Settlement Agreement Or Voluntary Redundancy

Posted on 11/02/2021 under General, Redundancy,
Last updated 08/11/2026

Redundancy rounds rarely come with much warning, and staff are often given days rather than weeks to decide what to do.  Rumours of workplace redundancies usually result in an atmosphere of stress and low morale – neither of which help facilitate calm, logical decision making.  This is where our Settlement Agreement Solicitors can help.  Some employers will offer a choice between accepting a Settlement Agreement or voluntary redundancy.  This article explains the differences between the two and provides the vital information you need to make the right decision for your situation.

What is the difference between a Settlement Agreement (formerly known as a Compromise Agreement) and redundancy?

Although Settlement Agreements are often used in redundancy situations, they are not the same.  A Settlement Agreement is a contract between you and your employer in which you agree to waive your right to bring a claim against your employer in the Employment Tribunal in exchange for a financial settlement.

Redundancy, on the other hand, is governed by the Employment Rights Act 1996.  Under section 139 of that Act, a dismissal is by reason of redundancy if it is mainly because your employer has closed (or plans to close) the business, has closed (or plans to close) the workplace where you were employed, or needs fewer employees to do work of a particular kind.  Furthermore, your employer must comply with all legislative requirements relating to making staff redundant, and that includes consulting the staff affected.  Where 20 or more redundancies are proposed at one establishment within 90 days, your employer must also consult collectively, at least 30 days before the first dismissal takes effect, or 45 days where 100 or more are proposed (Acas).  If it does not, a tribunal can make a protective award of up to 180 days’ pay for each employee affected (for dismissals on or after 6 April 2026).

What is voluntary redundancy?

If your employer is planning to make redundancies, you can choose to volunteer to be made redundant before or during the official selection process.  Your employer does not have to make you redundant upon request, they may consider your skills and experience too valuable to lose. 

Although accepting voluntary redundancy brings your employment to an end, it is normally still treated as a dismissal by reason of redundancy, so you keep your right to statutory redundancy pay if you have at least two years’ continuous service.  Notice is a separate right.  You are entitled to your contractual notice or, if longer, the statutory minimum of one week for each complete year of service (at least one week once you have worked a month, up to 12 weeks), giving you time to search for a new job.

Would I achieve a greater financial settlement by taking voluntary redundancy or negotiating a Settlement Agreement?

Voluntary redundancy often comes with a financial settlement which is higher than what you could expect from statutory redundancy pay.  A Settlement Agreement payment, on the other hand, is negotiated, and what you could get depends largely on the strength of any claims you would be giving up. 

The amount you could be offered in both scenarios will depend on factors such as your age, length of employment, how easy it would be for you to find a similar position and your current salary. 

Statutory redundancy pay is worked out from your age, length of service (up to 20 years) and weekly pay: half a week’s pay for each full year worked under 22, a week’s pay for each year aged 22 to 40, and one and a half weeks’ pay for each year aged 41 or over.  For redundancies on or after 6 April 2026, a week’s pay is capped at £751, so the most you can receive is £22,530 (GOV.UK).

You can use the government’s redundancy calculator to work out your statutory redundancy pay.  This will provide a base figure from which you can negotiate compensation.  You can also find a Settlement Agreement calculator on our website to help you determine how much compensation you could get under this route.

It is important to note that the first £30,000 of a genuine termination payment, such as redundancy pay or Settlement Agreement compensation, can be paid tax-free, and your statutory redundancy pay counts towards that £30,000.  Notice pay is different: it is taxed as earnings whether you work your notice or are paid in lieu (section 402B of the Income Tax (Earnings and Pensions) Act 2003), and so are salary, holiday pay and bonuses. 

Our Settlement Agreement Solicitors have the in-depth knowledge and experience needed to estimate how much you could expect in a Settlement Agreement or a voluntary redundancy situation. 

Should I take voluntary redundancy or a Settlement Agreement?

The decision as to whether to take voluntary redundancy or a Settlement Agreement will depend on your situation.  Because redundancies are going to occur anyway, your employer may be less inclined to negotiate your voluntary redundancy payment, adopting a ‘take it or leave it’ approach.  In this scenario, a Settlement Agreement may be more advantageous to you.  If this is the case, think about whether you have any potential claims, such as unfair selection or discrimination, as the strength of those claims is often what gives you room to negotiate.

You must keep in mind whether you may want to bring a future Employment Tribunal claim.  By signing a Settlement Agreement, you are legally bound to waive your rights to bring a claim.  A Settlement Agreement only stops you bringing a claim if you have had independent advice on its terms from a relevant independent adviser, such as a solicitor (section 203).  However, if you take voluntary redundancy without signing a Settlement Agreement, you will not be prevented from bringing a claim for discrimination or another applicable reason.  Some employers will only pay an enhanced voluntary redundancy package if you sign one.

Timing can matter too, because where your employment ends on or after 1 January 2027, even if you were given notice before then, you will be able to claim unfair dismissal after six months’ service rather than two years, and the cap on the compensatory award will be removed (SI 2026/559).  The two-year rule for statutory redundancy pay is not changing.

Final words

The consequences of ending your employment should not be underestimated.  It is vital to seek advice from a Settlement Agreement lawyer on which option – voluntary redundancy or a Settlement Agreement – will best protect your financial future and legal rights.

Have more questions about settlement agreements and redundancy? Call Settlement Agreement Solicitors today on 0800 368 6162 or fill in your details below to request a callback.