Settlement Agreements and Redundancy

Settlement Agreements and Redundancy: What You Need to Know

Losing a job through redundancy and business transformation can be stressful, emotional, and full of uncertainty. If you’re being offered a financial package or asked to sign legal paperwork during this process, it’s important to understand your rights and what it all really means. One common element that often causes confusion is the use of settlement agreements and redundancy in the same conversation.

We’ll explain the difference between settlement agreements and redundancy, what you’re entitled to, when you should seek advice, and how to move forward with clarity and confidence. We’ll also explain what is meant by the term compromise agreement, so you can feel empowered to make the best decisions for your future.

What Are Settlement Agreements and What Does Redundancy Mean?

Let’s start with a clear definition.

A settlement agreement is a legally binding contract between an employer and an employee. It usually sets out the terms of a financial package in exchange for the employee agreeing not to bring any future legal claims against the employer. These agreements are commonly used in redundancy situations, but they’re not a requirement for redundancy to occur.

Redundancy is a type of dismissal from your job, typically because the role is no longer needed due to restructuring, business closure, or changes in demand. Redundancy has its own legal framework that entitles you to specific protections and compensation depending on your length of service and the circumstances.

When both are involved together, people often wonder about the differences. Let’s clarify.

What are the main differences?

While the two are often linked, they are not the same.

Settlement Agreement:

  • A voluntary agreement, often offered during exits
  • Requires employee’s consent and legal advice
  • May include compensation above statutory levels
  • Waives employee’s right to take legal action

Redundancy:

  • A legal form of dismissal
  • Can happen with or without a settlement deal
  • Comes with statutory rights and pay
  • Doesn’t automatically involve legal waiver

Employers sometimes offer settlement agreements during redundancy to avoid disputes or to speed up the process, especially in senior or sensitive roles. In other cases, employees may be offered redundancy alone, without a settlement agreement. The key is to understand what’s being offered and whether it’s fair.

What Is a Compromise Agreement?

The term compromise agreement was used until 2013, when it was replaced by the term settlement agreement under UK employment law. So they are essentially the same, but the newer term is now used in all formal employment documents.

What Should The Agreement Include?

A typical settlement agreement redundancy package will include:

  • The reason for the offer (e.g. redundancy)
  • The amount of financial compensation
  • Payment for any untaken holiday
  • Payment in lieu of notice (PILON), if applicable
  • Waiver of claims against the employer
  • Confidentiality clauses
  • An agreement not to say anything damaging about the company
  • A contribution to the employee’s legal fees

To be legally valid, you must receive independent legal advice from a qualified solicitor. The employer usually pays for this.

Is a Settlement Agreement Compulsory in Redundancy?

No. Redundancy can take place without a settlement agreement. In fact, in many cases, employers follow a standard redundancy process which includes:

  • A consultation period
  • Alternative role offers (if available)
  • Redundancy notice and final working date
  • Statutory or contractual redundancy pay

But when circumstances are more complex, such as avoiding conflict, managing senior exits, or offering enhanced pay, employers may propose a settlement agreement redundancy package to wrap everything up more smoothly.

How Is Redundancy Pay Calculated?

If no settlement agreement is involved and you’re being made redundant under the standard process, you’re usually entitled to statutory redundancy pay if you’ve worked for your employer for at least two years. The calculation is based on:

  • Your age
  • How long you’ve been employed
  • Your weekly gross pay (up to a legal cap)

Employers may also offer enhanced redundancy pay as part of a redundancy settlement or within a settlement agreement.

Is the Redundancy Settlement Fair?

This is one of the most important questions to ask. Employers may offer a redundancy settlement or agreement that includes an enhanced pay package, but this is usually in exchange for waiving your legal rights. Before signing, always consider:

  • Is the payment higher than your legal redundancy entitlement?
  • Are you being treated fairly compared to colleagues?
  • Does the agreement restrict your ability to speak about your exit or work elsewhere?
  • Are there non-disparagement or non-compete clauses?
  • Have you been pressured to accept it without proper time or advice?

Never feel rushed. You are legally entitled to independent legal advice from an employment lawyer before signing, and most employers will give you at least 7–14 days to consider the offer.

When Should You Seek Career Support?

Going through redundancy or a settlement agreement isn’t just a legal and financial matter, it’s also a major life event. That’s why many employers offer additional services such as outplacement support or career coaching as part of the exit package.

At Careers Matters, we work with individuals who are navigating both settlement agreements and redundancy to help them:

  • Clarify their next steps
  • Build job search skills and strategy
  • Rework their CV and LinkedIn profile
  • Explore new sectors or self-employment
  • Build confidence and resilience after job loss

You don’t have to go through it alone.

Common Questions for settlement agreements

Q: Can I negotiate the terms of the agreement?

A: Yes. The initial offer is often a starting point. You can ask for more money, outplacement support, extended health benefits, or changes to restrictive clauses. Your solicitor can help you negotiate.

Q: What happens if I refuse to sign?

A: You remain entitled to your normal redundancy rights. But you may not receive any enhanced payments tied to the agreement.

Q: Is money from the agreement taxed?

A: The first £30,000 of genuine compensation for loss of employment is usually tax-free. But payments in lieu of notice, bonuses or holiday pay are taxable.

Q: Can I still claim benefits or Universal Credit?

A: Possibly—but redundancy or settlement pay may affect when and how much you can claim. It’s best to check with a benefits advisor.

How Employers Can Support Fair Redundancy Processes

If you’re an HR professional or business owner considering redundancy, offering fair and transparent processes is key to protecting both your staff and your reputation.

Providing employees with the following can make all the difference:

  • Time to consider their options
  • Legal support for settlement agreements
  • Outplacement or career transition coaching support
  • Clear communication
  • Respect and empathy

At Careers Matters, we deliver outplacement support and executive career coaching tailored to individual circumstances, especially in settlement agreement and redundancy scenarios.

Redundancy is never easy. But with the right information, advice and support, it can be the beginning of something better. Whether you’ve been offered a settlement agreement, or are going through a redundancy, it’s wise to be aware that additional services such as outplacement support or career coaching can be negotiated as part of the exit package and can make a huge difference to the time it takes to find a new role, as well as your wellbeing and confidence.

At Careers Matters, we’re here to support your career transition every step of the way.

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