Is A Settlement Agreement The Same As Redundancy?

If your employer has offered you a settlement agreement instead of redundancy, you’ll probably want to get some legal advice before considering the offer.

Settlement agreement definition

Many employees receive one not knowing what is a settlement agreement is.

In short, it’s a legally binding document you can sign in exchange for compensation, which authorises you to waive any future legal action attempts aimed at your employer. It ensures that you will not sue your employer for anything related to discrimination or harassment.

Settlement agreements are often used in redundancy situations. But, there’s a big difference between settlement agreements and redundancies. See our redundancy guide for more advice.

Definition of redundancy

Is legally defined as a situation where the work of a specific type for the company has ended. In practice, this means that the company no longer needs as many employees.

If an employer has to close their workplace, employees will generally be offered the chance to relocate to another location. This might not be viable for some though (e.g. if it’s not close to home), so the employee may have no choice but to accept redundancy.

If a company considers making staff redundant, they should share a redundancy plan with employees to include:

  • identifying which people in the company are more likely to be made redundant
  • ensure fairness when deciding on eligible employees
  • holding employee consultations
  • giving each employee a valid reason why they’ve been selected for redundancy
  • considering other options (redeployment etc)
  • allowing employees access to the company’s appeals process

Employers are faced with a difficult choice in this situation. Settlement agreements offer employees the opportunity to explore new employment opportunities without wasting the time of either party. It does, however, put some pressure on both employer and employees which may have an impact on office morale.

Following the coronavirus pandemic, some companies are working on redundancies to avoid long-term staff absences and the expense of hiring new employees. If redundancies become unavoidable, companies may opt for a settlement agreement while on furlough.

Settlement agreement or redundancy?

The settlement agreement terminates the right to go through the redundancy procedure fairly, but you’re likely to receive a higher redundancy payment. Sometimes there is no such thing as a perfect solution. The employer is able to avoid unnecessary distractions associated with employment tribunal threats and the employee receives financial compensation and in some cases a reference.

To avoid future disputes or claims, the employer offers the employee a settlement agreement. If you are offered one then you’re not obliged to accept it. If an employee refuses the option, employers could choose the redundancy procedure option. It’s worth bearing in mind that employees may want to seek legal counsel to see if they have been fairly dismissed and can make a claim for unfair dismissal at an employment tribunal.

You may find your employee more accepting of a settlement agreement if it includes a payment for their severance in full rather than the standard redundancy procedure you follow when someone is laid off.

If an employee accepts the settlement agreement that’s been offered, they will not be able to claim financial compensation at a later date. An employee can consider if their employer’s offer is acceptable. If they don’t think it is, they have have the option to negotiate.

It’s risky to reject a settlement agreement offer and take an employer to the tribunal to seek additional compensation. Settlement agreements are generally preferable, but that’s not always the case.

The benefit for the employer is that they will not need to start the redundancy process. The benefit for the employee is getting paid more than usual.

Settlement agreement vs a redundancy package

It is recommend that an employer accepts the settlement agreement however, if made redundant, the entitlement to certain payments still holds.

In UK employment law, redundancy payments come in two types:

Statutory

The minimum statutory payment equals the minimum amount of legally required money that an employer should pay if they’ve made an employee redundant.

Employee’s are entitled to Statutory Redundancy Payment based on three factors: Their annual salary, age and the length of time they’ve been in employment with their current employer.

Statutory redundancy is calculated by the age of the employee and their length of service. To work out how much statutory redundancy payment, useful information can be found on the UK government website.

Enhanced

An employer could offer an additional or enhanced payment in addition to the minimum legal amount. This will be an extra payment on top of the statutory amount.

Depending on the employment contract and staff handbook, an employee may qualify for an enhanced redundancy sum which could provide a useful little boost when deciding which choice to make.

Payments mentioned in an employment contract

It’s very important to be aware of what the employment contract includes. Here are some payments employees are entitled to even when being made redundant:

  • Employee benefits and full salary up until the date of termination.
  • Entitled duration of notice based on employment contract.
  • Holidays that haven’t been taken.

You are entitled to these payments, even if you choose not to sign the agreement.

In Lieu of Notice Payments

Employer’s may pay in lieu of notice so employees can get a few more weeks with their families before starting a new job.

An employment contract will often let the employers choose whether to pay you in lieu of notice.

The payment difference between redundancy and settlement agreement

A settlement agreement usually has a higher payout than a redundancy. This makes accepting the agreement more tempting than redundancy.

Any additional monetary incentive would depend on a few specific details. Perhaps an employer believes an employee may pursue and unfair dismissal claim in the employment tribunal against them. It may depend on how forthcoming and generous an employer is and how compensation has been awarded to employees before now.

Negotiating higher compensation

There are many different factors that contribute to settlement agreements. Situation dependent, you may have grounds to negotiate an increase in your settlement payment.

When an employee is in a tough place at work, the most effective way to speak with their employer is through a protected conversation. This lets both sides talk freely and openly without the worry of anything said being used inappropriately.

An employee may want to make the conditions of settlement more favourable if they believe the redundancy decision is not strictly related to their performance. Otherwise, it’s possible that you could consider claiming unfair dismissal.

Ideally, an employee shouldn’t have to use this approach but it may work better than some other negotiations. Rather than pointing out how the redundancy is unfair, its possible to ask for a fairer severance package. This is likely to be a better fit for workplaces where the employee is on good terms with their employer.

What are the tax implications regarding settlement agreements and redundancy?

There is no link between the tax implications of an agreement and whether or not it gets signed. Most payments received are nontaxable, but some can be taxable regardless of whether or not the agreement is signed.

There are a few exceptions. If a contribution towards the cost of legal advice is received, then this can be paid tax-free. This applies to any money related to a settlement agreement that is considered paid legal advice. If an employer pays for legal advice in a redundancy case, then this is taxable

Which option should you choose? Redundancy or a settlement agreement

If it appears that an employees employment is on the line and they aren’t going to be working there for much longer, then it may well be worth taking a settlement agreement. A larger payment sum may be received along with a good reference too. Many companies will also provide a financial contribution towards the legal fees.

If you are then made redundant and your situation qualifies as unfair dismissal, you will still be entitled to compensation. If you have been offered or given a settlement agreement, a qualified UK settlement agreement solicitor can help guide you through the process.