Voluntary Redundancy: A Guide for Employers

Voluntary redundancy can be a practical and more collaborative way to manage change in your business, but it still comes with the same legal responsibilities as any other redundancy process. Whether you are looking to reduce costs, restructure, or navigate a merger or relocation, it is essential to balance commercial needs with fair treatment of your employees. This guide explains how voluntary redundancy works in practice, when it is appropriate to use, and how to implement a compliant, well-managed process that protects both your business and your people.

Key takeaways

• Voluntary redundancy is still a dismissal in law, not a resignation, so you must follow a fair and legally compliant redundancy process even when employees choose to leave.
• Good reasons for voluntary redundancy include reducing costs, restructuring, managing overlaps after mergers, relocation, and responding to technological change – but you must still protect key skills and roles.
• A voluntary redundancy scheme sometimes includes an enhanced package (a voluntary severance package) on top of statutory redundancy pay.
• You do not have to accept every volunteer; decisions must be based on business needs and non‑discriminatory criteria.
• Clear communication, robust documentation and settlement agreements help you reduce legal risk and protect your reputation as an employer.

In this guide

In this guide, we’ll walk through:

• What voluntary redundancy is (and what it is not)
• Good reasons for offering voluntary redundancy
• Pros and cons of voluntary redundancy for your business
• How voluntary redundancy works step by step
• Voluntary redundancy pay and voluntary severance packages
• Handling “applying for voluntary redundancy” letters and communications
• Using settlement agreements safely
• Practical tips for smaller employers with limited HR resource
• FAQs on voluntary redundancy

What is voluntary redundancy?

Voluntary redundancy is where you invite employees to put themselves forward to be made redundant, rather than selecting people for compulsory redundancy straight away. The role still needs to be genuinely redundant – for example because the business is restructuring, closing a site, or no longer needs as many people doing that work.

Legally, a voluntary redundancy is a dismissal for redundancy, not a resignation. This means employees keep their normal rights to redundancy pay (if eligible), notice, consultation, and protection from unfair dismissal and discrimination. You cannot bypass a fair process simply because someone has volunteered.

For employees, “taking voluntary redundancy” usually means leaving on agreed terms. For you as an employer, it is one way of managing change more collaboratively and minimising conflict.

Good reasons for voluntary redundancy

Redundancy is never an easy choice, especially for small and medium‑sized businesses where you know your people personally. Voluntary redundancy can help you manage difficult decisions more sensitively, while still protecting the business.

You might consider a voluntary scheme where you need to:

• Reduce costs – persistent cash‑flow pressure, loss of a major customer, or rising costs may mean you need to reduce headcount to stabilise the business.
• Restructure or streamline – perhaps you are consolidating teams, shifting your strategy, or removing a management layer.
• Handle overlaps after a merger or acquisition – if you have duplicated finance, HR, or sales roles across entities.
• Respond to technology or automation – where new systems mean fewer people are needed in particular roles.
• Manage relocation or site closure – for example, when moving operations and some staff cannot or do not wish to move.

In each case, offering voluntary redundancy sends a clear message: “we recognise this is difficult, and we’re giving you some choice in how it affects you.” That can make a big difference to trust and morale, both now and in the future.

Pros and cons of voluntary redundancy

When you weigh up the pros and cons of voluntary redundancy, it helps to look at the impact on your business and on your people.

Benefits for your business

• Less confrontation and fewer disputes – employees who volunteer are often more accepting of the outcome, especially when the process is transparent and they feel properly consulted.
• Stronger morale among remaining staff – colleagues can see you have given people options, rather than simply “picking” who goes.
• Positive employer brand – acting fairly and respectfully during redundancies can protect your reputation with regulators, clients and future hires.
• More control over timing – you can usually agree exit dates and handover plans that minimise disruption.

Risks and downsides for your business

• Losing key skills – confident, high‑performing employees are often the ones most willing to volunteer, as they feel more secure about finding another role.
• Difficult conversations if you decline volunteers – you may have to turn down volunteers where you still need their skills, which can be uncomfortable.
• Ongoing legal obligations – if the process is rushed or poorly documented, you still face the risk of unfair dismissal, discrimination or protective awards.

The key is to design a scheme that encourages volunteers but still allows you to retain the people and skills your business needs for the future.

How does voluntary redundancy work in practice?

Every organisation is different, but a typical voluntary redundancy process looks like this.

1. Plan and define your business case

Before saying anything to staff, you should:

• Clarify the business reasons for the redundancy (e.g. financial, structural, technological).
• Identify which areas or roles are potentially affected – your “at risk” pool.
• Consider alternatives: recruitment freezes, cutting overtime, redeployment, reduced hours or job‑sharing.
• Check contracts and policies for any existing redundancy or voluntary provisions.

This planning stage helps you explain clearly to staff why redundancies are being considered and why voluntary options are on the table.

2. Decide on your voluntary redundancy scheme

Next, you agree the outline of your voluntary scheme:

• Eligibility – which teams, grades or locations can apply.
• Financial terms – if you are going to offer an additional voluntary severance package.
• Timelines – when applications open and close, when decisions will be made, and likely leaving dates.
• Process – how employees apply (for example, by email or form), who makes decisions, and how you will handle appeals or questions.

For many smaller employers, keeping the scheme simple and easy to explain is just as important as the numbers.

