Terminating the contract of an employee is not usually a decision that is made without much consideration. The process for terminating employment will be different depending on the circumstances of the employment and the reason for the termination. Whether or not the employee is in agreement to end their employment is a factor that will greatly impact the process that needs to be followed and it is essential that employers are aware of the differing processes and their legal obligations.

Here we explore two ways of terminating an employment and the differences between them.

What Does Redundancy Mean?

Redundancy is a term that most employers and employees are familiar with. It is a way for an employee to be dismissed from their employment because their job role is no longer required. Redundancy is usually a result of an employer needing to reduce their workforce, restructure, or make changes to the way they conduct business.  

What is a Settlement Agreement?

A settlement agreement is also a way of terminating employment. The agreement becomes a legally binding contract between an employer and employee with the aim of terminating the contract in a mutually agreed way. These can be used to resolve or avoid workplace disputes as both parties enter into an agreement that they are legally bound by.

The Reason for Ending Employment

The reason that the employment is being terminated is one of the key differences between the two processes.

Redundancy – for a person to be made redundant, the reason for the termination is that the job role will no longer exist. A person cannot be made redundant if the company intends to keep the job role and recruit into it once the current employee has vacated the position. A company may choose to make redundancies because they are streamlining the workforce, or a job role is no longer required.

Settlement Agreement – a settlement agreement will usually be used in cases where there is a workforce dispute or the potential of a workforce dispute that may result in an employment tribunal. In these types of situations, it is often mutually beneficial to end the employment.

Voluntary and Compulsory?

One of the main differences between redundancy and a settlement agreement is whether or not the parties have to be in agreement.

Redundancy – redundancy is a process that can be done to an employee, whether they agree with the termination of their or not. The rationale for redundancy is objective and based on the company requirements, i.e. if a job role is no longer required, the person fulfilling the role can be made redundant. When a selection is required, employers must choose the employees who will be made redundant in a fair and objective way. This can include ‘last in, first out’, looking at appraisals or disciplinary records or asking for volunteers. This does not mean the redundancy is a voluntary process, just that part of the selection may involve asking if anyone would like to take redundancy.

Settlement Agreement – a settlement agreement is a voluntary process for both parties, the employee, and the employer. Neither party is required to enter into the agreement, but it is usually beneficial for both and is used to avoid going to an employment tribunal. The process is a subjective one with negotiations on the terms of the agreement to ensure that both parties benefit from it.

There can also be a crossover between redundancy and settlement agreements. During redundancy, it is possible for a settlement agreement to be implemented to ensure both parties benefit adequately, however, a redundancy can go ahead without a settlement agreement and a settlement agreement can be implemented when redundancy is not happening. If a settlement agreement is included in redundancy, the redundancy will remain compulsory, and the settlement agreement will be voluntary.

Legal Status of the Employment Termination

The status of each of these employment terminations is different.

Redundancy – for redundancy, a statutory process is followed while a settlement agreement is a contractual process. This means that the impact on the employee and the obligations of the employer are different.

Redundancy is a process that does not need to take into account the views of an employee as it can be implemented against their wishes. Whilst this is obviously negative for any employee who wishes to remain in the job role, being made redundant does give employees an entitlement to a number of statutory benefits:

  • Statutory pay for employees who have been employed for more than 2 years.
  • Termination payment may include statutory pay, holiday pay, unpaid wages and company benefits.
  • A notice period where you continue to receive payment, or payment in lieu of notice.

Settlement Agreement – a settlement agreement is a contractual process where both parties negotiate and enter into an agreement that confers some benefits to each party. Most commonly arising as a reaction to a workplace dispute, a settlement agreement will usually be implemented to set out contractual obligations in relation to the termination of the employment contract. The most common terms of a settlement agreement include the employee giving up their right to take the company to an employment tribunal, and the employer agreeing to severance pay.

If you are an employer who is considering making people redundant, or an employee who is going through redundancy, we can provide advice guidance and representation at any stage of the process.

If you are involved in a workplace dispute that may go to an employment tribunal, we can offer legal guidance on negotiating a settlement agreement that is beneficial to both parties. Drafting a legally binding settlement agreement should always involve a legal professional with expertise in employment law.

For more information or assistance whether you are an employer or an employee, you can contact Carter Bond Solicitors at 020 3476 6751 or via email at info@carterbond.co.uk. You can also find valuable resources on their YouTube channel and website at www.carterbond.co.uk.

This note comprises the view of the author at the time of writing. This note is not a substitute for legal advice. Information may be incorrect or out of date and may not constitute a definitive or complete statement of the law or the legal market in any area. This note is not intended to constitute advice in any specific situation. You should take legal advice in specific situations. All implied warranties and conditions are excluded, to the maximum extent permitted by law.