Settlement Agreements And Redundancy (12 August 2026)

If your employer has told you that your job is at risk of redundancy you may be offered voluntary redundancy which is where, instead of going through the full redundancy process, you are offered an enhanced termination payment and other benefits that you would not be entitled to were you to go through the statutory process. These are usually settled by means of a ‘settlement agreement’ upon which it is necessary to get relevant independent advice, usually a solicitor.

What Is Redundancy?

Redundancy is a specific form of dismissal recognised in employment law in England and Wales. Broadly, a redundancy situation may arise where an employer closes or relocates its business or where its need for employees to carry out work of a particular kind has ceased or diminished, or is expected to do so. Employees facing redundancy may have rights to consultation, notice and consideration for suitable alternative employment. Employees with at least two years’ continuous service will normally also qualify for statutory redundancy pay, subject to the applicable eligibility rules.

An employer contemplating redundancies should follow a fair process. This will normally include genuine and meaningful consultation, consideration of ways to avoid or reduce redundancies, the use of fair selection criteria where employees are selected from a pool, and consideration of suitable alternative employment. There is no fixed statutory consultation period where fewer than 20 redundancies are proposed, although consultation should take place before the decision is finalised. Separate collective consultation rules apply where an employer proposes 20 or more redundancies within a 90-day period at a single establishment. A redundancy dismissal may be unfair if there was no genuine redundancy situation or if the employer failed to follow a fair procedure, although eligibility to bring an ordinary unfair dismissal claim will depend on the applicable legal requirements.

What Is a Settlement Agreement?

A settlement agreement, formerly known as a compromise agreement, is a legally binding written agreement under which an employer and an employee or worker settle specified legal complaints or claims. It is often used to bring employment to an end on agreed terms, although it can also settle a workplace dispute without terminating employment. The agreement is voluntary, and the individual must receive advice from a relevant independent adviser on the terms and effect of the agreement, including its effect on their ability to pursue the claims covered. A settlement agreement must identify the particular complaints or proceedings being settled and satisfy the other statutory validity requirements.

A settlement agreement is not a form of dismissal in itself, although it is often used to bring unemployment relationship to an end. It is a mechanism through which specified claims or potential claims can be settled on agreed terms. It may be used in connection with redundancy, performance, conduct, discrimination or another workplace dispute, and it is often used where the parties agree that the employment relationship should end. It can also be used without ending employment. A settlement agreement is voluntary, and an employee or worker cannot be compelled to accept or sign it.

Key Differences Between Voluntary Redundancy and compulsory Redundancy

Process

A redundancy should follow a fair procedure, but the applicable consultation requirements and timescales depend on how many redundancies are proposed. There is no fixed statutory consultation timescale where fewer than 20 redundancies are proposed, while collective consultation rules apply to larger-scale redundancies. A settlement agreement is negotiated between the parties. Although there is no single prescribed negotiation process, the ACAS Code recommends that employees should generally be given a reasonable period to consider a formal written offer and obtain independent advice. There is no general statutory requirement that the parties negotiate in good faith, although improper behaviour may affect whether settlement discussions remain protected in subsequent unfair dismissal proceedings.

Voluntary Redundancy

An employer can dismiss an employee by reason of redundancy without the employee’s agreement, provided there is a genuine redundancy situation and the dismissal is handled lawfully and fairly. A settlement agreement, by contrast, is voluntary, and an employee cannot be forced to sign it. If the employee declines the offer, the employment relationship continues unless and until the employer takes some other lawful step, such as proceeding with a redundancy, capability, conduct or other appropriate process. The employer could also withdraw or revise its proposal.

Financial Outcome

In a redundancy situation, an eligible employee may receive statutory redundancy pay, contractual or statutory notice or a payment in lieu of notice where permitted, and payment for accrued but untaken holiday. An employee may also be entitled to enhanced redundancy pay under their contract, a collective agreement, an established policy or the employer’s discretion. A settlement package may include contractual payments already due, redundancy pay where applicable, a termination payment, an agreed contribution towards legal advice and other negotiated benefits. A settlement agreement does not necessarily produce a higher payment than redundancy, so the proposed package should be compared carefully with the employee’s existing contractual and statutory entitlements and the potential value and risk of any claims being waived. This is why it is extremely important to take professional advice.

Confidentiality

Many settlement agreements contain confidentiality provisions covering the terms of the agreement and, in some cases, the circumstances leading to it. The wording and permitted disclosures should be checked carefully. Confidentiality clauses cannot lawfully prevent protected disclosures or disclosures that the law otherwise permits or requires, and agreements commonly include exceptions for disclosures to professional advisers, close family members, HMRC or regulatory and law-enforcement bodies. A redundancy dismissal does not automatically impose a new confidentiality obligation, although existing contractual duties and lawful confidentiality obligations may continue to apply.

Waiver of Claims

By signing a valid settlement agreement, an employee or worker gives up the right to pursue the particular legal claims identified as being settled by the agreement. These may include claims for unfair dismissal, discrimination, unlawful deductions from wages or breach of contract, depending on the wording and circumstances. A general statement that the agreement settles “all claims” is not, by itself, sufficient to compromise statutory claims: the agreement must identify the particular complaints or proceedings covered. Certain rights and claims may also be expressly excluded from the waiver. By contrast, a redundancy dismissal does not automatically prevent an employee from bringing an applicable claim, for example where the redundancy or selection process was unfair or discriminatory. Independent advice is therefore essential before the agreement is signed.

Why Employers Use Settlement Agreements Instead of Redundancy

Employers may propose settlement agreements in connection with redundancy or another proposed termination for several reasons:

• Speed — an agreed exit may be concluded more quickly than completing a formal redundancy or another employment process
• Confidentiality — the parties can agree lawful confidentiality provisions, subject to appropriate exceptions
• Certainty — a valid agreement can settle the specific claims listed in it, reducing the risk of later litigation concerning those matters
• Flexibility — the parties can negotiate matters such as the termination date, financial terms, an agreed reference, announcements, benefits, bonuses or share arrangements
• Managing legal or commercial risk — an employer may propose a settlement where there is uncertainty about the appropriate dismissal process, the fairness of a proposed termination or the potential claims that could arise

A settlement agreement should not be described as a device for disguising a redundancy or avoiding an employer’s legal duties. Its purpose is to document agreed terms and settle specified claims with the benefit of independent advice.

Should You Accept a Settlement Agreement Instead of Redundancy?

Whether a settlement agreement or a redundancy process is better for you will depend on your specific circumstances. There are situations where accepting a settlement agreement is clearly advantageous, and others where insisting on a formal redundancy process, or challenging the position entirely, is the right approach.

A settlement agreement may be attractive where the overall package compares favourably with your contractual and statutory entitlements, you want an agreed departure, or the agreement provides valuable terms such as an agreed reference. It may be less attractive where the proposed payment does not adequately reflect the rights and potential claims being waived, where you dispute the employer’s stated reason for termination, or where new or reaffirmed restrictive covenants could materially affect your ability to obtain future work. The strength and potential value of any claim, litigation risk, tax treatment, benefits and practical priorities should all be considered with an independent adviser.

One of the most important things to understand is that a settlement agreement is voluntary. You do not have to accept the first offer, and you may make a counteroffer or seek amendments to the proposed terms. Employers are not required to improve an offer, however, and their willingness to negotiate will depend on factors such as the strength of the parties’ positions, the potential claims, the costs and risks of continuing a formal process and the employer’s reasons for seeking an agreement.