in your employment contract. It may also restate them, amend them or introduce new restrictions. The wording matters. A short sentence confirming that existing covenants continue can have a significant effect if your contract contains detailed non-compete, non-solicitation or non-dealing clauses.

The most common restrictions prevent a departing employee from joining a competitor for a period, approaching clients or prospective clients, dealing with former clients, encouraging colleagues to leave, or recruiting staff. They may apply for three, six, nine or 12 months, depending on the role and the business concerned.

Not every restriction is enforceable simply because it appears in a document. Under English law, a covenant must go no further than reasonably necessary to protect a legitimate business interest. However, that is not a reason to dismiss the clause. A dispute about enforceability can be expensive and stressful, particularly when a new employer is waiting for certainty.

Do existing restrictive covenants survive a settlement agreement?

Often, yes. A settlement agreement typically ends the employment relationship but preserves obligations intended to continue afterwards. Confidentiality duties and restrictive covenants are common examples.

Look carefully for phrases such as “the post-termination restrictions in the contract remain in full force and effect” or “nothing in this agreement releases the employee from continuing obligations”. These provisions can preserve restrictions even where the settlement agreement itself does not repeat every clause.

The position can differ where the agreement states that it replaces all previous arrangements, or expressly releases you from particular covenants. That is why the agreement and your employment contract need to be read together. Reviewing only the settlement agreement can leave an important gap.

For employees, the practical question is not only whether a restriction could ultimately be enforced. It is whether it might interfere with a job offer, a planned consultancy role or the launch of a new business. For employers, clarity avoids later arguments about what was intended to survive termination.

The main types of restrictive covenant

Non-compete clauses

A non-compete clause seeks to stop you working for, setting up or being involved in a competing business for a defined period. This is usually the most restrictive type of covenant, so it requires careful scrutiny. A broad ban on working for any competitor in any capacity may be difficult to justify, especially if your new role does not involve the same clients, confidential information or strategic responsibilities.

The assessment is highly fact-specific. A senior executive with access to pricing strategy and key client plans may face a stronger restriction than an employee with limited commercial exposure. The length of the restriction and the market it covers are also relevant.

Non-solicitation and non-dealing clauses

A non-solicitation clause stops you actively approaching customers, clients, suppliers or colleagues. A non-dealing clause is wider: it can prevent you from doing business with a former client even if that client approaches you first.

The definition of “client” deserves close attention. It may be limited to people you dealt with personally in the previous 12 months, or it may be drafted much more broadly to include anyone known to the employer. A fairer and more workable clause is usually tied to relationships you had material involvement with or knowledge of.

Non-poaching clauses

These clauses restrict attempts to recruit former colleagues. They are usually intended to protect a team from being dismantled after a senior employee leaves. The provision should be clear about which employees are covered and whether it applies only to active solicitation, rather than a colleague independently applying for an advertised vacancy.

Confidentiality and non-disparagement

These are not always restrictive covenants in the strict legal sense, but they often sit alongside them. Confidentiality clauses may protect trade secrets and commercial information, while non-disparagement provisions seek to prevent damaging public statements.

They should not prevent protected disclosures, reporting wrongdoing, cooperating with regulators, or giving truthful evidence where legally required. A settlement agreement should make those limits clear.

What should you check before signing?

First, identify every restriction that may apply. This means checking the settlement agreement, the employment contract, any later variation agreement, bonus or share-plan documents, and sometimes a shareholders’ agreement. Senior employees may have obligations in more than one document.

Next, compare the restrictions against your actual plans. If you have a job offer, consider the duties, employer, territory and start date. If you are considering self-employment, think about the clients you expect to work with and whether you may employ former colleagues. A clause that is manageable in theory may be unworkable in a small specialist sector.

It is also sensible to check whether the settlement agreement includes garden leave or payment in lieu of notice. Time spent on garden leave may reduce the practical impact of a later restriction, but this depends on the drafting. Do not assume periods automatically run together.

Before accepting the payment on offer, consider whether you are being asked to give anything extra in return. If new or wider covenants are being introduced, that may be a proper point for negotiation. The compensation package, notice pay, bonus, holiday pay, reference and restrictions should be considered as a whole.

