Settlement agreement vs redundancy – a guide for employees
About the Author: Chris Hadrill
Understanding the nuances between redundancy and settlement agreements is crucial for both employers and employees navigating employment termination. This guide delves into these concepts, highlighting their differences, benefits, and considerations.
What Is Redundancy?
Redundancy occurs when an employer needs to reduce their workforce because a particular role is no longer required. This can result from various factors, including company restructuring, cost-cutting measures, or technological advancements rendering certain positions obsolete. In such cases, employees are entitled to statutory redundancy pay, which is calculated based on their age, length of service, and weekly pay.
When making redundancies employers must follow certain processes, including carrying out a fair selection process and consultation process. Before making an employee redundant an employer must consider alternatives to redundancy and alternative vacancies within the organisation that the employee could be placed into. However, employers may, before the start or the end of the redundancy consultation process, offer an employee a settlement agreement for redundancy in order to avoid having to deal with the entirety of the redundancy consultation process.
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 their rights to bring any claims against the employer in exchange for a financial payment. This agreement often includes terms like confidentiality clauses and may offer a compensation amount higher than the statutory redundancy pay. It’s essential for the employee to receive independent legal advice for the agreement to be valid.
A settlement agreement can settle almost any type of employment-related dispute, including an unfair dismissal claim where an employee has been made redundant by their employer. Settlement agreements also commonly settle the following types of claims: dismissal for performance reasons; misconduct allegations; ill-health absence; discrimination claims; sexual harassment allegations; and harassment claims.
What Is the Difference Between a Settlement Agreement and Redundancy?
While both redundancy and settlement agreements result in the termination of employment, they differ significantly:
- Redundancy: This is a process initiated by the employer due to the role no longer being necessary. Employees are entitled to statutory redundancy pay and must go through a consultation process.
- Settlement Agreement: This is a mutually agreed-upon contract where the employee waives their rights to pursue any claims against the employer, often in exchange for a higher financial payment than the statutory redundancy pay. It allows employers to bypass the full redundancy consultation process.
Settlement Agreement vs. Redundancy: A Comparison
| Aspect | Redundancy | Settlement Agreement |
| Process | Employer must follow a fair redundancy procedure, including lawful consultation and selection processes. | Allows employers to reduce their workforce without going through the full redundancy consultation process. |
| Financial Compensation | Entitled to statutory redundancy pay based on salary, age, and length of service. Sometimes entitled to contractual redundancy pay, depending on the terms of the contract | Often offers a higher pay package than redundancy, as the payment is agreed upon by the employee and the employer together. There are also tax benefits to the payment of ex-gratia amounts under a settlement agreement. |
| Non-financial terms | If an employee is made redundant then an employer will generally only provide benefits to the termination date or, if a payment in lieu of notice is agreed, for the payment in lieu of notice (this depends on the terms of the contract). | An employee can often negotiate additional non-financial benefits under the terms of a settlement agreement: an improved reference; contribution to outplacement costs; and extended medical coverage, among other things. |
| Taxation | Any statutory redundancy may be paid tax-free to the employee. Any additional sums must be subject to tax and national insurance in the normal way. | There are additional tax advantages to a settlement agreement – primarily, up to £30,000 of any ex-gratia payment made under a settlement agreement can be paid free of tax and national insurance contributions to the employee. |
| Legal Rights | Retain the right to bring claims against the employer if the redundancy process is not handled fairly. | Waive the right to pursue legal action against the employer, including claims for unfair dismissal or discrimination. |
| Voluntariness | Compulsory termination initiated by the employer. | Voluntary and mutually agreed upon by both parties. |
| Control over the process | Employers tend to have a great degree of control over redundancy processes, and employees generally do not have that much control. | An employee can exercise more control over the negotiation of a settlement agreement, as the process of negotiation would naturally imply that the agreement can be completed only if both parties agree. |
| Cost of legal advice | If an employee is made redundant the employer will not cover a contribution towards the employee’s legal fees. | If the employer enters into a settlement agreement then the employer will generally make an agreed financial contribution towards the employee’s legal fees. |
Settlement Agreement vs. Redundancy: Which Is Better?
Determining whether a settlement agreement or redundancy is more beneficial depends on individual circumstances:
- Settlement Agreement: May be advantageous if the offered compensation is significantly higher than the statutory redundancy pay and if the employee prefers a swift resolution without the need for a formal redundancy process.
- Redundancy: Might be preferable for employees who wish to retain the option to bring claims against the employer or if the statutory redundancy pay and notice period are satisfactory.
Should You Sign a Settlement Agreement or Go Through the Redundancy Process?
Before deciding, consider the following:
- Financial Offer: Evaluate whether the settlement agreement offers a compensation package that exceeds the statutory redundancy entitlements.
- Legal Rights: Understand that signing a settlement agreement waives your rights to pursue future claims against the employer.
- Employment Prospects: Consider your ability to secure new employment and whether the terms of the settlement agreement, such as confidentiality clauses, might impact your job search.
It’s crucial to seek independent legal advice to fully understand the implications of either option and to ensure that your rights are protected.
Speak to one of our settlement agreement solicitors today
Our employment lawyers are experts in dealing with settlement agreement advice.
Alex Hodson is a Senior Associate in our employment team and has extensive experience in advising employees on employment claims, Employment Tribunal proceedings, and settlement agreements.
Speak to Alex today to discuss your situation.
