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A settlement agreement is a contract between an employer and employee and it’s legally binding. The common use for settlement agreements is for ending someone’s period of employment, but does this mean a settlement agreement is the same as redundancy?
A settlement agreement is an alternative to redundancy, but it’s not the same thing as redundancy.
What is a Settlement Agreement?
In a settlement agreement, the employee agrees to give up their rights in exchange for something the employer offers.
In most cases, this is a settlement payment.
What rights does the employee agree to give up?
Essentially, the employee will not be able to pursue any claims against the employer, if they sign up to the agreement.
By making this agreement, the employer and employee agree mutually to end the employee’s employment, offering both parties a clean break. This applies in situations where ending employment is the preferred solution.
The employer can offer an employee a settlement agreement at any time during the employee’s period of employment, without having to go through a disciplinary process.
What is Redundancy?
Redundancy is a process that is defined in law and it only applies in certain situations:
- If the employer has stopped carrying out the part of the business in which the employee works
- If the employer is closing down the place of work
- If the employer is reducing the head-count of staff because they no longer require as many employees.
When an employer dismisses an employee, they can’t simply call it redundancy unless the appropriate conditions apply.
Redundancy won’t apply if an employer restructures their business but this has no impact on the head count.
It may still be fair for them to dismiss someone because of this restructuring, but it won’t count as a redundancy. The employer won’t have to make a redundancy payment.
Of course, this doesn’t stop an employer from making a redundancy payment in this type of situation if they decide it’s the right thing for them to do.
If an employer chooses to dismiss staff using redundancy, they must go through a procedure and this procedure must be fair.
The employer must:
- Identify the group of people at risk of redundancy
- Apply fair selection criteria to this group
- Consult with staff
- Explain the reason for redundancies
- Explore potential alternatives
- Look at whether staff can be given alternative job roles
- Allow them to appeal against their redundancy.
Therefore, the redundancy process does come with an administrative burden, which can impact time and resources.
In redundancy, the employee can have various rights, such as:
- Redundancy pay
- A period of notice
- Consultation with employer
- The option to move into a different job
- Time off to find a new job.
And if the employer is making them redundant due to insolvency, then the employee also has specific rights that allow them to apply to the government for various payments, including redundancy, outstanding pay and holiday pay.
What are the Key Differences?
In a settlement agreement, the employee waives their right to go through a fair redundancy procedure. Therefore, the various rules of redundancy will not apply.
However, in return, the employer may agree to a settlement payment that would be more than a redundancy payment. This is a typical incentive that employers offer to encourage employees to agree to a settlement.
In a settlement agreement, the employer is not tied to the conditions of redundancy. They can offer it at any time, under any conditions.
For the employee, in exchange for payment and other terms in the settlement agreement, they can make a clean break and take the money that’s being offered.
Under redundancy, the options for them are either a statutory or enhanced redundancy payment.
The statutory payment is calculated on:
- Length of employment.
These factors make up the legal minimum the employer must offer. They may decide to offer an enhanced payment which is above this, but the employee’s entitlement to it will depend on their contract.
The additional financial incentive an employee might expect from a settlement agreement pay-out will depend on various factors, such as:
- What risk there is of them pursuing an employment tribunal claim for unfair dismissal
- How generous the employer is
- What previous amounts they’ve offered staff in the past.
The settlement agreement will usually include various non-financial terms, such as a reference for the employee and a confidentiality clause.
Both redundancy and settlement agreements are legally binding.
Settlement Agreement or Redundancy?
With settlement agreements, there are pros and cons for both employers and employees.
For employers, a settlement agreement enables them to dismiss staff without the risk of an employment tribunal or the administrative burden of going through the redundancy process.
For employees, they’re likely to receive more than they’d get with statutory redundancy, and there may be room for them to negotiate a higher sum. Normally, they also get a reference to help them find new work.
However, redundancy will offer them certain rights and protections, if the employer is in a position to offer it.
There can be some confusion as settlement agreement and redundancy are often used interchangeably when employees have their contracts terminated. But they are not the same. A settlement agreement is an alternative to redundancy.