Settlement Agreement or Redundancy? Which Should You Choose?

If your employer has offered you a settlement agreement as an alternative to redundancy, you may be wondering which option to take. This article explains all you need to know to make the right decision.

If you’d like specific legal advice about your situation, give Andrew Crisp a call on 0330 333 6050 or complete the form at the end of this page.

What is a settlement agreement?

A settlement agreement is a document by which an employee agrees to waive their rights to bring any kind of legal action against their employer.   This is usually in exchange for a settlement payment.

Often, a settlement agreement is used in a redundancy situation. However, a settlement agreement is not the same thing as redundancy.

What is a redundancy?

Redundancy is defined by the law.  It usually means that the needs of the employer for work of a particular type has ceased or diminished. Effectively, the employer does not need as many staff as it used to.

Alternatively, it can mean that the employer is closing a workplace and the staff who work there will be asked to move to a different location. If they are unable to do so (for example, because it’s too far to travel), then they may be made redundant.

If an employer is in a redundancy situation, it must go through a fair redundancy procedure before deciding which staff to make redundant.  This may need to include:

• identifying a pool of people at risk of redundancy
• applying fair selection criteria
• consulting with employees
• explaining the reasons for the redundancies
• exploring whether there are alternatives
• considering whether the staff could be re-deployed to another job role
• giving employees the opportunity to appeal against their redundant

This can be a burden for employers, both in terms of time, administration and morale. Often an employer will offer staff a settlement agreement as an alternative to going through the redundancy procedure.

As a result of the Coronavirus crisis, many employers are putting their staff on furlough leave in an effort to avoid redundancies. However, if redundancies become inevitable, an employer may offer a settlement agreement, even if they’re on furlough leave.

Is it fair to offer the settlement agreement instead of redundancy?

There is nothing wrong with this in principle.

One of the effects of the settlement agreement is that the employee waives any right to go through a fair redundancy procedure in exchange for an enhanced redundancy payment. It’s often a win-win. The employee gets more money and the employer can spend more time on running the business.

The employee does not have to accept the settlement agreement.  If they refuse it, the employer can still go through the redundancy procedure and the employee may want to take advice on whether it has been done fairly or whether they could claim compensation in an employment tribunal for unfair dismissal.

However, the employee may prefer to accept the settlement agreement because it usually contains an offer to pay more money than they would receive if their employment was terminated following a standard redundancy procedure.

Accepting the settlement agreement would mean you won’t be able to claim compensation in an employment tribunal. You would need to consider whether the amount being offered by your employer is adequate. If it’s not, there may be scope for negotiation.

However, refusing a settlement agreement in order to try to claim more compensation in an employment tribunal is risky and there are a number of reasons  why a settlement agreement is often (but not always) preferable to a tribunal claim.

The incentive for the employer to pay more money to the employee is that the employer avoids having to go through the redundancy procedure.  The incentive for the employee is the extra compensation they will receive.

How does a redundancy package compare to a settlement agreement?

If you refuse the settlement agreement and your employer makes you redundant, you will still receive certain minimum payments in a redundancy package. These include:

A redundancy payment

There are two types of redundancy payment.

1. Statutory Redundancy Payment

A statutory redundancy payment is the minimum sum of money that your employer is required by law to pay you if you are made redundant.

The amount of the statutory redundancy payment depends on three factors:

• Your salary
• Your age
• How long you’ve been employed

To calculate how much your statutory redundancy payment should be, have a look at this government website.

2. Enhanced Redundancy Payment

In addition to the statutory redundancy payment, your employer may also pay you an enhanced redundancy payment. This is a redundancy payment that goes beyond the legal minimum.

Your entitlement to this will depend on what’s in your employment contract or in the staff handbook. It’s well worth checking whether you’re entitled to an enhanced redundancy payment when you’re weighing up your options.

Contractual payments

Your employment contract requires your employer to pay you certain sums of money, even if you’re made redundant. These payments include:

• Full salary and benefits up to the termination date
• Notice pay (the amount of notice you’re entitled to should be stated in your employment contract)
• Payment for any accrued but untaken holiday

You should expect to receive these payments even if you don’t sign a settlement agreement.

Payment in Lieu of Notice

Your employer may well pay you a payment in lieu of notice. In other words, you receive a payment for your notice period without having to work it.

There is no obligation on an employer to make a payment in lieu of notice. The employment contract usually gives them the discretion to do so if they want.

What payments can you expect if you opt for the settlement agreement instead of redundancy?

If you accept a settlement agreement instead of redundancy, you will usually be paid more money. Otherwise, what incentive is there for you to accept the settlement agreement?

The amount of any extra financial incentive depends on a number of factors, including:

• Whether there’s any risk of you pursuing an Employment Tribunal claim for unfair dismissal
• The generosity or otherwise of your employer
• How staff have been compensated in the past

For more information, you may want to read this page about how much you should expect in a settlement agreement.

You may also be able to negotiate non-financial benefits, such as a good reference.

Should you try to negotiate a higher settlement agreement payment?

Depending on the circumstances that led to the offer of a settlement agreement, you may be able to negotiate a higher payment.

The best way to communicate with your employer is in the context of a protected conversation. This enables both parties to have an open discussion about the employment situation without worrying that their words will be used against them.

If you suspect that it’s not a genuine redundancy, then you may want to let your employer know that you will claim unfair dismissal if the settlement payment is not increased.

However, if you’re satisfied that the redundancy is genuine, you may be better off negotiating on the basis of good will. Rather than threatening legal proceedings, you may get a better result simply by asking your employer to be more generous. This is more likely to be effective where you have a good relationship with your employer.

If you intend to ask for more money, have a read of the articles below first:

• How to Negotiate the Best Deal on Your Settlement Agreement
• How to Make a Counter-Offer on your Settlement Agreement

Will you pay less tax if you accept a settlement agreement instead of being made redundant?

Generally, the tax status of any payment you receive is not dependent on whether or not you sign a settlement agreement. Some payments are taxable. Others are not. Signing a settlement agreement doesn’t change this.

A small exception to this rule applies if you receive a contribution towards the cost of legal advice. If the contribution is for legal advice on a settlement agreement, this can be paid tax free. However, if your employer makes a contribution towards your legal costs for advice on a redundancy (where there is no settlement agreement), it’s taxable.

For more information, you may want to read this article about how much tax you would pay if you accept a settlement agreement.

Should you accept the redundancy or the settlement agreement?

If you feel you’re likely to be made redundant anyway, it may well be a good option to accept the settlement agreement. You receive more money and you may be able to negotiate a good reference as well. Your employer will usually contribute towards your legal costs too.

However, if you feel you’re being treated unfairly or that you shouldn’t be made redundant, then you may prefer to refuse the settlement agreement and go through the redundancy procedure instead. If you are subsequently made redundant then you will still have the right to claim compensation for unfair dismissal.

You should take legal advice from an employment solicitor before making a decision. You don’t want to be in a position where you’ve given up the opportunity to accept a higher payment, only to find that you’re made redundant with no prospect of claiming compensation.

Contact Us For Advice on Your Settlement Agreement

If you have received an offer of a settlement agreement, you will need to make sure you receive legal advice on it.

We advise clients throughout the UK. We provide clear and prompt advice on a confidential basis.

Call us now for a free consultation.

From a landline: 0800 531 6050
From a mobile: 0330 333 6050

Alternatively, complete the form below and we’ll contact you.