Voluntary redundancy: A guide for employers

For many growing or pivoting businesses, redundancy is a necessary step toward long-term sustainability. When handled correctly, voluntary redundancy can mitigate the sting of job losses, preserve company culture, and protect your brand reputation.

What is voluntary redundancy?

At its core, voluntary redundancy is a formal invitation from an employer to a specific at-risk group of employees. Individuals are essentially asked to waive their right to remain in their current role in exchange for a financial incentive that exceeds their statutory entitlement.

While it is often framed as a choice, it is important to understand the three pillars that define this process:

1. It is still a dismissal

Even though the employee raises their hand to leave, in the eyes of UK employment law, voluntary redundancy is still a dismissal. Because it is technically a dismissal by the employer (and not a resignation by the employee), the staff member retains their legal rights to:

• A notice period (or payment in lieu of notice)
• Redundancy pay (statutory or enhanced)
• A fair process (including consultation)

2. It can be rejected

Voluntary redundancy is not a unilateral right held by the employee. Just because an employee applies for the package does not mean the employer is legally obligated to accept it.

3. It meets your legal duty as an employer

Under Section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992, employers have a legal duty to consider ways of avoiding or reducing the number of compulsory redundancies. Asking for volunteers is the primary way to satisfy this legal requirement. With volunteers, you effectively eliminate the need for the more painful, high-risk process of scoring and selecting people for compulsory exit.

Voluntary vs. compulsory redundancy

The primary difference between these two paths lies in who holds the power of initiation. In a voluntary redundancy scenario, the process is built on a call to action. The employer sets the stage by identifying a need to reduce headcount and then invites employees to self-identify if they are ready to move on. This creates a collaborative atmosphere where the departure is a mutual agreement rather than a top-down directive. Psychologically, this is much easier for the remaining team to process.

Compulsory redundancy, by contrast, is a more clinical and often high-stress procedure. Here, the employer must use objective selection criteria (such as performance scores, skill matrices, or disciplinary records) to decide who stays and who goes. While this gives the business total control over exactly which skills are retained, it comes with a significantly higher burden of proof. Every selection decision must be defensible in an Employment Tribunal, making the legal aspect of compulsory redundancy much more intensive than the voluntary route.

From a financial perspective, the two paths usually involve different price tags. Because you are asking someone to give up their job voluntarily, you generally offer an enhanced package. Compulsory redundancy, while often restricted to the statutory minimum, can end up being more expensive in the long run if a disgruntled employee brings a claim for unfair dismissal. Essentially, with voluntary redundancy, you are paying a premium for a smoother, lower-risk transition.

Voluntary redundancy acts as a pressure valve. By allowing people to leave of their own volition, you demonstrate a level of respect and care for the workforce. It signals to those who stay that the company exhausted all options, which is instrumental in preserving your brand reputation.

Why does voluntary redundancy happen?

Redundancies aren’t always about financial distress. Understanding the root cause helps you communicate the need for change more effectively to your team.

Technological shifts and automation

As industries evolve, the tools we use change. New software or AI-driven automation may render certain manual or administrative roles obsolete. In these cases, voluntary redundancy allows long-serving staff who may not wish to retrain in high-tech roles to exit gracefully.

Mergers and acquisitions

When two companies become one, there is almost always a doubling up of central functions. You don’t need two Finance Heads for a single entity. Voluntary redundancy helps resolve this without the friction of picking favourites between two formerly separate teams.

Economic downturns and market volatility

External factors (inflation, supply chain disruptions, or a dip in consumer spending) can force a company to lean down to survive. Reducing the wage bill through volunteers is often more palatable for remaining staff than forced cuts.

Strategic changes and relocation

A company may decide to close a specific department or physical office to focus on a more profitable area or move to a more cost-effective location. If the staff cannot (or do not want to) relocate, a voluntary scheme provides a bridge to their next opportunity.

Streamlining management

Sometimes, a business may need to structurally reorganise. Streamlining management layers to improve decision-making often involves offering voluntary exit packages to senior staff.

How employers should approach voluntary redundancy

Approaching this process requires a blend of legal aptitude and human empathy. If you are considering this route, your strategy should follow these pillars:

1. The financial incentive

To encourage staff to volunteer, you usually need to offer more than the bare minimum. While you are legally required to offer statutory redundancy pay, most voluntary schemes offer enhanced redundancy pay (also known as an ex-gratia payment).

For employees who have worked for you for at least two years, the minimum pay is calculated as follows:

• Half a week’s pay for each full year they were under 22
• One week’s pay for each full year they were 22 or older but under 41
• One and a half weeks’ pay for each full year they were 41 or older

2. The communication strategy

Communication is the make-or-break factor in any redundancy exercise. Done poorly, it breeds resentment and legal risk, so it is important that it is handled carefully.

