If you have been offered a settlement agreement during a redundancy process, you are probably wondering what the difference actually is. Are they the same thing? Do you get one instead of the other? And what happens if you don’t sign?
The short answer: A settlement agreement and redundancy are not the same thing. Redundancy is a reason for dismissal when your role is no longer needed. A settlement agreement is a legal contract that sets out the terms of your exit. Employers often use them together to conclude redundancy quickly and avoid tribunal risk.
This guide explains the key differences between settlement agreements and redundancy, when employers use them together, and what to consider before signing.
If you’ve been offered a settlement agreement in a redundancy situation and want it reviewed, our employment law team can help. We have offices across the North West including Blackburn, Bury, and Accrington, and advise clients throughout England and Wales.
This guide was written by Katie Wright, Senior Associate Solicitor and Head of Civil Litigation at WHN Solicitors. Katie has over a decade of experience in dispute resolution, including advising individuals on settlement agreements.
Is a Settlement Agreement the Same as Redundancy?
No. Redundancy and settlement agreements are not the same thing. They serve different purposes and have different legal implications.
Redundancy is a form of dismissal. It usually happens when your employer no longer needs your role, whether due to restructuring, cost-cutting, or business closure. Under UK employment law, a genuine redundancy arises when the business is closing, a workplace is closing, or the need for employees to carry out a particular type of work has reduced or ceased.
If you’ve been employed for at least two years, you’re entitled to statutory redundancy pay. You’re also entitled to a notice period (or payment in lieu) as well as any accrued holiday pay. Employers must follow a fair process, including consultation, objective selection criteria, and consideration of alternative roles. If they don’t, the dismissal could be unfair.
A settlement agreement (formerly known as a compromise agreement before 2013) is something different. It is a legally binding contract that sets out the terms on which your employment will end. In return for a financial payment and other agreed terms, you waive your right to bring employment claims against your employer. These might include claims regarding:
- Unfair dismissal.
- Discrimination.
- Breach of contract.
- Unpaid wages.
For the agreement to be valid, you must receive independent legal advice from a qualified adviser, usually a solicitor. You can be made redundant without signing a settlement agreement. In that case, you’d receive your statutory entitlements and retain your right to challenge the process if you believe it was unfair.
Equally, you can sign a settlement agreement without being made redundant. Settlement agreements are used in many contexts where there’s no redundancy at all, such as resolving a grievance or parting with a senior employee by mutual agreement.
Settlement Agreement and Redundancy: How Do They Work Together?
When an employer offers a settlement agreement during redundancy, it’s usually for one or more of the following reasons:
- Speed: A formal redundancy process involves consultation, selection criteria, and potential appeals. A settlement agreement can conclude matters much faster.
- Certainty: By signing, you waive your right to bring claims. This gives the employer certainty that the matter is closed, with limited or no risk of a tribunal claim later.
- Confidentiality: Settlement agreements typically include confidentiality clauses, keeping the terms of your departure private.
- Enhanced Payments. Employers typically offer more than statutory redundancy pay in exchange for signing. This can include an enhanced lump sum, payment of legal fees, and an agreed reference.
From the employer’s perspective, offering a settlement agreement during redundancy is a way to manage risk. From your perspective, it can mean a quicker exit with better financial terms — but only if the offer is fair.
Settlement Agreement vs Redundancy: Key Differences
The table below summarises the main differences between going through a standard redundancy process and signing a settlement agreement.
| Redundancy | Settlement Agreement | |
| What it is | It can be a type of dismissal because the role is no longer needed. | A contract agreeing the terms of exit. |
| Legal requirement | Employer must follow a fair process. | Employee must receive independent legal advice. |
| Payment | Statutory redundancy pay (if 2+ years’ service). | Negotiable, often higher than statutory. |
| Your rights | You retain the right to challenge an unfair process. | You waive your right to bring most claims. |
| Timescale | Can take weeks due to consultation requirements. | Can be concluded quickly. |
| Confidentiality | Not inherently confidential. | Usually includes confidentiality clauses. |
| Agreed Reference | No automatic agreed reference. | Usually includes agreed wording. |
| Legal Fees | Employer doesn’t pay for your legal advice. | Employer typically contributes £350-600 plus vat. |
| Tax treatment | First £30,000 tax-free. | First £30,000 tax-free. |
| Negotiation | Limited room to negotiate statutory terms. | Terms are negotiable. |
The table above covers the typical scenario where redundancy and a settlement agreement are used together. But sometimes employers skip the formal redundancy process entirely.
Settlement Agreement Instead of Redundancy
Rather than going through a full redundancy consultation, some employers offer a settlement agreement as an alternative from the outset.
This might happen when:
- Only one or two roles are affected, making a full consultation process disproportionate.
- The employer wants to avoid the time and cost of a formal process.
