Redundancy settlement agreements are a strategic tool for UK employers seeking to manage workforce changes fairly, legally, and with minimal disruption. Often used to bring employment to a close on mutually agreed terms, these agreements provide clarity and finality for both parties, protecting employers from future legal claims while offering employees certainty and financial support.
In an environment where redundancy decisions carry both legal and reputational implications, settlement agreements allow employers to exit employees with greater flexibility and control than formal redundancy processes alone. When handled properly, they can help avoid disputes, accelerate transitions, and preserve organisational goodwill.
Kingfisher Professional Services supports employers across the UK with expert legal advice and HR consultancy, helping ensure settlement agreements are compliant, carefully drafted, and aligned with wider business and people strategies.
Why Employers Use Settlement Agreements in Redundancy
Settlement agreements serve as a powerful risk-management mechanism during redundancy situations. Employers often turn to these agreements to pre-empt potential claims, such as unfair dismissal, breach of contract, or discrimination, that could otherwise escalate into costly and time-consuming employment tribunal proceedings. By agreeing on terms and waiving claims in writing, both parties gain certainty and closure.
In practice, settlement agreements can offer a swifter and more amicable conclusion than statutory redundancy processes. Particularly in sensitive situations, where interpersonal dynamics are strained, performance concerns exist, or the employee has a grievance history, offering a settlement agreement can provide a cleaner path forward.
Additionally, employers value the flexibility of settlement agreements. Unlike statutory redundancy processes bound by strict timelines and consultation procedures, settlement agreements can be adapted to suit commercial needs. They can be offered where redundancy is expected but not yet confirmed, or as an alternative to performance-related dismissal. This discretion can be especially valuable during restructuring, business mergers, or department closures where speed and discretion are essential.
Key Elements Employers Must Include
A well-drafted settlement agreement must address several critical components to ensure it is legally binding and commercially robust.
The financial section should clearly distinguish between statutory entitlements, contractual obligations, and any discretionary or ex-gratia payments. Statutory redundancy pay, PILON (pay in lieu of notice), accrued holiday, and outstanding bonuses or commissions must be calculated and detailed transparently. Ex-gratia payments, often made as goodwill in exchange for legal waivers, must also be appropriately framed, particularly to benefit from the tax-free threshold up to £30,000. Employers must seek legal guidance to ensure tax treatment is compliant and avoids unintended liability.
Legal waivers are at the heart of the agreement. To be enforceable, the agreement must list specific claims the employee agrees not to pursue. These typically include claims under the Employment Rights Act, Equality Act, and other relevant legislation. Generic waivers are insufficient; the document must be explicit. Employers must also ensure the language used does not inadvertently waive rights that cannot be excluded by law, such as pension entitlements or personal injury claims unknown at the time.
Confidentiality clauses are another key inclusion. These typically prohibit the employee from disclosing the terms of the agreement or making disparaging comments about the business. Employers may also wish to include post-termination restrictions, particularly if the departing employee had access to sensitive information or worked in a competitive role. Agreements may also specify reference terms, helping manage future employer enquiries in a consistent, neutral tone.
Finally, for the agreement to be legally binding, the employee must receive advice from an independent solicitor. This requirement ensures the individual understands the implications of the waiver. Employers usually offer a fixed contribution to cover the cost of legal advice. The agreement must also include a clear timeline for signature, allowing reasonable consideration time, typically 10 calendar days, and a provision confirming the adviser’s credentials.
When Should Employers Consider Using a Settlement Agreement?
Settlement agreements are not a substitute for good redundancy planning, but they can be highly effective in specific scenarios. When formal consultation processes may be impractical, such as with small-scale redundancies, isolated role eliminations, or performance-related concerns, settlement agreements provide a compliant and efficient alternative.
They are especially useful where there’s a risk of dispute. If an employee has raised grievances, alleged discrimination, or appears resistant to the redundancy rationale, reaching a mutual agreement can defuse tensions and avoid escalating matters to a tribunal. The employer gains protection through the legal waiver, and the employee receives a guaranteed financial package.
Moreover, during restructures involving high-performing or long-serving employees, employers may wish to offer enhanced packages as a goodwill gesture. Doing so through a settlement agreement ensures the business gains closure and avoids future claims. In these cases, the agreement serves both as a legal safeguard and a respectful exit mechanism.
Employers planning wider changes can also use settlement agreements as part of a broader workforce strategy. Whether scaling down operations or reshaping teams for efficiency, these agreements help manage exits with dignity and minimal disruption to remaining staff morale.
