While redundancy and settlement agreements can overlap, they are fundamentally different. If your employer has offered you a settlement agreement as an alternative to redundancy, you should carefully consider which route to take, as each has different financial, professional, and legal consequences. One of our employment solicitors, Laura Colebrook, explains the differences.
Quick answer: What is the difference between redundancy and a settlement agreement?
Redundancy is a formal legal process used when an employer no longer needs a role to exist. A settlement agreement is a separate legal contract in which an employee agrees to leave on agreed terms, usually in return for compensation.
The key difference is that:
- redundancy follows a formal process with specific legal obligations on the employer
- a settlement agreement is voluntary and usually involves the employee giving up certain legal claims in exchange for agreed terms
In some situations, an employer may offer a settlement agreement instead of, or alongside, a redundancy process. Independent legal advice is usually required before signing a settlement agreement.
What is redundancy?
If you are offered redundancy by your employer, it is a form of dismissal that occurs when your employer no longer requires your role to be performed. For a redundancy to be fair, employers must follow a structured process. This includes identifying a selection pool, consulting with employees, applying objective selection criteria, and, where possible, considering alternative employment options.
Employees affected by redundancy have a number of legal rights, including:
- the right to consultation
- statutory or contractual notice
- redundancy pay (if eligible)
- time off to look for alternative employment
Redundancy terms are usually fixed using Statutory Redundancy Pay calculation, which is a legal entitlement for employees who have worked for their employer for at least two years.
How does a Settlement Agreement differ from redundancy?
In the case of a settlement agreement (previously known as a ‘compromise agreement’), there is no requirement for your role to cease, and the formal redundancy process is not required.
Whilst settlement agreements can be used in redundancy situations, they are also often used when a dispute between an employee and employer has occurred, particularly where there are performance issues or potential unfair dismissal claims.
A settlement agreement is essentially a legally binding contract between the employer and the employee that sets out the terms of the employee’s termination. That typically involves the employee waiving their rights to bring legal claims in exchange for compensation, often referred to as a severance package. Employers may offer enhanced financial packages to encourage employees to accept a settlement agreement rather than pursue legal action.
Unlike redundancy, settlement agreements are voluntary and are open to negotiation regarding payment, reference, and terms etc. Settlement agreements often offer an enhanced financial package (above the statutory redundancy calculation) as an incentive for the employee to waive their legal rights to bring claims against their employer, such as taking an employer to an Employment Tribunal.
Importantly, a settlement agreement is not legally binding unless an employee receives independent legal advice (often funded by the employer).
Employer contribution toward their employees’ legal fees for advice on a Settlement Agreement
If an employee is offered a settlement agreement, they are required in law to obtain legal advice before signing. In most cases, an employer will offer to pay a fixed contribution toward the employee’s legal fees, typically ranging from £500 to £750 + VAT.
If an employee appoints a solicitor, that solicitor will work for the employee, not the employer, regardless of who pays the fee. The solicitor’s job is to ensure the terms are fair to the employee and that the employee understands what they are signing.
An employment solicitor will explain what legal rights the employee is giving up, assess whether the terms are lawful, and help them understand whether the agreement is reasonable in light of their circumstances.
If an employee is not being offered a settlement agreement, but just standard statutory redundancy, the employer is usually not required to pay for their legal advice.
Why do employers offer Settlement Agreements instead of Redundancy?
In many cases, employers offer settlement agreements during redundancy situations because they can:
- avoid a lengthy consultation processes
- reduce the risk of legal claims
- keep the terms of the agreement confidential
For employees, the decision often comes down to whether the severance package is more beneficial than pursuing redundancy rights or potential legal claims.
How can an employment solicitor help if you are offered redundancy or a settlement agreement?
In a nutshell, redundancy is a statutory legal right, whereas a settlement agreement is a contractual, voluntary “clean break”. In both instances, an employee should obtain independent legal advice as early as possible to ensure that any terms offered by their employer are fair and that their legal rights are upheld. The decision whether to accept a settlement agreement or redundancy will depend on the employee’s personal circumstances.
If you have been offered redundancy or a settlement agreement and would like to discuss your employment rights, or any other employment law issues, please contact: