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 feeling unsure about which path to take. This decision can have a significant impact on your future, both financially and professionally. In this guide, we’ll explain the key differences between settlement agreements and redundancies, outlining the pros and cons of each option so you can make an informed choice. Whether you’re considering financial compensation, job security, or potential legal claims, we’ve got all the insights you need to help you navigate this critical decision.

What is a Settlement Agreement?

A settlement agreement is a legally binding contract between an employer and an employee where the employee agrees to waive certain employment rights, typically in exchange for a financial settlement. By signing this document, the employee forfeits their right to bring legal claims against the employer, such as unfair dismissal or discrimination claims, even if they feel the redundancy process was unfair.

Settlement agreements are often offered when an employer wants to avoid the formal redundancy procedure or prevent potential disputes from escalating into costly employment tribunal claims. These agreements can be presented during redundancy discussions, but they are also used in other scenarios, such as workplace disputes, disciplinary procedures, or mutual agreements to part ways.

One key aspect of a settlement agreement is that it provides benefits to both parties:

• For the employer, it eliminates the risk of future legal action and allows them to resolve the employment relationship more quickly and amicably.
• For the employee, it often comes with a financial incentive that exceeds the statutory redundancy package, and it can include non-financial benefits such as a positive job reference or the agreement to keep the terms of the departure confidential.

It’s important to note that accepting a settlement agreement is entirely voluntary. You are under no obligation to sign it. You should always seek independent legal advice before deciding, as this will ensure that you fully understand your rights and the potential consequences.

For an in-depth understanding of settlement agreements, check out our free guide: What is a Settlement Agreement? Advice for Employees

What is a Redundancy?

Redundancy occurs when an employer needs to reduce its workforce due to operational changes, such as a reduction in work, business restructuring, or the closure of a workplace. Redundancy is legally defined, and the employer must follow specific procedures to ensure fairness and compliance with employment law.

In the UK, redundancy typically happens when:

• The employer no longer requires so many employees to perform a specific type of work due to decreased demand or changes in the business structure.
• The workplace is closing or relocating, and employees cannot reasonably be expected to move.

If an employer is making employees redundant, they are required to follow a fair redundancy process, which may include:

1. Identifying a pool of employees who are at risk of redundancy.
2. Applying objective selection criteria to decide which employees will be made redundant.
3. Consulting with employees to discuss the reasons for redundancy and any potential alternatives, such as redeployment within the company.
4. Exploring alternatives to redundancy, such as offering different job roles, reducing hours, or changing work patterns.
5. Offering employees the right to appeal, in case they believe the redundancy decision was unfair.

In a redundancy, employees are usually entitled to certain payments, including:

• Statutory Redundancy Pay: This is a legal entitlement for employees who have worked for their employer for at least two years.
• Enhanced Redundancy Pay: Some employers offer additional redundancy payments, typically detailed in employment contracts or company policies.
• Notice Pay: You are entitled to be paid for your notice period or to receive payment in lieu of notice if your employer decides not to require you to work during this time.
• Accrued Holiday Pay: Payment for any unused holidays you’ve accumulated during your employment.

It’s worth noting that redundancy should be a genuine business decision. If you feel the redundancy is a cover for an unfair dismissal or other unfair treatment, you may have grounds to challenge it through an employment tribunal. This is where the decision between redundancy and a settlement agreement becomes critical—accepting a settlement agreement means you waive your right to make such claims.

Settlement Agreement vs Redundancy: A Comparison

When deciding between a settlement agreement and redundancy, it’s important to understand how these options differ, particularly regarding the financial benefits, legal protections, and the overall process. Below, we’ll break down the main distinctions to help you make an informed choice.

1. Financial Compensation

• Settlement Agreement: Typically, the financial offer made in a settlement agreement is higher than what you would receive through statutory redundancy. Employers may offer an enhanced payment as an incentive for employees to waive their legal rights and avoid a lengthy redundancy process.
• Redundancy Pay: If you choose redundancy, you are entitled to statutory redundancy pay based on your salary, age, and length of service. Some employers may provide an enhanced redundancy package, but this depends on company policy and your employment contract.

2. Your Legal Rights

• Settlement Agreement: By signing a settlement agreement, you waive your rights to pursue legal action against your employer, including claims for unfair dismissal, discrimination, or breach of contract. This can be beneficial if you prefer a clean break with additional compensation but limits your options for pursuing legal recourse later.
• Redundancy: If you are made redundant, you retain the right to challenge the fairness of the redundancy process, potentially bringing claims to an employment tribunal. If you believe the redundancy was handled improperly or if your employer failed to follow a fair procedure, you could be entitled to compensation for unfair dismissal.

3. Costs of Legal Advice

• Settlement Agreement: A settlement agreement is only valid if the employee gets legal advice. Usually, the employer will pay the costs of you obtaining that advice to ensure the validity of the agreement, which means there’s no charge to you personally.
• Redundancy: If you go through a redundancy procedure, you can still get legal advice if you want it. However, because it’s not legally required, the employer won’t usually pay for that advice, which may mean it’s more expensive for you.

