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Are settlement agreements the same as redundancy?

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Settlement agreements and redundancy both involve an employee being paid monetary compensation for the loss of their job, however, they are essentially two different things which offer different legal rights. It you are going through a redundancy process and are offered a settlement agreement, it is important that you understand the difference between the two and which option is best for you.

Settlement agreements

Settlement agreements are legally binding contracts that (in most circumstances) end the relationship between employer and employee. The agreement is voluntary and will usually involve the employer paying the employee a sum of money in exchange for waiving their rights to make any future claims against the company.

As well as being voluntary, the employee has the right to negotiate the terms of the agreement, for example, by requesting a good reference for future employment. It is important that employees seek independent legal advice to go through the terms of the negotiation and ensure that they get a fair outcome.

Depending on the circumstances, settlement agreements can involve larger sums of money than redundancy payments, as any compensatory (non-contractual) payments are exempt from tax on the first £30,000.

Redundancy

Redundancy is a type of dismissal from your job. Redundancies can happen for a number of reasons, but the most common tends to be that the employer needs to reduce their workforce. Depending on certain circumstances, when an employee is made redundant they are eligible for certain rights including:

  • a consultation period with their employer (varies depending on company size)
  • a notice period (varies depending on length of service)
  • the option to move into a different position within the company (if applicable)
  • time off to find a new job
  • statutory redundancy pay.

Selection for redundancy must be fair and must not be discriminatory against people due to their age, gender, disabilities or religion etc.

If an employee has been working for an employer for at least two years, they are usually entitled to:

  • half a week’s pay for each full year they were under 22
  • one week’s pay for each full year they were older than 22, but under 41
  • one and a half week’s pay for each full year you were 41 or olde

The weekly pay is capped at £525 and the length of service is capped at 20 years. Your employer may negotiate other payments towards you under the terms of your redundancy.

Can a settlement agreement be used in place of a redundancy?

Sometimes settlement agreements are used in a redundancy situation, however it is important that the employer understands the difference between the two, what the terms of the settlement agreement are and what their rights are.

One of the main differences between a settlement agreement and redundancy is that generally an employee would receive a larger amount of money in a settlement agreement, however they may have less rights than in a redundancy situation. For example, an employer may offer an employee a settlement agreement that is more attractive than their redundancy package which, if agreed to, helps them to avoid the lengthy consultation process, keeps it confidential from other employees and also to avoid future claims being brought against them.

For employees, the prospect of avoiding the stress and uncertainty during a consultation process and the larger monetary compensation, makes settlement agreements the more attractive option. However, it is important that they seek independent legal advice so that they fully understand the terms of the agreement and their rights. A solicitor can help the employee to negotiate the terms of the agreement and can advise as to whether to sign it or not.

Get expert legal advice on settlement agreements

If you’re going through a redundancy or need help negotiating a settlement agreement, speak to our specialist team of employment law solicitors. We specialise in providing fast, friendly and efficient employment advice focused on promoting your employee rights and achieving an outcome which helps you to move on with your career with confidence. Call today on 01476 372 047 or use our enquiry form to the right of this page.

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