Drafting Settlement Agreements: Employer Best Practices
Legal compliance is essential in every aspect of drafting. The agreement must follow the ACAS Code of Practice, particularly regarding communication. Conversations leading up to the offer should be framed as “without prejudice” and, where applicable, under the protections of section 111A of the Employment Rights Act. This protects the discussion from being used in future legal proceedings if negotiations fail.
Employers must give employees time to reflect on the offer. Applying pressure or demanding immediate acceptance can render an agreement unenforceable and undermine trust. It is best practice to allow at least 10 days for consideration, though more complex cases may require longer.
Clarity between contractual entitlements and ex-gratia amounts is vital. Misrepresenting statutory rights as discretionary offers can lead to challenge. Transparency builds credibility and ensures agreements hold up under legal scrutiny.
Several common pitfalls must also be avoided. A failure to include relevant claims in the waiver clause, such as breach of contract or unlawful deduction from wages, can leave employers exposed. Incorrect tax classification of payments can result in HMRC liability. And forgetting to include clawback provisions, particularly for misconduct discovered post-agreement, can prevent recovery of funds paid in error.
Settlement Agreement vs Statutory Redundancy Process
Both settlement agreements and statutory redundancy procedures offer lawful routes to terminate employment, but they differ in structure, risk, and outcomes.
The statutory redundancy process involves collective consultation (where applicable), selection criteria, minimum notice, and redundancy pay. It is time-consuming and bound by legal timelines. It also requires employers to demonstrate fairness throughout, including in selection scoring and alternative employment offers.
By contrast, a settlement agreement allows for direct negotiation with the employee. There is no need for consultation, and terms can be more generous than the statutory minimums. This flexibility is particularly useful for senior or long-serving staff, or in restructuring, where discretion is key.
Employers may start with a statutory process but switch to offering settlement agreements if employees raise objections, disputes arise, or speed becomes a business necessity. However, any switch should be done with legal guidance to avoid allegations of procedural unfairness.
Employer Checklist Before Offering a Settlement Agreement
Before offering a settlement agreement, employers should:
Review the employee’s full contract of employment, including notice terms, benefits, and restrictive covenants. Ensure you understand what they are contractually entitled to and what you are offering in addition.
Document the rationale for redundancy clearly, including supporting business cases, board minutes, and financial data where appropriate. This helps reinforce the legitimacy of the decision if later challenged.
Plan the timing of the offer carefully. Avoid delivering it too early, before the business case is established, or too late, when tensions may already be high.
Set a clear and realistic budget for settlement, including legal contribution and tax liabilities. Ensure all decision-makers are aligned before discussions begin.
Work with a legal advisor to draft the agreement, tailoring it to the individual and ensuring it complies with legal standards and best practice.
How Kingfisher Supports You
Kingfisher Professional Services offers a comprehensive suite of employment law and HR solutions to help employers manage redundancy settlements with confidence:
- Settlement Agreement Drafting & Review: Kingfisher’s legal specialists collaborate with your leadership and HR teams to draft, review, and finalise legally compliant, business-aligned settlement agreements. Each agreement is tailored, never templated, to ensure financial terms, waivers, and post-termination clauses support your business objectives.
- Negotiation Coaching & Manager Guidance: During sensitive redundancy conversations, Kingfisher provides behind-the-scenes support to help your managers communicate clearly and compliantly. From coaching on tone and timing to avoiding coercion, their guidance ensures enforceability and professionalism.
- 24/7 Legal Consultancy Access: When last-minute challenges arise – be it employee pushback, clause amendments, or tax queries – Kingfisher offers round-the-clock access to employment law advisors who know your business and can provide fast, pragmatic advice.
With Kingfisher’s support, your redundancy settlement agreements become a powerful tool to reduce risk, resolve exits respectfully, and protect your brand and people throughout change.
Conclusion
Redundancy settlement agreements offer UK employers a flexible, efficient, and legally sound route for managing workforce transitions. Used appropriately, they support clean exits, reduce tribunal exposure, and protect both financial and reputational interests.
With careful planning, clear communication, and legal expertise, these agreements can form a cornerstone of responsible people management, especially during times of business change.
Kingfisher Professional Services brings the knowledge, attention to detail, and strategic foresight employers need to get settlement agreements right. Their blend of employment law and HR insight makes them a trusted partner for businesses looking to manage redundancies with confidence and care.