- There’s a risk the redundancy could be challenged as unfair.
- The employer simply wants a clean break.
In these situations, the employer is essentially saying: “We could go through a redundancy process, but we’d rather agree terms now and part ways quickly.”
This can work in your favour. You may receive a higher payment than statutory redundancy, avoid the uncertainty of a drawn-out process, and leave with an agreed reference. However, you’re also giving up your right to challenge the situation if you believe the redundancy isn’t genuine or the process would have been unfair.
Before accepting a settlement agreement instead of redundancy, consider whether the offer properly reflects what you’d be entitled to through a formal process, and whether you have any potential claims that you’d be waiving.
Settlement Agreement and Voluntary Redundancy
The situation is slightly different when redundancy is voluntary rather than compulsory.
Voluntary redundancy is when an employer invites employees to volunteer to leave, rather than selecting people compulsorily. It is often used when a business needs to reduce headcount but wants to avoid the difficulties of compulsory selection.
If you volunteer for redundancy, you may still be asked to sign a settlement agreement. This protects the employer by ensuring you are not able to later claim you were pressured into volunteering or that the process was unfair.
A voluntary redundancy settlement agreement typically includes:
- An enhanced redundancy payment (often more generous than compulsory terms).
- Confirmation of your final working day and any garden leave.
- Payment of accrued holiday.
- An agreed reference.
- Confidentiality provisions.
- A waiver of claims.
If you’re considering voluntary redundancy, make sure the financial package properly reflects the value of what you’re giving up. The fact that you’re volunteering doesn’t mean you should accept less than a fair deal.
Example Settlement Agreement During Redundancy
To illustrate how this works in practice, consider the following scenario. Sarah has worked for her employer for eight years on a salary of £45,000. She has been told her role is being made redundant due to restructuring. Instead of going through a formal consultation process, her employer offers a settlement agreement.
The offer includes:
- £12,000 ex-gratia payment (tax-free under the £30,000 threshold).
- Payment in lieu of her 12-week notice period (taxable).
- Accrued holiday pay (taxable).
- £500 contribution towards independent legal advice.
- An agreed reference confirming her job title, dates of employment, and that she left due to redundancy.
How does this compare to her statutory entitlements? Based on her age and length of service, Sarah’s statutory redundancy pay would be approximately £6,500. The settlement offer is nearly double this amount. She also gets certainty about her reference, avoids a potentially lengthy consultation process, and can move on quickly.
But there’s a complication. Sarah recently raised a grievance about her line manager. If the redundancy is not genuine, and she is actually being pushed out because of the grievance, she might have claims worth significantly more than £12,000 at tribunal.
Before signing, Sarah needs independent legal advice to assess whether the offer is fair given what she’d be waiving. If she has strong claims, she may be able to negotiate a higher payment or decide not to sign at all.
Red Flags When Offered a Settlement Agreement During Redundancy
Not every settlement agreement offered during redundancy is straightforward. Some situations warrant extra caution.
Be alert if:
- Solo Redundancy but the Role Continues: If your employer claims the role is redundant but then recruits someone else or redistributes your work, the redundancy may not be genuine. This could be unfair dismissal dressed up as redundancy.
- Pressure to Sign Quickly: The ACAS Code of Practice recommends at least 10 calendar days to consider a settlement agreement. If you’re being pushed to sign within 24-48 hours, consider that a concern.
- No Enhancement on Statutory Pay: If the offer doesn’t improve on what you’d receive through a formal redundancy anyway, there’s little incentive to sign away your rights.
- No Legal Fees Contribution: Most employers contribute £350-600 towards the cost of independent legal advice. If they’re not offering this, it may signal they expect you to sign without proper scrutiny.
- Vague or Missing Reference: A settlement agreement should include clear reference wording. If this is missing or non-committal, your future job prospects could be affected.
- Recent Grievance or Complaint: If you’ve complained about discrimination, bullying, or whistleblowing concerns, a sudden redundancy may be retaliatory. These claims can be worth significantly more than a standard settlement offer.
- Pregnancy or Maternity Leave: Redundancy selection of pregnant employees or those on maternity leave faces extra scrutiny. If you fall into this category, you may have automatic unfair dismissal or discrimination claims.
- Subjective Selection Criteria: If you’ve been told you scored poorly in a selection process but the criteria seem vague or designed to target you, the process may be unfair.
If any of these apply, don’t sign until you’ve had proper legal advice. What looks like a reasonable offer may significantly undervalue what you could claim.
What to Check Before Signing a Settlement Agreement During Redundancy
If you’ve been offered a settlement agreement during redundancy, there are several things to consider before signing:
- Is the redundancy genuine? If you suspect the redundancy is being used as a cover for something else, such as pushing you out due to a grievance or performance concerns, you may have stronger claims than you realise. Signing a settlement agreement would waive those claims.
