Offered a Settlement Agreement Instead of Redundancy?

Many employers would rather offer a settlement agreement than run a full redundancy process. It is quicker for them, it avoids the risk of a tribunal claim, and it lets them part company with you without consulting for weeks. For you, it can mean more money than the legal minimum, but only if you understand what is on the table and negotiate before you sign.

Why does an employer offer a settlement instead of redundancy?

A redundancy process has to be genuine and fair. Your employer must consult you, use objective selection criteria, and look for suitable alternative work. That takes time and carries legal risk. A settlement agreement lets them avoid all of that by paying you a sum in return for you agreeing not to bring any claims.

An offer is often a sign that your employer is worried about the strength of your potential claims, which means you usually have more room to negotiate than you might think.

What is a settlement agreement?

A settlement agreement is a legally binding contract. In return for a payment, you give up your right to bring employment tribunal claims against your employer. To be valid, it must be in writing, relate to specific claims, and you must take independent legal advice from a qualified adviser who is named in the agreement. Your employer should pay a contribution towards that advice, commonly between £250 and £750 plus VAT. For a fuller explanation, see our guide on how to negotiate a settlement agreement.

How should the money compare to redundancy pay?

A settlement offered instead of redundancy should normally be worth more than your statutory redundancy entitlement, because you are also giving up the right to claim. A fair package usually reflects:

• Your statutory or enhanced redundancy pay as a starting point

• Your full notice pay, either worked or paid in lieu

• Any accrued but untaken holiday pay

• An additional ex gratia sum that reflects the strength of any claims you could bring and how long it may take you to find new work

If you do not know what your statutory figure should be, work it out first using our guide on how much redundancy pay you will get. That number is your floor, not your ceiling.

How is a settlement payment taxed?

Genuine compensation for the loss of your job, including statutory redundancy pay, is normally free of income tax and National Insurance up to £30,000. Notice pay and holiday pay are taxed as earnings. A well-drafted agreement should set out clearly which parts of the payment are taxable and which are not.

What to check before you sign

• The reference. Ask for an agreed reference to be attached so you know exactly what future employers will be told.

• Restrictive covenants. Check whether the agreement repeats or tightens any post-termination restrictions in your contract. See our guide on restrictive covenants.

• Confidentiality. Most agreements ask you to keep the terms confidential. This should work both ways.

• The legal contribution. Make sure it actually covers the cost of your advice.

• Timing. The ACAS Code recommends you are given at least ten calendar days to consider an offer. Do not let an informal deadline rush you.

Should I take voluntary redundancy or a settlement?

Voluntary redundancy is still a redundancy, so it usually keeps your statutory rights and may include enhanced pay, but it does not stop you bringing a claim unless it is wrapped up in a settlement agreement. A settlement agreement gives the employer certainty and so should reward you for that. Which is better depends on the size of the offer, the strength of your claims, and what you want next. This is exactly the kind of question worth a short advice session.

Frequently asked questions

Can I be forced to accept a settlement agreement?
No. You cannot be made to sign. If you refuse, your employer must either run a proper redundancy process or keep you employed.

What happens if I reject the offer?
Rejecting an offer does not remove your redundancy rights. Your employer would then need to follow a fair redundancy procedure, and you keep the right to claim if it does not.

Is the conversation about leaving confidential?
Often, yes. Pre-termination settlement discussions can be protected so they cannot be used in an ordinary unfair dismissal claim. Our guide on protected conversations explains how this works.

Do I really need a solicitor?
Yes. The agreement is not legally binding unless you take independent advice, and a specialist will often negotiate a better figure than the one first offered.

How much should the ex gratia payment be?
There is no fixed formula. It depends on the strength of your claims and your circumstances. A specialist can value your claims quickly and tell you whether the offer is fair.

Speak to an employment law specialist

Before you sign anything, it is worth knowing whether the offer is fair and where you could push for more. Book a 30-Minute Advice Session — £99 for direct telephone advice and a written summary, or request a free case review first.

Related guides: How much redundancy pay will I get? and Settlement agreements versus COT3