What Is the Difference Between a Settlement Agreement and Redundancy Payments?

If you’re facing the end of your employment, you might hear terms like settlement agreement and redundancy payment. They sound similar, but they’re not the same – and knowing the difference can help you make informed decisions.

Let’s break it down in simple terms.

What is a Settlement Agreement?

A settlement agreement is a legally binding contract between you and your employer. It sets out the terms of your departure and usually includes a key condition:
You agree not to bring certain legal claims (like unfair dismissal or discrimination) against your employer in exchange for compensation or other benefits.

For the agreement to be valid:

• You must get independent legal advice.
• It must clearly reference the legal rights you’re waiving.

If these conditions aren’t met, the agreement won’t hold up, and you could still make a claim.

What is a Redundancy Payment?

Redundancy happens when your job disappears – maybe because the company is restructuring, closing down, or cutting costs. If you’ve worked for your employer for at least two years, you’re usually entitled to a statutory redundancy payment.

Here’s how it works:

• Who pays? Your employer is responsible for paying statutory redundancy. The government only steps in if the employer is insolvent (through the Redundancy Payments Service).
• Eligibility: You must have worked continuously for the same employer for two years or more.
• Calculation: Based on your age, length of service, and weekly pay (up to a legal cap, currently £669).
  • Under 22: Half a week’s pay per year of service
  • 22–40: One week’s pay per year
  • 41 and over: 1.5 weeks’ pay per year

Redundancy payments up to £30,000 are tax-free.

Can You Get Both?

Yes! If you’re being made redundant, you might receive your statutory redundancy payment and sign a settlement agreement for extra compensation. Employers often offer enhanced redundancy packages through settlement agreements to ensure everything is resolved smoothly.

Why Would You Sign a Settlement Agreement?

Employers use settlement agreements to avoid future disputes. In return, you might get:

• Extra compensation
• Payment in lieu of notice
• Accrued holiday pay
• Other negotiated benefits

The amount can vary widely—from a few thousand pounds to much more—depending on your role, circumstances, and any potential claims you’re waiving.

Which Is More Common?

• Statutory redundancy is the default scenario when roles are genuinely redundant and the employer follows a fair process.
• Settlement agreements are less common and usually appear when:
  • There’s a risk of dispute.
  • The employer wants a clean break without lengthy procedures.
  • The employee holds a senior role or has strong potential claims.

What Level of Role Typically Gets a Settlement Agreement?

There’s no strict rule, but settlement agreements are more common for senior roles or employees who might pose higher legal risk (e.g., long service, protected characteristics, or high-value disputes).

For junior roles, employers often stick to statutory redundancy unless there’s a specific risk.

Myth-Busting

• Myth: The government pays redundancy.
  Reality: Your employer pays statutory redundancy. The government only steps in if the employer is insolvent.
• Myth: Everyone gets redundancy pay.
  Reality: You need at least two years of continuous service to qualify.

The Bottom Line

• Redundancy payment = your legal entitlement if your job is redundant (and you’ve worked for two years or more).
• Settlement agreement = a negotiated deal that often includes extra payments and requires you to waive certain rights.

If you’re facing redundancy or offered a settlement agreement, get legal advice. It ensures you understand what you’re signing and whether the offer is fair.