- Is the payment fair? Compare the offer to your statutory entitlements. Are you receiving more than you’d get through a standard redundancy? If not, there may be little incentive to sign. Consider your length of service, salary, and any potential claims you might have.
- What claims are you waiving? Settlement agreements typically waive all employment-related claims. Make sure you understand exactly what you’re giving up. If you have a potential discrimination or whistleblowing claim, this could be worth significantly more than the offer on the table.
- What about your reference? An agreed reference is often included in settlement agreements. Check the wording carefully. A vague or lukewarm reference could affect your future job prospects.
- Are there restrictive covenants? If your contract includes non-compete or non-solicitation clauses, check whether these continue after you leave. The settlement agreement should address this clearly.
- What’s the tax position? The first £30,000 of a genuine redundancy or termination payment is usually tax-free. Payments for notice, holiday, and bonuses are taxable. Make sure the agreement structures payments correctly to maximise tax efficiency.
- Have you taken legal advice? You’re required to receive independent legal advice for the agreement to be valid. Use this as an opportunity to have the offer properly reviewed, not just rubber-stamped.
Should You Accept a Settlement Agreement in Redundancy?
There’s no universal answer on whether or not you should accept a settlement agreement in redundancy proceedings. It will depend solely on your circumstances.
A settlement agreement may be worth accepting if:
- The financial offer is genuinely better than your statutory entitlements.
- You want a clean break and don’t wish to go through a lengthy process.
- You have no significant claims you’d be giving up.
- The terms include benefits you value, such as an agreed reference or extended notice.
A settlement agreement may not be worth accepting if:
- The offer is no better than what you’d receive through redundancy anyway.
- You have strong potential claims that could be worth more at tribunal.
- You believe the redundancy isn’t genuine.
- You’re being pressured to sign quickly without proper time to consider.
If you’re unsure, get proper advice before making a decision. Once you sign, you can’t go back.
Settlement Agreement and Redundancy FAQs
Can I refuse a settlement agreement and take redundancy instead?
Yes. Signing a settlement agreement is voluntary. If you refuse, your employer will need to continue with the formal redundancy process. You’d then receive your statutory entitlements and retain your right to challenge the process if it’s unfair.
Is a settlement agreement better than redundancy?
It depends on the offer. A settlement agreement often includes a higher payment than statutory redundancy, plus benefits like an agreed reference. But you’re also waiving your right to bring claims. Whether it’s “better” depends on whether the offer fairly reflects what you’re giving up.
Do I have to pay tax on a settlement agreement?
The first £30,000 of a termination payment is usually tax-free. Payments for notice, holiday, and contractual bonus are taxable in the normal way. The agreement should clearly set out how payments are being treated for tax purposes.
How long do I have to consider a settlement agreement?
The ACAS Code of Practice recommends a minimum of 10 calendar days, though this can be varied by agreement. If you’re being pressured to sign more quickly, that’s a concern worth raising with a solicitor.
What if I’ve already been through a redundancy consultation?
You can still be offered a settlement agreement after consultation has started or even concluded. Employers sometimes do this to finalise matters quickly once selection has been made. The key question is whether the offer is fair given everything that’s happened.
Can I Negotiate a Settlement Agreement Offered During Redundancy?
Yes, settlement agreements are negotiable. You may be able to secure a higher payment, better reference wording, removal of restrictive covenants, or other improved terms. How much leverage you have depends on factors including the strength of any potential claims, how much the employer wants certainty, and how quickly they want to conclude matters.
Get Advice on Your Settlement Agreement
If you’ve been offered a settlement agreement during redundancy, don’t sign until you’ve had it properly reviewed. Even agreements that look straightforward can contain terms that aren’t in your best interests.
This guide was written by Katie Wright, Senior Associate Solicitor and Head of Civil Litigation at WHN Solicitors. Katie has over a decade of experience in dispute resolution and advises individuals on settlement agreements, ensuring they understand what they’re signing and whether the offer on the table is fair. Katie was recently promoted to Senior Associate in recognition of her expertise and contribution to the firm.
For complex employment law matters — including high-value settlements, discrimination claims, or whistleblowing situations — WHN Solicitor’s team also includes Michael Shroot, Chief Executive Officer and employment law specialist. Michael is a member of the Employment Lawyers Association with experience representing clients across the Employment Tribunal, Employment Appeal Tribunal, and Court of Appeal, and has specific expertise in enforcing restrictive covenants and advising senior employees and directors.
Contact Katie Wright at 01200 408303 or via katie.wright@whnsolicitors.co.uk
Contact Michael Shroot: 0161 761 8087 or email michael.shroot@whnsolicitors.co.uk
Our team advises employees across the North West and throughout England and Wales. We’ll explain what you’re signing, assess whether the offer is fair, and advise on whether negotiation is appropriate.
