Voluntary redundancy and settlement agreements: what employees need to know

Announcements of job cuts are a stark reminder that redundancy can affect anyone, often with very little warning. When an employer begins reducing its workforce, whether driven by international competition, rising costs or a shift to new technologies, employees can suddenly find themselves facing difficult decisions about their future.

If an employer has announced redundancies and invited volunteers, it’s important to understand what voluntary redundancy means in practice, what employees are entitled to and how a settlement agreement fits into the process.

What is voluntary redundancy?

Voluntary redundancy arises when an employer invites employees to put themselves forward to leave, rather than selecting individuals compulsorily. It’s typically used when a business needs to reduce headcount but wishes to avoid the difficulties and potential unfairness of a compulsory selection process. Employers will often offer an enhanced financial package as an incentive, over and above the minimum statutory redundancy pay, to encourage sufficient take-up.

It’s worth remembering that volunteering for redundancy is entirely an employee’s choice. An employee is under no obligation to put themself forward, and a decision not to volunteer will not affect existing employment rights or any contractual or statutory entitlements they may have if they are made compulsorily redundant at a later stage.

Equally, an employer isn’t obliged to accept every volunteer because the business may need to retain employees with particular skills or experience. Even though an employee has chosen to leave, voluntary redundancy is still legally classified as a dismissal rather than a resignation.

What is a settlement agreement?

A settlement agreement is a written and legally binding contract used to settle an employment dispute or agree the terms on which employment will end. In return for a financial package or other benefits, the employee agrees not to bring the specific claims listed in the agreement.

They are often used in redundancy situations, senior executive exits and negotiated departures, but can also resolve disputes while employment continues, such as disagreements about bonus entitlements.

Settlement agreements are commonly used where an employee applies for voluntary redundancy and this is accepted by the employer. In those circumstances, the termination will still generally qualify as a dismissal by reason of redundancy, even though the departure is agreed by both parties. Employees are asked to sign a settlement agreement to remove all risk from the employer in not following a formal redundancy process to achieve the dismissal.

What are the legal requirements of a settlement agreement?

A settlement agreement can be made with an employee, worker, former worker or job applicant, depending on the claim being settled and the individual’s employment status.

To validly waive statutory claims, the agreement must be in writing, relate to a particular complaint or proceedings, identify the claims being settled, state that the conditions regulating settlement agreements under the relevant legislation are satisfied and confirm that the individual received advice from a named independent adviser who had a policy of insurance or indemnity covering the advice.

Independent legal advice is required

For an agreement to be valid and binding, employees must receive advice from a relevant independent adviser, such as a solicitor holding a current practising certificate, a barrister, a certified trade union official or an advice centre worker certified to give advice. The adviser must be identified in the agreement and must hold insurance or an indemnity covering the risk of a claim against them arising from the advice.

Employers often contribute towards the cost of that advice, although this isn’t a legal requirement.

Why is taking legal advice important?

A solicitor experienced in employment law can:

• Explain the terms of the agreement and what claims an employee would be waiving
• Advise on whether the financial package being offered is fair and reasonable in the circumstances
• Identify whether an employee may have additional claims — for example, relating to the way the redundancy process has been handled — that could strengthen a negotiating position
• Help negotiate improved terms, such as a higher payment, a longer notice period or more favourable reference wording.

What terms are usually included?

The main clause of a settlement agreement is that the employee is waiving their right to bring almost all claims which they might otherwise have been entitled to pursue. The number of exceptions to this waiver is very few.

The agreement should explain what payments will be made, when they will be paid and what deductions apply. Salary, bonus, commission, holiday pay and payment in lieu of notice are usually subject to income tax and National Insurance contributions, while genuine termination payments (including statutory and enhanced redundancy payments) may be paid free of tax and National Insurance up to a combined £30,000 threshold.

If a reference is included, the wording should be agreed in the settlement agreement and used consistently by the employer.

Settlement agreements also typically contain the following types of clauses:

• Confidentiality, including both confidential information about the employer generally but also the terms and existence of the settlement agreement specifically
• Reasonable assistance if the employer needs the employee’s support with matters such as court proceedings or internal investigations
• A tax indemnity for all outstanding income tax or National Insurance contributions due on sums payable under a settlement agreement or paid generally during the employee’s employment
• Non-derogatory comments clauses, requiring that neither side makes comments which might damage the reputation of the other party.

Settlement agreements often contain entire agreement clauses which make any promises, assurances or statements void and unenforceable once the settlement agreement has been fully signed. It’s therefore vital for employees to ensure everything they have been assured will be provided is contained within the terms of the settlement agreement.

Take time before signing

Employees should be given a reasonable period to consider the written offer and obtain advice. The Acas Code of Practice on Settlement Agreements recommends at least 10 calendar days, unless the circumstances genuinely justify a shorter period or the parties mutually agree otherwise.

If a settlement agreement is not reached or is breached

If a settlement agreement is not entered into and voluntary redundancy is not successful, the employer may need to continue with a fair redundancy process, which can include identifying the appropriate redundancy pool, applying objective selection criteria, consulting with affected employees and considering suitable alternative employment.

Ultimately, if an employer doesn’t achieve enough voluntary redundancies to remove the requirement to make compulsory redundancies, then an employee’s employment can still be terminated. Often, in that case, an employee can only expect to receive their contractual entitlements and statutory redundancy payment.

Where an agreement has been signed but one party later fails to comply with its terms, this may amount to a breach of contract. This entitles either party to bring court proceedings against the breaching party to enforce the terms of the agreement. The right for the employee to do so is one of the exceptions to the waiver referred to above.

In summary, settlement agreements can be a useful way to resolve employment issues clearly and commercially, particularly where both parties want certainty and a clean break. However, they should be approached carefully, with enough time for proper consideration, negotiation where appropriate and independent advice to ensure the final terms are understood and suitable for the circumstances.