Can restrictive covenants be negotiated?

Yes. Settlement agreements are voluntary documents, and restrictive covenants are regularly negotiated. The best approach is usually specific and practical rather than confrontational. Explain why the clause affects a genuine next step and propose wording that protects the employer without unnecessarily blocking your future work.

Possible changes may include reducing a six-month restriction to three months, narrowing a client definition, removing prospective clients, limiting a non-compete clause to a particular business area, or adding written consent provisions. If you already have a new role lined up, it may be possible to obtain an express carve-out for that employer and position.

A release from restrictions can be valuable, but it is not always the right outcome. An employer may have legitimate concerns, particularly where a departing employee holds sensitive information or strong client relationships. In that case, a narrower covenant can offer a better balance than an all-or-nothing argument.

Employers should avoid using standard wording without considering the employee’s role. Overly broad restrictions can create delay, damage goodwill and make an otherwise amicable exit harder to achieve. Targeted terms are more likely to be commercially sensible and legally defensible.

Independent advice gives you a clear starting point

For a settlement agreement to validly waive statutory employment claims, the employee must receive advice from an independent adviser on its terms and effect. That advice should include more than the headline compensation figure. Restrictive covenants, confidentiality, tax treatment, reference wording and the claims being waived all deserve proper consideration.

At Arcos Settlement Agreements, the focus is on clear, independent advice in plain English. A careful review can identify whether restrictions are being preserved, widened or introduced for the first time, and whether changes should be requested before you commit.

Do not treat post-termination restrictions as small print. The right wording can protect a business without closing off your next opportunity, and it is far easier to resolve that balance before the agreement is signed.

Being told not to return to work can make garden leave feel different from ordinary employment. Tax-wise, however, the answer to “are garden leave payments taxable” is usually straightforward: yes. If you remain employed and continue to receive your normal salary during garden leave, those payments are normally taxed through PAYE and subject to National Insurance in the usual way.

That does not mean every payment made around the same time will be treated identically. A settlement agreement may include notice pay, holiday pay, bonus, benefits and a termination payment. Each element needs to be identified clearly before you decide whether the proposed figures are fair.

What garden leave means for tax

Garden leave is a period during your notice period when you remain employed but are not required to carry out your normal duties. Your contract may require you to be available, keep information confidential, avoid working elsewhere and comply with restrictions on contacting clients or colleagues.

The key point is that your employment has not yet ended. You are still receiving pay under your contract, rather than compensation for the loss of your job. HMRC will generally treat salary paid during this period as employment income.

Your employer should deduct income tax and employee National Insurance contributions before paying you. The employer will also usually account for its own National Insurance contributions. Your payslip should show the deductions in the same way it did before garden leave started.

For many employees, this is the simplest arrangement. You continue to receive monthly pay, pension contributions may continue, and benefits such as private medical insurance or a company car may remain available if your contract or agreement says so. The fact that you are at home does not make the pay tax-free.

Why garden leave is different from a tax-free termination payment

The tax-free treatment often associated with settlement agreements can cause understandable confusion. A genuine termination payment may, in some circumstances, be paid tax-free up to £30,000. But that exemption does not apply to ordinary salary, contractual notice pay or payments made for time during which you remain employed.

Garden leave pay is normally contractual remuneration. It therefore sits outside the £30,000 exemption.

The same principle applies where an employer calls an amount “compensation” but it is really payment for notice, salary, commission already earned or holiday accrued. Labels are not decisive. What matters is the legal and practical reason for the payment.

Where notice is not worked, tax treatment can also be affected by the post-employment notice pay rules, often referred to as PENP. These rules can bring part of a termination payment into tax where it represents basic pay for unworked notice. Garden leave usually avoids that particular issue because notice is being worked in the sense that the employment continues, even if duties do not.

Payments commonly included alongside garden leave

A proposed exit package can contain several separate sums. It is worth asking for a clear written breakdown, particularly if the total figure is presented as one headline amount. The following items are commonly taxed as earnings:

• salary paid during garden leave;
• pay in lieu of notice, where payable under the contract or caught by PENP rules;
• accrued but untaken holiday pay;
• bonuses, commission and other incentives that have been earned or are contractually due; and
• taxable benefits or cash allowances continuing during employment.

