When businesses face organisational change, difficult decisions are sometimes unavoidable. Redundancy can be unsettling for both employers and employees, creating a period of uncertainty and anxiety. As a firm specialising in employment law, we are often asked whether a settlement agreement is better than going through a redundancy process. The honest answer is that the best route depends on the situation. However, settlement agreements can offer clear advantages when used appropriately.
In this blog, I will outline what a settlement agreement is, when it may be the most suitable option and how it compares with redundancy from the perspective of both the employer and the employee.
What is a settlement agreement?
A settlement agreement is a legally binding contract between an employer and an employee. It usually ends the employment relationship or settles a workplace dispute. In return for signing the agreement, the employee receives a financial settlement and agrees not to pursue legal claims against the employer in the future. Independent legal advice is required for the agreement to be valid. This ensures that the employee fully understands the terms before signing.
Why employers choose settlement agreements
For employers, settlement agreements can provide a straightforward and controlled alternative to redundancy. Redundancy can become lengthy, stressful and costly, particularly if there is a risk of dispute. An employer settlement agreement gives clarity from the beginning.
Benefits for employers include:
- Reduced legal risk. The agreement prevents future claims, including unfair dismissal, discrimination or breach of contract.
- Cost certainty. Although employers usually offer more than statutory redundancy pay, the final cost is known upfront.
- Speed and efficiency. The matter can often be resolved far more quickly compared to a full redundancy consultation.
- Protecting reputation and morale. A mutually agreed exit helps avoid conflict, reduce disruption and preserve the working environment.
Why employees may prefer settlement agreements
From the employee’s point of view, redundancy can be emotionally challenging and often raises financial concerns. A settlement agreement provides clarity and can deliver a better financial outcome.
Advantages for employees include:
- Improved financial compensation. Settlement payments are usually higher than redundancy pay.
- Negotiable terms. The agreement can include reference wording, garden leave, bonus entitlement, confidentiality and more.
- Certainty and closure. Instead of dealing with appeals or potential legal disputes, the employee can move forward confidently.
- Legal protection. Independent legal advice helps ensure the agreement is fair and properly understood.
Is a settlement agreement better than redundancy?
The most suitable option depends on the circumstances. There are certain situations where a settlement agreement is typically more appropriate. Examples include:
- When the working relationship has broken down
- When the organisation wants to avoid a long and stressful process
- When there is a risk of potential legal claims
- When both sides want a quick and respectful resolution
- When confidentiality is required
Redundancy may be more appropriate when:
- A fair and transparent redundancy process can run without dispute
- A number of employees are affected, and a structured consultation is required
- The employee prefers to retain their right to pursue claims and does not wish to sign a waiver
Neither option is automatically better than the other. The best choice depends on what protects the interests of both the employer and the employee.
Settlement agreements handled correctly
At Hook & Partners, we ensure that settlement agreements are negotiated and drafted in a fair and professional manner. A well-structured settlement agreement should offer closure, certainty and dignity for both parties. When handled correctly, it is an effective tool for managing organisational change without unnecessary conflict.