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What Is The Difference Between Redundancy And A Settlement Agreement?


In the UK, there are several ways in which an employment relationship can come to an end. Two common methods are redundancy and settlement agreements. While both can result in the termination of employment, they differ significantly in terms of the reasons for termination, the legal processes involved, and the rights and entitlements of the affected employees. In this blog post, we will explore the key differences between redundancy and settlement agreements to help you better understand each process.


Definition and reasons for redundancy

Redundancy occurs when an employer decides to reduce the number of employees in their organisation due to operational changes, financial constraints, or the cessation of business. The reasons for redundancy can be varied, but the critical factor is that the employee’s job role is no longer required. Redundancies can be either voluntary or compulsory.

Legal process

The redundancy process in the UK is governed by specific employment laws that ensure employees are treated fairly and consistently. Employers must follow a fair and transparent consultation process, during which they must:

  1. Inform employees about the reasons for redundancy and the selection criteria used to determine who will be made redundant.
  2. Consider any suitable alternative roles within the organisation.
  3. Allow employees the right to appeal their redundancy.

Entitlements and compensation

Employees made redundant are entitled to a statutory redundancy payment, provided they have been employed for at least two years. The amount of this payment depends on the employee’s age, length of service, and weekly pay, up to a capped amount. Employees may also be entitled to additional redundancy pay if their contract of employment provides for it. Furthermore, employees have the right to a notice period or pay in lieu of notice.

Settlement Agreement

Definition and reasons for a settlement agreement

A settlement agreement, formerly a compromise agreement, is a legally binding contract between an employer and an employee that sets out the terms under which the employment relationship will be terminated. Settlement agreements can be used in various situations, such as resolving workplace disputes, performance issues, or when an employer wishes to terminate an employee’s contract without following the usual disciplinary or redundancy procedures. The key feature of a settlement agreement is that both parties mutually agree to the terms.

Legal process

Settlement agreements are negotiated between the employer and the employee, usually with the assistance of legal advisors. The terms of the agreement can vary, but they typically include:

  1. A termination date for the employment relationship.
  2. A financial settlement, can include compensation for the loss of employment, notice pay, and any outstanding holiday pay.
  3. A confidentiality clause, which prevents both parties from discussing the terms of the agreement or the reasons for termination.
  4. A reference for the employee, which is often agreed upon as part of the negotiation process.

Before a settlement agreement can be considered legally binding, the employee must receive independent legal advice on the terms and implications of the agreement. This is to ensure that the employee fully understands their rights and the consequences of entering into the agreement.

Entitlements and compensation

The financial settlement offered in a settlement agreement is usually greater than the statutory redundancy payment, as it often includes compensation for the loss of employment rights, such as the right to bring a claim against the employer in an employment tribunal. The actual amount of the settlement will depend on various factors, such as the employee’s length of service, salary, and the circumstances surrounding the termination of employment.


Redundancy and settlement agreements are two different methods of terminating an employment relationship in the UK, with distinct reasons, legal processes, and entitlements for the affected employees. Redundancy is a process in which an employee’s job role is no longer required, and the employer must follow specific legal procedures to ensure fairness and transparency. Employees made redundant are entitled to statutory redundancy pay and a notice period.

In contrast, a settlement agreement is a negotiated contract between an employer and an employee that sets out the terms for ending the employment relationship. This can be used in various situations, such as resolving disputes or performance issues, and generally results in a higher financial settlement for the employee. The employee must receive independent legal advice before entering into a settlement agreement to ensure they understand the implications and consequences of the agreement.

Ultimately, both redundancy and settlement agreements can result in the termination of employment, but the reasons, processes, and outcomes differ significantly. Understanding these differences is crucial for both employers and employees in order to navigate these situations effectively and protect their respective rights and interests.

Need Help With Redundancy Or A Settlement Agreement? 

Monarch Solicitors specialist Redundancy and Settlement Agreement solicitors provide a tailor-made approach to your needs and can help offer expert advice. Please contact us by either calling 0330 127 8888 or emailing [email protected] for an initial consultation.


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