Settlement agreement with restrictive covenants

Restrictive covenants in an employment contract may be too wide to enforce, may have been overtaken by a promotion, or may fall away if the employer ends the employment in breach, and the settlement agreement is the last chance to fix them: the settlement payment is consideration for new or reaffirmed covenants, the termination date fixes the restricted period, and the agreement can add the undertakings, the repayment on breach and the obligations towards a new employer that make the covenants worth having. For many departures the covenants are the real value of the agreement. The agreement is drafted for the employer, with a note on how to have the conversation, for a fixed £795 in three working days; where the employer wants the negotiation with the employee's adviser handled as well, the fee is £995.

Who this is for

Employers in England and Wales parting with an employee who holds client relationships, confidential information or influence over colleagues, and employers whose contracts have covenants they are not sure would hold.

What matters in a settlement agreement with covenants

Why the settlement is the moment to fix the covenants

Covenants are judged at the date they were entered into and fall away entirely if the employer terminates the employment in repudiatory breach, so an employer whose contract has doubtful covenants, or whose exit might otherwise be a breach, uses the settlement to put the covenants on a fresh footing: the employee gives new or reaffirmed covenants in return for the settlement payment, the termination is by agreement rather than by breach, and the covenants are tailored to the employee's role as it was at the end rather than as it was at the start; the agreement is drafted so that the covenants stand on their own if the original contract's are challenged.

Reaffirming existing covenants and the consideration that supports it

Where the existing covenants are sound, the agreement should reaffirm them expressly, confirm that the employee has complied with them to date, state that the settlement payment is consideration for the reaffirmation (a specific sum allocated to the covenants is usual, and is taxed as earnings rather than exempt up to thirty thousand pounds under section 403 of the Income Tax (Earnings and Pensions) Act 2003, which the accountants confirm), and record the termination date from which the restricted period runs; the reaffirmation should set out the covenants in full rather than by reference, because the employee's adviser will ask to see what is being reaffirmed and the court will read the settlement.

Replacing weak covenants with ones that will hold

Where the existing covenants are too wide, out of date or absent, the agreement should contain new ones drafted for the employee's actual role at the end: non-solicitation and non-dealing with the clients and prospects the employee dealt with in a stated final period, non-poaching of named or defined colleagues, non-interference with suppliers where the role justifies it, and a non-compete only where the other covenants would not protect the employer, for a period measured in months, each as a separate clause with a severance provision; the settlement payment is the consideration, and the employee's adviser will test the width, which is why covenants drafted at the scope a court will uphold settle faster than ambitious ones.

Garden leave, the restricted period and the dates

The agreement should state the termination date, any garden leave served before it, and the restricted period running from termination with any garden leave credited against it so that the total restraint stays reasonable, should say what the employee may do during garden leave (nothing for anyone else, no contact with clients or colleagues, availability for handover), and should fix the dates so that the employee, the employer and a new employer can all see when the restrictions end; a covenant with an uncertain start date is argued, and one with a clear end date is observed.

Repayment, undertakings and the remedies for breach

The agreement should make part of the settlement payment (or the whole of a sum allocated to the covenants) repayable if the employee breaches the covenants, the confidentiality terms or the warranties, should contain the employee's undertakings (that they have returned all property and data, retain no copies, have not solicited clients or colleagues, and will tell the employer of any approach), should preserve the employer's right to an injunction and damages in addition to repayment, and should record that the employee has had independent advice on the covenants as well as on the waiver; a repayment clause gives the employer a remedy that does not require proof of loss, which is why it matters.

The new employer, the announcement and policing the covenants

The agreement should require the employee to show the covenants to any new employer before accepting a role during the restricted period, should permit the employer to send a copy to the new employer where it reasonably believes the covenants are at risk, should agree the announcement and the position on social media (the employee may update their profile but not announce a competing move during garden leave), and should set the employer's monitoring of compliance (client feedback, the employee's warranties, the handover record); the covenants are enforced by the employer noticing a breach early and acting on it, and the agreement should give it the means.

What it costs

Settlement agreement, £795. Drafted for your situation, with a note on how to have the conversation. Three working days.

Settlement agreement including reasonable negotiation with the employee's adviser, £995. The agreement in three working days. The negotiation then runs until the agreement is signed or it becomes clear it will not settle. Reasonable negotiation means what, in my experience, amounts to the standard back and forth on a settlement agreement. If the employee or their adviser is being unreasonable, for example by conducting themselves unprofessionally or requiring a substantial rewrite that needs material further legal advice to you, I will flag it and we will discuss how best to proceed, which may involve further fixed-fee work. That would be unusual.

Buying online forms the engagement on payment. The scope is what the settlement agreements for employers page describes, you accept the Terms of Service at checkout, and I email you within four working hours to get started. If you would rather ask something first, email me.

What you get

• A bespoke settlement agreement drafted for the exit you are dealing with
• Proper waiver of the relevant statutory claims, so the agreement does what you are paying for
• Advice on the tax treatment, including the £30,000 exemption and what falls outside it
• Confidentiality, non-derogatory statements and an agreed reference
• Reaffirmation or replacement of restrictive covenants, which is often the real value
• A short note on how to open the conversation and keep it without prejudice or protected
• One round of amendments after the employee's adviser responds

What is not included

• Advising the employee, which their own adviser must do independently for the agreement to be valid
• Tribunal representation if the matter does not settle
• Payroll processing of the settlement sums
• Handling the settlement payment, since I do not hold client money

Questions I am often asked

Our contract's covenants were written when the employee was junior. Will they hold?

Possibly not, since covenants are judged at the date of signing against the role then. The settlement is the moment to replace them with covenants for the role as it ended, supported by the settlement payment.

Is a payment for the covenants tax-free?

It is not. A sum allocated to new or reaffirmed covenants is taxed as earnings, unlike compensation for loss of employment within the thirty thousand pound exemption. The agreement allocates the sums and the accountants confirm the treatment.

What happens if the employee breaches the covenants after signing?

The agreement provides for repayment of the sum allocated to the covenants, and preserves the employer's right to an injunction and damages. The repayment clause is the remedy that does not require proof of loss.

Related guidance and services

• Settlement agreements for employers, £795, the service this page describes
• Employment contracts and handbooks, £595
• Shareholders agreement, £995
• Employment contract with restrictive covenants
• Settlement agreement to exit a senior employee

This page is general guidance for businesses in England and Wales, not advice on your own circumstances. Last reviewed: October 2026. Email geoffrey@caesar.co.uk.