January 31, 2024
When employees are offered a settlement agreement rather than redundancy, questions can arise about which option is better. As two different choices, it may be confusing to understand why employers have offered one rather than the other and which would benefit the employee more.
In this article, we explain the difference between a settle agreement and redundancy to help employees recognise and make an informed decision.
What is Redundancy?
Defined by law, redundancy refers to when an employer no longer requires an employee to work. This may be due to companies looking to reduce their costs, restructuring or relocating, or there is no longer a need for the specific job role.
Other options may be explored by employers such as altering working hours, transferring employees into different roles, or offering voluntary redundancy. No matter what the reason, the employer must always follow a fair redundancy procedure including lawful consultation and selection processes.
What is a Settlement Agreement?
A settlement agreement is a legally binding contract between an employer and an employee that typically provides financial compensation in exchange for no legal action to be pursued by the employee. There may also be other confidentiality clauses included in this.
They are voluntary and mutually agreed upon by both parties in order to resolve either employment disputes or voluntary redundancy situations. A settlement agreement clearly sets out the terms to terminate the employment relationship.
What is the Difference Between a Settlement Agreement & Redundancy?
Even though a settlement agreement is sometimes used for redundancy, they are not the same thing; they have different implications for both employers and employees.
Settlement agreements offer employers a way to reduce workforce without having to go through the full redundancy process and without the risk of unfair dismissal claims. Redundancy is compulsory termination, whereas a settlement agreement is voluntary, however both processes result in payment packages.
Redundancy Packages vs Settlement Agreement Packages
A settlement agreement often offers a higher pay package than redundancy. A redundancy package includes certain minimum payments, whereas the settlement agreement payment is agreed upon by the employee and the employer together.
Within a redundancy package, a statutory redundancy payment is received and sometimes an enhanced redundancy payment. The statutory redundancy payment is the minimum sum of money an employer is legally required to pay in the event of redundancy. Salary, age and length of employment all play a factor in calculating this payment.
Enhanced redundancy is the payment that goes beyond the employer’s legal requirement. There is also the payment in lieu of notice where an employer can pay an employee for their notice period without actually working it.
Which is Better: Settlement Agreement or Redundancy?
Whether a settlement agreement or redundancy is better for an employee depends on the individual circumstances of the employment relationships and the employee themselves. Here are some of the benefits and drawbacks to both options:
- Legal minimum payment requirements
- More opportunities to be rehired
- Voluntary and option to negotiate
- Higher payment package
- No opportunities to be rehired
Do You Need Legal Advice for a Settlement Agreement or Redundancy?
If employees feel like they are being treated unfairly and shouldn’t be made redundant, it’s beneficial to receive legal advice for going through the redundancy procedure and claiming compensation for unfair dismissal. It’s also beneficial for employees to receive legal advice before signing a settlement agreement in order to make sure it’s the best decision for them. Premier Legal’s specialist team is here to help you navigate which option is best for you, so get in touch with us today