Settlement Agreement vs Redundancy: A UK Employee's Guide

If your employer has told you your role is "at risk" or offered you a redundancy package, you may be wondering whether to accept the standard terms — or to negotiate a settlement agreement instead. The two routes look similar on the surface, but they are legally very different and can produce very different outcomes for your pay-off, your reference, and your right to bring a Tribunal claim.

This guide from our UK employment law solicitors explains the difference, when a settlement agreement is likely to be a better deal, and how to negotiate one.

The short answer

• Redundancy is a statutory dismissal process. You receive statutory redundancy pay (a formula set by law) plus notice pay and any contractual enhancement. You keep the right to bring a claim if the process was unfair.
• A settlement agreement is a private negotiated contract. In return for a lump sum — usually more than statutory redundancy — you agree to waive your right to sue your employer.

If your redundancy process is weak (poor consultation, unfair selection, a role that is not genuinely redundant), a settlement agreement will almost always leave you better off. If the process is textbook and there is nothing to negotiate against, statutory redundancy may be the right route.

What is a statutory redundancy?

A genuine redundancy under section 139 of the Employment Rights Act 1996 arises where:

• the employer has ceased or intends to cease the business or workplace; or
• the requirement for employees to carry out work of a particular kind has diminished.

Where you have two or more years' continuous service, you are entitled to:

• Statutory redundancy pay — half a week's pay for each full year under age 22, one week's pay per year aged 22–40, and one-and-a-half weeks' pay per year aged 41+. Capped at 20 years' service and (from April 2025) £719 per week — a maximum of £21,570.
• Statutory or contractual notice pay — one week per full year of service, capped at 12 weeks (or your contract, if longer).
• Any enhanced redundancy pay in your contract or staff handbook.
• Accrued but untaken holiday pay.

Statutory redundancy pay is tax-free up to £30,000. Notice pay and holiday pay are taxed as normal earnings (PILON is fully taxable under s.402D ITEPA 2003).

What is a settlement agreement?

A settlement agreement is a legally binding contract under section 203 of the Employment Rights Act 1996. In exchange for a payment (and usually an agreed reference and confidentiality clause), you agree not to bring specified employment claims against your employer — for example unfair dismissal, discrimination, or unlawful deductions.

For it to be legally valid, you must receive independent legal advice from a qualified solicitor, and the solicitor must be named and insured. The employer almost always pays a contribution towards those legal fees (typically £500–£1,500 plus VAT), which usually covers our costs in full.

At Deen & Co we provide same-day settlement agreement advice — read more or contact us.

Redundancy vs settlement agreement — side by side

| | Statutory redundancy | Settlement agreement | | --- | --- | --- | | Legal basis | ERA 1996 s.139 | ERA 1996 s.203 (contract) | | How much you receive | Statutory formula + notice + any contractual enhancement | Negotiated — usually statutory redundancy plus an ex-gratia payment | | Tax treatment | First £30,000 of the redundancy element tax-free | First £30,000 of the ex-gratia element tax-free | | Can you still sue? | Yes — unfair dismissal, discrimination, etc. | No — you waive listed claims in exchange for the payment | | Independent legal advice | Not required | Required by law; employer usually pays the fee | | Reference | Not negotiated | Usually a written agreed reference | | Confidentiality | None imposed | Standard mutual confidentiality clause | | Notice period | You work it or receive PILON | Often waived — you leave sooner with pay in lieu |

When to negotiate a settlement agreement instead of accepting redundancy

Employers usually offer a settlement agreement when they know the redundancy process is legally risky. Common triggers include:

• The redundancy is not genuine. Your role is being renamed, split, or given to a contractor. This is often not a true redundancy under s.139.
• Consultation was inadequate. For 20+ redundancies at one establishment, s.188 TULRCA 1992 requires 30 or 45 days' collective consultation. Individual consultation must also be meaningful — not a rubber-stamp.
• The selection pool or scoring was unfair. Small or artificially narrow pools, subjective scoring, or scoring done after the decision is made are all challengeable.
• Discrimination in selection. If part-time workers, women returning from maternity leave, disabled employees, or older workers are disproportionately selected, this can be direct or indirect discrimination under the Equality Act 2010.
• You raised a grievance or made a protected disclosure. Dismissal following whistleblowing (s.103A ERA 1996) is automatically unfair with no service requirement and uncapped compensation.
• You are pregnant or on maternity leave. Regulation 10 MAPLE 1999 gives you priority for suitable alternative roles — breach almost always triggers a settlement offer.

If any of these apply, a solicitor can usually negotiate an ex-gratia payment on top of the statutory redundancy — often equivalent to 3–6 months' pay, sometimes more for senior roles or strong discrimination claims.

What a good settlement agreement should contain

• A clear breakdown of statutory redundancy, notice pay, holiday pay, and the ex-gratia (tax-free) element.
• Confirmation that the first £30,000 of the ex-gratia payment is paid free of tax under s.401 ITEPA 2003.
• An agreed written reference attached as a schedule.
• A mutual confidentiality clause (not just one-way).
• A non-derogatory clause (both sides).
• Removal or narrowing of any post-termination restrictions you no longer need.
• Payment of your legal fees direct to your solicitor.

What to do if you are offered redundancy

1. Do not sign anything on the day. You are entitled to reasonable time to take advice.
2. Ask whether a settlement agreement is on the table as an alternative.
3. Get the offer, the score sheet (if any), and the consultation timeline in writing.
4. Speak to a specialist employment law solicitor — most consultations are free and, if a settlement agreement is offered, the employer pays the legal fee.
5. Negotiate before signing. Once the agreement is signed and paid, you cannot re-open the claim.

Redundancy agreement solicitor — how we can help

Our redundancy agreement solicitors at Deen & Co advise employees across the UK — usually on the same day, often for no cost to you.

We will:

• review your redundancy process and score sheet for unfairness or discrimination;
• benchmark the offer against comparable settlements;
• negotiate an improved ex-gratia payment, tax structure, reference and notice terms;
• advise on the tax treatment and any restrictions; and
• sign the agreement as your independent legal adviser so it becomes binding.

Read more about settlement agreements or contact us to speak to a redundancy and settlement agreement solicitor today.

This article is general information and not legal advice for your specific situation. For tailored advice, please contact Deen & Co Solicitors.