A discretionary bonus needs closer attention. Your contract may say that you must be actively employed, not under notice, or not on garden leave on the payment date. Alternatively, it may give the employer a broad discretion. The position depends on the wording, established practice and the circumstances of your departure. It should not simply be assumed that no bonus is payable.

Pension contributions also deserve specific attention. If you are on garden leave, your contractual pension arrangements may continue until the termination date. If a settlement agreement proposes that contributions stop earlier, or offers a cash alternative, obtain advice on both the value and tax consequences.

How a settlement agreement should deal with tax

A carefully drafted settlement agreement should separate the payments due to you and explain the intended tax treatment. It should state the amount of salary or garden leave pay, notice pay, holiday pay, any bonus or commission, and any payment described as compensation for termination.

Most agreements contain a tax indemnity. This is a clause saying that if HMRC later seeks tax, National Insurance, interest or penalties on sums paid to you, you may have to reimburse the employer. Such clauses are common, but they should not be treated as a reason to accept an unclear allocation of payments.

You should check that the agreement does not attempt to describe taxable earnings as tax-free compensation simply to make the offer appear more generous. If HMRC takes a different view later, the risk may be passed back to you through the indemnity. Clear drafting and a realistic tax analysis protect both sides.

There may also be a clause allowing the employer to make deductions required by law. That is standard. It does not give the employer a free hand to deduct sums without explanation. Ask for an estimated net payment schedule where possible, especially if you need to plan rent, mortgage payments or the period before your next role begins.

Timing can affect your net position

Garden leave pay is usually processed through the normal payroll cycle. If a large bonus, holiday payment or taxable benefit is paid in the same month, PAYE may initially make the deduction look higher than expected. This does not always mean too much tax has been paid overall, but it can affect cash flow.

Your tax code, other employment income and the date your new job begins can all alter the final position. If you leave one employer and start another during the same tax year, make sure your P45 is provided and give it to your new employer promptly. This helps the correct code be applied.

The tax year end can matter too. An exit in late March rather than early April may affect when income falls for tax purposes, although it is rarely sensible to make a major employment decision on tax timing alone. The strength of the settlement terms, your notice rights and the security of your next step normally matter more.

A practical check before you sign

Before accepting a settlement agreement that includes garden leave, compare the proposal against your employment contract and recent payslips. Check the start and end dates of garden leave, your gross salary, pension contributions, benefits, bonus provisions and accrued holiday.

Then look closely at the payment schedule. Does it distinguish salary paid up to termination from a genuine termination award? Is tax being deducted from the sums that are clearly taxable? Does the agreement explain what happens if you secure another role before garden leave ends? Some contracts allow an employer to reduce or offset payments if you start work elsewhere, while others do not.

You should also consider the non-financial terms. Garden leave can affect when you may join a competitor, communicate with customers or announce your departure. A settlement agreement may include new or extended restrictions, confidentiality obligations and agreed reference wording. A higher headline payment may not be a fair trade if the restrictions are wider than your contract allows.

When independent advice is particularly useful

Independent legal advice is required for a settlement agreement to validly waive statutory employment claims. The adviser’s role is not limited to witnessing your signature. They should explain what claims you are giving up, whether the financial terms reflect your rights, and whether tax wording or restrictive covenants create avoidable risk.

Advice is especially valuable where garden leave runs for several months, bonus or commission is disputed, the agreement combines several types of payment, or the employer has offered a figure said to be tax-free without a clear breakdown. Senior employees may also need to consider share schemes, deferred incentives and director obligations.

Arcos Settlement Agreements provides clear, independent advice on the terms as a whole, including how garden leave and tax clauses fit within the proposed exit. If a separate accountant’s input is needed for complex personal tax planning, that can be identified early rather than after the agreement is signed.

Garden leave should give you breathing space, not leave you guessing about your income. Ask for the figures in writing, check what remains payable until your employment ends, and make sure the agreement reflects the real nature of every payment before you commit.

A proposed settlement agreement may arrive with a line saying your employer will contribute to your legal costs. That is helpful, but it rarely answers every question. Agreement review fees can vary depending on the document, the circumstances of your exit and whether the terms need negotiating. Knowing what the contribution is intended to cover helps you make a clear decision before you sign away valuable employment rights.

