Settlement Agreements and Redundancy: What You Need to Know

Being made redundant and being offered a settlement agreement are two different things — though employers frequently present them together in the same conversation. Understanding the distinction matters, because signing a settlement agreement has permanent legal consequences that a standard redundancy does not.

What a settlement agreement is

A settlement agreement is a legally binding contract between you and your employer. In exchange for an agreed payment, you waive your right to bring specified employment tribunal claims — typically including unfair dismissal, discrimination, and redundancy-related claims — against your employer.

Once signed by both parties and countersigned by your independent legal adviser, it is final. You cannot generally return to an employment tribunal on the claims covered by the agreement, even if you later discover you were entitled to more.

Why employers offer them during redundancy

Employers use settlement agreements during redundancy for two main reasons.

The first is certainty. A redundancy process — even a well-run one — carries risk. If the selection criteria were not perfectly documented, if consultation was shorter than ideal, or if there is any question about the fairness of the process, a settlement agreement removes the employer's exposure to an unfair dismissal claim. They are buying protection from litigation.

The second is speed. A settlement agreement allows the parties to bypass some of the formal redundancy process — consultation periods, selection scoring, appeals — and reach a clean conclusion on agreed terms. For employers managing a sensitive exit, particularly for senior employees, this is often preferable to a drawn-out process.

Both of these reasons mean the employer is getting something valuable when you sign. That is leverage you can use.

What you are giving up

The central thing you waive is your right to bring employment tribunal claims. This typically includes:

• Unfair dismissal
• Wrongful dismissal
• Discrimination claims
• Claims arising from the redundancy process itself

Some rights cannot be waived by a settlement agreement. Your accrued pension rights, personal injury claims that were unknown at the time of signing, and claims arising from events after the agreement is signed cannot be excluded.

Crucially, if your employer has not calculated your statutory redundancy pay correctly, you should know the correct figure before you sign — because signing may waive your right to challenge the calculation. Check your statutory entitlement independently before you agree to anything.

What makes a settlement agreement legally valid

For a settlement agreement to be legally binding, several conditions must be met under the Employment Rights Act 1996:

• It must be in writing
• It must relate to specific complaints or claims
• You must have received independent legal advice from a qualified adviser on the terms and their effect, including the effect on your ability to bring tribunal claims
• The adviser must have professional indemnity insurance

The independent legal advice requirement is not a formality — it is a statutory condition. A settlement agreement signed without it is not valid. Your employer cannot require you to sign without giving you time and opportunity to obtain that advice.

Your employer will almost always contribute to the cost of your legal advice — typically £250 to £500 plus VAT. This is standard practice and you should expect it to be offered without asking.

You do not have to sign

Settlement agreements are entirely voluntary. You have the right to refuse, and refusing does not mean your employer can simply dismiss you. If you decline a settlement agreement, your employer must continue with a fair and lawful redundancy process — the same consultation, selection criteria, and notice obligations that apply in any redundancy.

The risk of refusing is that if the redundancy process is fair and your dismissal is lawful, you will receive only your statutory redundancy entitlement rather than any enhanced package that was on the table. Whether the settlement offer is worth accepting depends entirely on what is being offered versus what you would realistically receive through the formal process.

What you can negotiate

Because the employer is getting certainty, there is often room to negotiate. Elements commonly open to discussion include:

The financial payment. The offer will usually include your statutory redundancy pay as a baseline, plus an additional ex-gratia sum as compensation for waiving your claims. The ex-gratia element is the negotiable part. How much is reasonable depends on the strength of any claims you might have, your length of service, and the circumstances of the redundancy.

The reference. Always negotiate the wording of any reference explicitly. A vague verbal assurance from your manager is worth nothing — agree the text in writing as part of the settlement agreement itself.

Confidentiality. Most settlement agreements include a confidentiality clause preventing you from disclosing the terms. This is standard and usually non-negotiable, but the scope of what you cannot discuss is worth checking — some clauses are broader than others.

Post-termination restrictions. If the agreement includes non-compete or non-solicitation clauses, these are negotiable, particularly in terms of duration and geographic scope.

The leaving date. If you want more time, or less, the termination date is often flexible.

The tax position

Payments made under a settlement agreement follow the same tax rules as redundancy pay generally. The first £30,000 of genuine compensation for loss of employment is tax-free. Your statutory redundancy pay sits within — not on top of — that £30,000 threshold. Notice pay is always taxable as normal earnings regardless of how it is labelled in the agreement.

See our guide on is statutory redundancy pay taxable for the full breakdown of what qualifies for the exemption and what does not.

Before you sign anything

Check your statutory redundancy entitlement independently before you engage with the settlement figure. Use our calculator to establish your baseline — the legal minimum your employer must pay regardless of any settlement. If the settlement offer is below that figure, that is not negotiation, it is an underpayment.

Read our full guide on what settlement agreements mean and what you are signing away for a plain-English breakdown of the individual clauses you are likely to encounter.

And if you have any doubt about whether the offer is fair — take the independent legal advice your employer is required to fund before you make any decision.