Should you agree to a Settlement Agreement instead of Redundancy?

If you’re being made redundant, your employer may offer you a settlement agreement instead of simply paying your redundancy entitlement through the normal process. This can leave employees wondering which option is better.

The answer depends on your individual circumstances. A settlement agreement can offer additional financial benefits, but it also means giving up certain legal rights. Understanding what each option involves can help you make an informed decision.

What is a Settlement Agreement

A settlement agreement is a legally binding contract between you and your employer. In return for a financial payment, you agree to not bring certain legal claims against your employer, usually relating to your employment or its termination.

To make the agreement legally valid, you must receive independent legal advice before signing it. In many cases, employers will contribute towards or pay the cost of this advice.

What happens if you don’t sign?

If you choose not to sign a settlement agreement, you will usually still receive any redundancy payments and other contractual entitlements that you are legally owed.

This may include:

  • Statutory redundancy pay, depending on your length of service
  • Your notice pay or pay in lieu of notice
  • Any outstanding holiday pay
  • Any contractual redundancy benefits your employer is required to provide

Importantly, if you do not sign a settlement agreement, you generally keep your right to bring legal claims if you believe your redundancy was handled unfairly or unlawfully.

Why might an employer offer a Settlement Agreement

Employers often use settlement agreements to bring the employment relationship to a clear and final end. By signing the agreement, both sides gain certainty that the matter is settled.

To encourage employees to sign, employers may offer benefits that go beyond the standard redundancy package, such as:

  • An enhanced redundancy payment 
  • An additional compensation payment
  • Continued benefits for a period after employment ends 
  • Other agreed financial arrangements

Not every settlement agreement includes significantly higher payment, so it's important to compare the offer with wat you would receive through the normal redundancy process.

What rights are you giving up?

The main difference between accepting redundancy and signing a settlement agreement is that the settlement agreement usually requires you to waive your right to bring most employment-related claims against your employer.

This includes claims for:

  • Unfair dismissal
  • Wrongful dismissal
  • Discrimination
  • Unlawful deduction from wages
  • Other employment related claims connected to your employment or its termination

Because you are giving up important legal rights, independent legal advice is a legal requirement before the agreement can take effect.

Things to consider before you decide

  • Is the financial offer better than your normal redundancy entitlement?
  • Do you believe the redundancy process has been fair?
  • Are there any potential legal claims you would be giving up?
  • Are there confidentiality or other terms you are comfortable agreeing to?

Your solicitor can explain the legal effect of the agreement and help you understand whether the terms are reasonable.

Settlement Agreement vs Redundancy

Whilst they are closely linked, they are not the same thing. Redundancy is the reason your employment ends, while a settlement agreement is a legal contract that sets out the terms of your departure.

In both cases, you will usually receive any redundancy pay (subject to your length of service), notice pay, or other contractual payments you are entitled to. The main difference is that a settlement agreement normally includes an additional payment or benefit exchange for giving up your right to bring most employment claims against your employer.

If you do not sign a settlement agreement, you generally keep the right to challenge the redundancy if you believe the process was unfair (subject to you having the requisite length of service to bring an unfair dismissal claim). Whether a settlement agreement is a better option depends on the offer being made and your individual circumstances.

Should you agree to a settlement agreement instead of redundancy?

Whilst there isn't a single answer that applies to everyone, a settlement can be good option if it offers additional financial benefits that fairly reflect legal rights you are giving up.

However, if you have concerns about the way your redundancy has been handled or believe you may have a legal claim, it is important to consider whether signing the agreement is in your best interest.

Before making a decision, take the time to understand exactly what is included in the offer and seek independent legal advice. Comparing the settlement package with your normal redundancy entitlement will help you decide which option is right for your individual circumstances.

How can we help?

Need support with settlement agreements? At Smith Partnership in Stoke, our team offers a comprehensive range of services to guide you through all aspects of settlement agreements.

Get in touch with our specialist settlement agreement solicitors today. Contact our team by telephone on 0178 232 4454, complete our contact form, or send us an email via info@smithpartnership.co.uk

We also have offices across the East Midlands and Staffordshire with expert settlement agreement solicitors, in BurtonDerbyLeicester and Swadlincote.

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