For most employees, the key point is simple: a settlement agreement is not legally valid unless you receive advice from an independent adviser. Your employer will therefore commonly offer a contribution towards that advice. It is not a favour, and it should not be treated as part of the compensation for ending your employment. It is the practical cost of making the agreement enforceable.

What are agreement review fees?

Agreement review fees are the legal fees charged for advising you on a proposed settlement agreement. The work usually begins with reading the agreement and the accompanying termination letter or offer. Your adviser should then explain, in plain English, what claims you are being asked to waive, what you will receive in return and whether the terms properly protect your position.

A useful review is more than a signature on an adviser’s certificate. It should consider whether the compensation reflects the circumstances, whether notice pay and holiday pay have been dealt with correctly, and whether the tax wording is sensible. It should also cover practical terms that can affect your next role, including the agreed reference, confidentiality obligations, post-termination restrictions and the announcement to colleagues or clients.

Where the agreement is straightforward and the offered terms are acceptable, the review may be completed quickly. Where there are concerns about discrimination, whistleblowing, a grievance, bonus entitlement, shares, restrictive covenants or senior-level duties, more detailed advice may be needed. That is why one fixed contribution does not always cover every case.

Who normally pays agreement review fees?

In the UK, employers commonly contribute towards the employee’s independent legal advice. A typical contribution is often in the region of £350 to £500 plus VAT, although the figure varies. Some employers offer more where the agreement is detailed, the employee is senior, or negotiations are anticipated.

The contribution is usually paid directly to the solicitor after the advice has been given. You should check the agreement or the employer’s offer carefully. It should state the amount available, whether VAT is included, and whether payment is conditional on you signing. In most cases, a solicitor can invoice the employer even if you decide not to sign, provided the employer has agreed to meet the advice costs. The exact position depends on the wording of the offer.

An employer may ask you to use a particular law firm, but the adviser must be genuinely independent. You are entitled to choose an appropriately qualified independent solicitor, barrister or certified adviser. The person advising you cannot also be acting for your employer in relation to the agreement.

Is the employer’s contribution enough?

It depends on what needs to be done. For a clear agreement with no changes required, the employer’s contribution may meet the full cost of advice. For a document that requires negotiations or several rounds of drafting, the fee may exceed the contribution.

This does not automatically mean you should pay the difference yourself. If the agreement needs material amendment, it can be reasonable to ask the employer to increase its contribution. For example, an employer may be asked to cover further fees where there is a dispute over the tax treatment of payments, an unclear reference, an overbroad non-compete clause or a proposed waiver of claims that is wider than expected.

Before instructing an adviser, ask for clarity about the scope of the quoted fee. Does it include a consultation, review of supporting documents, advice on the settlement sum, and reasonable amendments to the agreement? Is negotiation with the employer included, and if not, what would it cost? Clear answers prevent an unexpected bill at an already stressful time.

What should your legal advice cover?

Independent advice should give you a practical view of the agreement, not simply repeat its wording. You should understand what you are giving up and what would happen if you declined the offer.

Your adviser will normally check whether the statutory requirements for a valid settlement agreement are met. The agreement must be in writing, relate to particular complaints or proceedings, identify the independent adviser and confirm that the relevant legal conditions have been satisfied. It should not use vague wording to prevent you from pursuing rights you have not properly had explained to you.

The financial provisions deserve close attention. A settlement payment can be made up of several elements, such as notice pay, accrued holiday, unpaid salary, bonus, compensation for loss of employment and an employer contribution to legal fees. These amounts may have different tax treatment. A figure described as an ‘ex gratia’ payment is not automatically tax-free, particularly if it is actually payment for notice or another contractual entitlement.

The non-financial terms can be equally significant. A good agreement should be workable after you leave. If you need a reference for future applications, its wording should be agreed and attached where possible. If you are bound by confidentiality provisions, you should know what you can still say to your family, prospective employer, professional advisers and relevant authorities. If restrictions limit where you can work next, they should be reviewed carefully rather than accepted as boilerplate.

When should you seek a higher fee contribution?

