Yes, it is legal--anyone may agree to settle a debt for less than the full amount, and to give up any right to sue or other legal claim.You are not required to agree; if you believe you are owed $12k in unpaid wages, you could sue the company to recover that money. Bear in mind that even good suits are not certain (you may be very likely to win, but it's never guaranteed); a lawsuit takes time (often up to 2 years or more); and if between when you start the suit and when it concludes, the company goes bankruptcy or out of business, you might not be able to recover anything. Bearing all that in mind, decide whether accepting $5k now is better than possibly getting $12k later.