Settlement Agreements: Seven Points to Settle Before You Sign

A settlement agreement cannot be cancelled once signed. These seven points should be resolved before you put pen to paper — otherwise it becomes costly or needlessly complicated.

HR puts a settlement agreement in front of you, often with a request to sign it that same day. The difficulty is this: unlike many consumer contracts, there is no right of cancellation here. Whatever you sign stands. That is precisely why it pays to take a second look before the pen touches the page.

In brief

Before you sign, there are seven points you should have settled. These seven points are: the termination date and notice period; the amount of any severance and when it falls due; the type of garden leave and its effect on your holiday entitlement; the reference grade; the return of work equipment; any post-contractual non-compete clause together with the compensation it requires; and the reach of the settlement (or “full and final settlement”) clause. There is no statutory right of cancellation as there is with distance contracts. The courts allow you to escape the agreement only in narrow exceptional cases — for example, where the employer negotiated unfairly. There is no statutory period for reflection. If the employer does set you a deadline to sign, however, that deadline binds only the employer, not you.

How I can help

• Reviewing the draft agreement, point by point, before you sign
• Negotiating with your employer over severance, the termination date, the reference grade and garden leave
• Assessing the risk of a benefit disqualification period (Sperrzeit) and proposing wording that softens it
• Advising you where the agreement has already been signed and you want to explore whether you can still get out of it

The seven points at a glance

1. Termination date and notice period. A settlement agreement may provide for an earlier or later date than ordinary notice would. That is its very purpose. Compare the proposed date with your normal notice period. An early date suggests that you played an active part in bringing the employment to an end — and that is exactly what the employment agency (Arbeitsagentur) scrutinises most closely.

2. Severance amount and when it falls due. There is no statutory right to severance under a settlement agreement. It is a matter for negotiation. Do not clarify only the amount. Clarify too: When is it paid — as a lump sum or in instalments? And what happens if the employer becomes insolvent before it falls due?

3. Garden leave — revocable or irrevocable. Where garden leave is irrevocable, your remaining holiday will as a rule be treated as taken once the garden-leave period arithmetically covers it. Where it is revocable, the employer can, in theory, call you back, so your holiday is not automatically used up. This distinction decides whether you are still owed payment in lieu of untaken holiday at the end.

4. Reference grade and your right to a reference. Under § 109 GewO you are entitled to a written reference. On request, you are also entitled to a full reference addressing your performance and conduct. Ideally, negotiate the grade and the exact wording at the same time, as a schedule to the settlement agreement. Anyone who leaves this open often ends up arguing over wording alone later — and by then has no leverage left.

5. Return of work equipment. Laptop, work phone, company car, keys, access cards — set out in writing what goes back, when, and in what condition. This heads off later disputes over alleged damage or items said not to have been returned.

6. Post-contractual non-compete. If your original employment contract contains a non-compete clause, § 74 HGB applies. The same is true where the settlement agreement itself seeks to create a new non-compete. The restriction must be in writing. It is binding only if the employer undertakes to pay compensation for the restraint — at least half of the contractual remuneration you last received. Check whether any existing clause is expressly cancelled in the settlement agreement. Otherwise it can continue to have effect.

7. Full and final settlement clause. Most settlement agreements end with a clause providing that, on performance of the agreement, “all claims arising from the employment relationship” are settled. That can also sweep in undisputed overtime, outstanding bonus entitlements, or claims under side agreements. Read this clause as carefully as the rest of the agreement.

Take the benefit-disqualification risk seriously

If you resign yourself, or sign a settlement agreement without good cause, you risk a disqualification period (Sperrzeit) for your unemployment benefit. The employment agency treats this as having contributed to your own unemployment. Whether, and how, this can be avoided or softened depends heavily on how the agreement is worded and on the circumstances of the termination. You will find a fuller account in my article on the disqualification period and settlement agreements. This is a point to settle before you sign, not after.

No right of cancellation, no mandatory reflection period

Unlike many consumer contracts, a settlement agreement carries no statutory right of cancellation. The relevant rules for distance and doorstep transactions do not apply to employment settlement agreements. Escaping an agreement you have already signed is possible only within narrow limits — for example, where the employer put you under unfair pressure: sprung on you, without time to reflect, in an exceptional situation. That is a high bar. Nor is there any statutory reflection period before you sign. If the employer nonetheless sets you a deadline — “signed by this evening”, say — that deadline binds only the employer. You may take as much time as you need to review it.

A typical case from practice

An employee receives a settlement agreement on a Friday, with a request to return it signed on the Monday. The termination date falls two months before her ordinary notice period would expire. A severance figure is stated, but there is nothing on when it falls due. The garden leave is worded as “irrevocable”, with no mention of the remaining holiday. The final paragraph also carries a broadly drafted full and final settlement clause. After a legal review, I bring the termination date into line with the proper notice period and set out precisely when the severance falls due. I also record expressly that the remaining holiday is treated as settled, and I confine the settlement clause to the employment relationship. The result: the same agreement, but without the quiet pitfalls.

Common mistakes

• Signing under time pressure without having a solicitor read the agreement through
• Assuming that severance is automatically due
• Failing to compare the termination date with your actual notice period — with consequences for the disqualification period
• Leaving the reference grade and wording out of the agreement to be “sorted out later”
• Overlooking an existing non-compete clause from the old employment contract, so that it is neither cancelled nor backed by compensation for the restraint
• Skimming past the full and final settlement clause, even though it also captures undisputed claims

Frequently asked questions

Do I have to sign a settlement agreement straight away?

No. There is no legal obligation to sign on the spot, and no statutory reflection period. A deadline set by the employer binds only the employer. You may take the time you need to review it.

Can I cancel a settlement agreement I have already signed?

There is no right of cancellation as there is with distance contracts. Escaping the agreement is possible only in narrow exceptional cases — for example, where the employer breached the duty to negotiate fairly. That is the case where they sprang it on you, say, or put you under undue pressure.

Do I automatically receive severance under a settlement agreement?

No, there is no statutory right to it. Severance is a matter for negotiation. Among other things, it depends on how strong your position is against a possible dismissal.

Does every settlement agreement risk a disqualification period?

Not inevitably. The risk is real, though, where there is no good cause for ending the employment by agreement. You will find the details and strategies for avoiding it in the linked article on the disqualification period.

What if the settlement agreement does not mention an old non-compete clause?

The old clause from the employment contract can then continue to have effect. Before you sign, check whether any existing clause is expressly cancelled, or whether compensation for the restraint needs to be agreed.

Your next step

A settlement agreement cannot be undone once it is signed. That is why it pays to review it beforehand, rather than to regret it afterwards. Send me the draft before you sign. In an initial consultation I will go through all seven points with you and assess the disqualification-period risk. I will also negotiate with your employer on whatever remains open. You can find out more about my work in employment law at /en/topics/employment-law.

This information is no substitute for legal advice in an individual case.

This article provides general information and is no substitute for legal advice in an individual case. Last updated: 2026-08-23.

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