You may have a good reason to request a higher legal-cost contribution where the proposed agreement is unusually lengthy, the facts are contested or the financial package is substantial. The need is particularly common for directors, senior managers and employees with commission arrangements, long-term incentive plans, shares or complex bonus rights.

It may also be appropriate where you have raised, or may have grounds to raise, a grievance or tribunal claim. A settlement agreement is intended to bring certainty, but that certainty must be properly priced. If you may be giving up claims for unfair dismissal, discrimination, unpaid wages or breach of contract, the proposed compensation and the legal costs needed to assess it should reflect the real issues.

A request for a greater contribution need not be confrontational. It can be framed as a practical point: the agreement requires additional review and amendments before you can receive fully informed independent advice. Employers who want a reliable and amicable exit often recognise that properly funded advice benefits both sides.

Do not let the fee limit the advice you receive

A contribution towards legal costs is useful, but it should not rush you into accepting terms you do not understand. Settlement agreements often include a deadline, sometimes with pressure to respond quickly. A short deadline does not remove the need for proper advice, and it is reasonable to ask for more time where the circumstances require it.

Send your adviser the full agreement, any offer letter, your contract of employment, relevant correspondence and details of your concerns. Be open about what matters most to you. For one person, that may be improving the compensation figure. For another, it may be securing a neutral reference, preserving a bonus payment or removing a restriction that could affect a new job.

At Arcos Settlement Agreements, the focus is on clear, independent advice that helps you understand both the legal wording and the practical consequences. The purpose of the review is not to create conflict where none is needed. It is to ensure you can decide whether the proposed terms are fair and whether they give you the certainty you need.

Before agreeing to any settlement, treat the legal-fee contribution as the starting point for informed advice, not the limit of what you are entitled to ask. A carefully reviewed agreement can protect your finances, reputation and next step at work long after the document is signed.

A settlement agreement may arrive after a difficult meeting, during a redundancy process or when a workplace relationship has broken down. The top settlement agreement negotiation tactics are not about creating conflict for its own sake. They are about understanding what you are being asked to give up, identifying the terms that genuinely matter and making a calm, evidence-based request for a fairer outcome.

Once signed, a valid settlement agreement can prevent you from bringing most employment claims connected with your employment or its termination. That is why the document, the payment and the practical wording around your future all deserve careful attention before you agree to anything.

Start with the full picture, not just the payment

The headline figure is often the first thing people see. It is rarely the whole deal. A proposed payment may include sums you are already entitled to receive, such as salary up to your leaving date, accrued but untaken holiday, notice pay, bonus or commission. Those contractual sums should be separated from the additional compensation offered in return for settling potential claims.

Ask for a clear breakdown. This allows you and your adviser to assess whether the employer is offering meaningful compensation, rather than simply repackaging existing entitlements. It also helps establish the correct tax treatment. Payments for notice, holiday and wages are normally taxable, while some compensation payments may be paid tax-free up to the applicable statutory limit, subject to the circumstances and drafting.

Your negotiating position will depend on the facts. Relevant issues can include the strength of any potential claims, the employer’s process, your length of service, the impact of the departure on your career, seniority, notice entitlement and how quickly you are likely to find another role. A reasonable proposal is not always the highest possible figure. It is one that properly reflects what you are waiving and gives you confidence to move forward.

Top settlement agreement negotiation tactics that work

Take independent advice before responding

A settlement agreement is only legally effective if you receive advice from an independent adviser on its terms and effect. The employer will commonly contribute towards the cost. That contribution is useful, but it does not mean the adviser works for the employer. Your adviser’s duty is to you.

Do not assume a short deadline means you must sign immediately. Employers often set a timescale to keep matters moving, and a genuine offer should allow reasonable time for advice. If the agreement is lengthy, the issues are sensitive or you need supporting information, it may be appropriate to ask for an extension.

Independent advice also changes the quality of the conversation. Rather than replying emotionally or accepting vague assurances, you can make focused requests based on the wording, your legal position and the practical consequences of signing.

Prioritise the terms with lasting value

Not every clause deserves the same attention. Concentrate first on the points that could affect your finances, reputation or next role. For many employees, these are the compensation sum, payment date, reference, restrictive covenants, confidentiality obligations and tax indemnity.