4. Control Over the Process

• Settlement Agreement: With a settlement agreement, both the employer and employee have more flexibility to negotiate terms, such as compensation, non-financial benefits (e.g., a good reference), and even tax treatment of the payout. You can also negotiate to include favourable terms like confidentiality or restrictions on your employer’s ability to speak negatively about your departure.
• Redundancy: In a redundancy situation, the employer must follow a legally defined process that includes consultation and fair selection criteria. However, redundancy packages tend to be less negotiable and are usually bound by company policy or statutory requirements.

5. Tax Implications

• Settlement Agreement: Some payments made under a settlement agreement provide for more favourable tax treatment. For example, in addition to the first £30,000 of a termination payment being tax-free, your employer’s contribution to legal costs and the costs of outplacement support can also be paid tax-free.
• Redundancy Package: Redundancy payments, including enhanced redundancy pay, still benefit from the £30,000 tax-free threshold. However, standard redundancy packages rarely offer additional tax advantages.

6. Timeline and Efficiency

• Settlement Agreement: The process of negotiating a settlement agreement is generally faster and more straightforward than going through a formal redundancy process. It allows both parties to part ways without the time-consuming consultation and selection procedures required by redundancy law.
• Redundancy: The redundancy process can be lengthy and unpredictable, especially if your employer needs to consult with multiple employees. This can prolong the uncertainty around your employment status, which may affect your ability to plan your next career move.

6. Non-Financial Benefits

• Settlement Agreement: Alongside financial compensation, a settlement agreement can include non-monetary benefits, such as an agreed reference, confidentiality agreements, and even outplacement services to help you find new employment.
• Redundancy: Redundancy packages tend to focus solely on statutory entitlements. Additional benefits such as a positive reference or outplacement support are less commonly negotiated in redundancy cases.

Settlement Agreement vs Redundancy: Key Differences

Should You Agree to the Settlement Agreement Instead of Redundancy?

Ultimately, deciding whether to accept a settlement agreement depends on the specifics of your situation. A settlement agreement can often benefit both parties—provided it is handled transparently and fairly. Here are a few factors to consider.

1. Employee’s Perspective: What Are You Giving Up?

While a settlement agreement might offer you more money upfront, it’s important to consider what rights you are waiving. By signing a settlement agreement, you agree to:

• Waive your right to go through the full redundancy process, meaning you give up the opportunity to challenge whether the redundancy decision was fair.
• Waive your right to pursue an employment tribunal claim, which includes claims for unfair dismissal, discrimination, or any other grievances related to the termination of your employment.

If you believe you have strong grounds to challenge the redundancy on the basis of discrimination or unfair treatment, it might be worth considering whether refusing the settlement agreement would better protect your interests.

2. When a Settlement Agreement Is Fair

In many cases, offering a settlement agreement as an alternative to redundancy is fair, particularly when:

• The redundancy situation is genuine, and the employer is using the settlement agreement to speed up the process while offering the employee more compensation than they would otherwise receive.
• Both the employer and employee have the opportunity to negotiate the terms, ensuring the employee receives compensation that fairly reflects the circumstances of their departure.

If the employer is offering a significantly higher settlement payment in exchange for waiving your redundancy rights, this could be seen as a win-win situation, allowing you to receive greater financial compensation while the employer avoids potential legal complications.

3. When a Settlement Agreement Might Not Be Fair

However, there are situations where a settlement agreement might not be in your best interests, particularly if:

• The settlement offer is inadequate and does not provide more compensation than you would receive in a statutory redundancy situation.
• You feel that the redundancy is not genuine and is being used as a cover for unfair dismissal or other discriminatory practices.
• The employer is pressuring you into signing the settlement agreement without allowing you the time to properly consider it or seek legal advice.

In such cases, it might be better to refuse the settlement agreement and go through the full redundancy process, as this will allow you to challenge any unfair decisions and potentially claim compensation through an employment tribunal.

Should You Try to Negotiate a Higher Termination 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 based on goodwill. 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

Negotiating a higher settlement agreement requires careful consideration and strategy. It’s important to understand your rights, the value of what you’re giving up, and how to use that information to your advantage. With the right approach, you may be able to increase your compensation or secure additional benefits that make the settlement more worthwhile. Always seek legal advice to ensure you’re getting the best possible outcome.

Is a Settlement Agreement the Right Choice?

If your employer is offering an attractive financial package and you are confident the redundancy is genuine, accepting the settlement agreement can be a faster and more beneficial way to leave the company. However, if you have concerns about fairness or believe the redundancy is being used improperly, pursuing the full redundancy process may be the better option.

Need Advice on a Settlement Agreement?

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

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

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Andrew Crisp

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Andrew Crisp is the Principal Solicitor at Mason Bullock Solicitors, where he specialises in employment law and dispute resolution. With over two decades of legal experience, Andrew has built a reputation for his expertise in advising employees on settlement agreements and helping clients navigate complex litigation processes, including the removal of County Court Judgments (CCJs).

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