The pre-announcement phase

Before you speak to a single employee, your management team must be aligned. This involves:

• Defining why it is happening and confirming that all alternatives have been considered.
• Drafting a script so that all managers use consistent language.
• Deciding how you will tell remote workers versus office-based staff. Personal delivery (via video call or face-to-face) is always preferred.

The initial announcement

This is where you inform the affected group that the business needs to make redundancies. It is important to be empathetic but firm and clearly outline the incentive. Employees need to know what is in it for them immediately so that they can weigh their options.

3. Managing the rumour mill

There should be frequent communication to dissipate any anxiety. Even if there is no news, a weekly status update email can help the team feel in the loop.

For employees who aren’t at risk of redundancy, there will be a natural worry about their own security and the potential increased workload. It is important to be transparent with them about the future stability of the business.

Remaining fair and transparent

To remain legally compliant and avoid discrimination claims, which can range from ageism and religious discrimination to accent bias, consider the following:

• As mentioned, you reserve the right to refuse a volunteer. However, your reasons for rejection must be documented and objective.
• Never pull an employee aside and suggest they volunteer. This can lead to claims of constructive dismissal or harassment.
• If you receive more volunteers than you need, you must use fair criteria to decide who gets to go. This might be based on maintaining a specific skill mix or performance levels within the remaining team.

What happens next: Settlement agreements

Once an employee has volunteered and you have accepted their application, the transition is usually formalised through a settlement agreement. This is a critical legal document that protects both parties.

What is a settlement agreement?

A settlement agreement is a legally binding contract between the employer and the employee. In exchange for the agreed redundancy payment (and often other benefits), the employee agrees to waive their right to bring any legal claims against the business to the Employment Tribunal.

Why are they essential in voluntary redundancy?

1. Once signed, the employer knows they won’t face a surprise legal battle six months down the line.
2. These agreements usually include non-disclosure clauses, preventing the employee from sharing the specific terms of their exit or disparaging the company publicly.
3. You can include a pre-written reference within the agreement, giving the employee peace of mind about their future job hunt.

The legal requirements

For a settlement agreement to be legally valid in the UK, it must meet specific criteria:

• It must be in writing.
• It must list the specific complaints or proceedings the employee is waiving.
• The employee must receive advice from a qualified independent solicitor (or a certified trade union official).
• Because the employee is legally required to seek advice, it is standard practice for the employer to pay a contribution towards the employee’s legal fees.

Tax implications of voluntary redundancy

One of the main draws for employees is the tax treatment of redundancy pay. Under current HMRC rules, the first £30,000 of a genuine redundancy payment is usually tax-free. However, Payment in Lieu of Notice (PILON) and holiday pay are still subject to standard income tax and National Insurance (NI) contributions.

The crucial role of HR

In a redundancy scenario, HR can keep the process safe and human.

HR ensures the business follows the law regarding consultation periods. If you are making 20 or more people redundant within a 90-day period, collective consultation rules apply. In April 2026, the maximum protective award for failing to consult correctly is to be doubled to 180 days’ pay. An experienced HR consultant is your shield against this significant financial risk.

Consulting with an HR specialist can also help safeguard your business against bias. Even in voluntary schemes, selection can be contentious. HR ensures that the criteria for accepting or rejecting volunteers are entirely objective. This prevents claims that you favoured younger workers or discriminated against those with health issues.

The role of HR is instrumental in the support system available to employees. Redundancy is stressful, and HR can manage the wellbeing aspect of the process by signposting Employee Assistance Programmes (EAPs), offering outplacement support (help with CVs and interviews), and ensuring managers have the training to handle distress during meetings.

An HR consultant also acts as a mediator. Sometimes, communication breaks down between a manager and their team. HR acts as a neutral third party who can explain complex terms.

How Sapphire HR can assist your business

At Sapphire HR, we work with businesses across the North East and the wider UK in supporting and nurturing teams through difficult transitions. Whether you are in healthcare, retail, manufacturing, or beyond, we provide bespoke HR support that balances business objectives and security with human kindness.

We specialise in helping SMEs navigate voluntary redundancy with:

• Bespoke documentation: We provide the letters, scripts, and settlement agreement templates tailored to your specific situation.
• Strategic consultation: We help you define your selection pool and criteria to ensure you don’t lose the talent you need to grow.
• On-site support: If the thought of holding these meetings fills you with dread, we can be there in the room with you to lead the conversation professionally.

Priding ourselves on a friendly and direct approach to HR, our advice is clear and jargon-free, with a commitment to offering practical solutions. If you’re an employer dealing with a challenging people management issue, or you’re looking for long-term HR support to simplify processes, we’re here to help. Contact us for advice.