A reference can be as valuable as additional compensation, especially where you are seeking a new role quickly. Ask for the agreed wording to be attached to the agreement or otherwise clearly specified. A promise to provide a reference is less useful if the content is left uncertain. For senior employees, it may also be sensible to address internal and external announcements, handover communications and who will respond to reference requests.

Restrictive covenants need particular care. An agreement may repeat existing restrictions, but it can also seek to introduce broader obligations after employment ends. Consider whether restrictions on joining a competitor, contacting clients, recruiting colleagues or working in a particular area are reasonable and workable for your plans. Do not accept a new limitation simply because it is presented as standard wording.

Build your request around facts, not threats

The strongest negotiation is usually measured and specific. Explain the issue, identify the change needed and give a practical reason. For example, if a proposed payment does not reflect a long notice period or the potential loss of a bonus, ask for the calculation to be reconsidered. If the reference is too limited, propose agreed wording that accurately reflects your role and dates of employment.

You do not usually need to set out every possible legal claim in an opening response. A broad or aggressive allegation can make an amicable resolution harder. Equally, you should not minimise legitimate concerns. An experienced adviser can help decide what should be raised, how much detail is appropriate and whether the employer’s offer reflects the risks it is seeking to resolve.

Keep records of key events, relevant correspondence, performance reviews, grievance documents and pay information. These materials may support a negotiation, but they also help you assess the position privately before deciding whether settlement is right for you.

Negotiate the agreement as a package

A settlement agreement is not simply a cheque in exchange for a signature. The terms should work together. An improved payment may be welcome, but it may not compensate for an unfair tax indemnity, an unhelpful announcement or restrictions that make it difficult to secure your next job.

Tax clauses are a good example. Employers often ask employees to indemnify them if HMRC later finds that tax or National Insurance should have been paid. Some protection for the employer may be understandable, but the clause should not make you liable for the employer’s own errors or for tax that arises because it has structured the payment incorrectly. The drafting should reflect the payment breakdown and be reviewed carefully.

Confidentiality clauses should also be proportionate. It is common for an agreement to protect confidential business information and the settlement terms. However, you should retain the ability to speak to your legal, tax and financial advisers, close family where appropriate, and relevant authorities or regulators. The agreement must not prevent protected disclosures, often known as whistleblowing.

Be clear about what happens next

Check the leaving date, notice arrangements and whether you are expected to work, garden leave or receive payment in lieu of notice. Confirm when each payment will be made, whether expenses and holiday are included, and whether benefits such as private medical cover continue to a stated date.

If you hold shares, options, deferred bonus awards or commission rights, do not leave them to assumption. These arrangements often sit under separate plans with detailed rules. The settlement agreement should deal clearly with treatment on termination, or refer accurately to the relevant documents.

For employers, certainty comes from the same clarity. A well-drafted agreement should identify the claims being settled, meet the legal requirements for a valid waiver and avoid ambiguous promises that create a fresh dispute later. A fair process and realistic terms are generally more effective than pressure.

When accepting may be the sensible choice

Negotiation is not always necessary, and it is not always commercially wise to pursue every point. An offer may already provide fair compensation, a suitable reference and clean terms for departure. Where the employment relationship has reached its end, accepting a sound agreement can provide certainty, privacy and the chance to focus on your next role.

The question is not whether you can ask for more. It is whether the final terms fairly reflect your circumstances and protect your future. Your adviser should explain the strengths and limits of your position in plain English, including where a proposed change is realistic and where it may not be.

A practical way to approach the conversation

Before replying, gather the agreement, your contract, recent payslips, bonus or commission documents, any relevant correspondence and the proposed reference if one has been provided. Write down your priorities in order. You may care most about a financial cushion, while someone else may place greater value on an agreed announcement or the removal of a restrictive covenant.

Then obtain independent advice and make a concise, structured response. It is often better to ask for a limited number of meaningful amendments than to argue over every line. If the employer makes a revised offer, review the entire document again. A change to one clause can affect another.

A settlement agreement should leave you with clarity rather than lingering uncertainty. Taking calm, confidential advice before you sign gives you the space to make a decision that protects both your rights and your next step.