3. Communicate with staff

You then announce the proposals to affected staff, ideally in person or via live video if you’re a remote business, supported by written communication. You should:

• Explain the business reasons and the alternatives you have considered.
• Set out how voluntary redundancy fits into the overall plan – and that compulsory redundancies may still be needed, particularly if not enough people volunteer.
• Outline the terms of the voluntary scheme and how staff can express interest.

This is usually followed by individual and/or collective consultation meetings, where staff can ask questions and consider their options.

4. Employees apply for voluntary redundancy

Employees who are interested will then apply – often by sending an “applying for voluntary redundancy” letter or email. Typically, you will ask them to:

• Confirm that they understand the role may be made redundant and they wish to be considered.
• Acknowledge that applying does not guarantee acceptance.
• Indicate any preferred timescales, for example, for notice or handover.

You might provide a simple template to make this easier, but you should still treat each application individually and sensitively.

5. You decide which volunteers to accept

You then review applications against your business needs and any objective criteria you have set, such as:

• Skills and experience you need to retain
• Future structure and headcount requirements
• The need to avoid unfair selection or discrimination.

You are not obliged to accept all volunteers. In some cases, you may accept a volunteer only if another employee in a similar role agrees to redeploy or you can reorganise work sensibly.

6. Consultation, confirmation and exit

For those you propose to make redundant, you should:

• Hold a redundancy consultation individually about the decision, the proposed terms, and any alternatives such as redeployment.
• Confirm the decision in writing, including notice, redundancy pay, and any additional payments or benefits.
• Put in place a settlement agreement (see below) where appropriate.

Employees may work their notice, move onto garden leave, or receive a payment in lieu of notice (PILON), depending on their contract and what is agreed. You should also ensure accrued holiday and any other entitlements are paid correctly.

Throughout, open communication helps you manage the “rumour mill” and reassure both those leaving and those staying.

Voluntary redundancy pay and voluntary severance packages

For many employees, the decision to take voluntary redundancy will turn heavily on the financial package. For you, it is about balancing fairness, affordability and legal compliance.

Statutory redundancy pay

Employees with at least two years’ continuous service are entitled to at least statutory redundancy pay, calculated based on age, length of service (up to 20 years) and a capped weekly pay figure. The basic formula is:

• 0.5 week’s pay for each full year under age 22
• 1 week’s pay for each full year aged 22 to under 41
• 1.5 weeks’ pay for each full year aged 41 and over.

You must pay at least this amount and comply with any more generous contractual redundancy terms you have already agreed (for example in contracts, policies or collective agreements).

For tax purposes, the first £30,000 of genuine termination payments can usually be paid tax‑free, while notice pay, holiday pay and sums above that limit are normally taxable as income. It is sensible to make the tax position clear in your letters and settlement agreements so employees understand the net sums they will receive.

Settlement agreements and legal protection

Voluntary redundancy exits are often formalised using a settlement agreement – a legally binding contract where the employee agrees to waive most employment claims in return for the agreed terms.

For a settlement agreement to be valid, it must:

• Be in writing
• Identify the specific claims being settled
• Confirm the employee has received independent legal advice from a qualified adviser (typically funded by the employer)
• State that the relevant statutory conditions have been met.

A settlement agreement for voluntary redundancy usually sets out:

• Statutory and enhanced redundancy payments and any ex-gratia sums
• Notice arrangements (worked, garden leave, or PILON)
• Payment of holiday and any bonuses
• Confidentiality, non‑disparagement and return of property
• Agreed reference wording and any post‑termination restrictions.

Using settlement agreements gives both you and the employee clarity and closure, reducing the risk of later disputes or tribunal claims.

Practical risk‑management checklist for SMEs

Here is a quick practical checklist tailored for smaller employers with lean or no HR support. You can use this as a sense‑check before launching or finalising a voluntary redundancy scheme:

1. Is the role genuinely redundant?
   • Have you documented the business case (financials, structure charts, forecasts)?
2. Have you considered alternatives?
   • Redeployment, part‑time options, or natural attrition.
3. Are your criteria for accepting volunteers clear and non‑discriminatory?
   • Can you explain why one volunteer was accepted and another declined?
4. Do you understand your collective consultation obligations?
   • If you are proposing 20 or more redundancies at one establishment within 90 days, do you have a plan for electing representatives and consulting in time?
5. Are you clear on affordability and cash flow?
   • Have you checked the cash impact of packages, including notice, holiday and tax?
6. Are your managers ready for difficult conversations?
   • Have you briefed them on the message, FAQs, and where to signpost employees for support?
7. Is your documentation consistent and accurate?
   • Letters, FAQs, settlement agreements, and internal notes all aligned and reviewed by HR/legal advisers?

Spending a little time on these points can save you a lot of time, cost and stress later.

Voluntary Redundancy FAQs

What is voluntary redundancy in simple terms?

Voluntary redundancy is where you ask employees if they would like to be considered for redundancy, rather than choosing who goes straight away. The job still has to be genuinely redundant, and it is still treated as a dismissal in law.

Is voluntary redundancy better than compulsory redundancy?

Neither is inherently “better”, but voluntary redundancy can reduce conflict and show you are acting fairly, especially in smaller businesses where relationships matter. However, you may lose experienced staff if you do not manage selection carefully.

Do I have to accept every voluntary redundancy application?

No. You can decline applications where you need to retain key skills or where accepting them would undermine your future structure. Your reasons should be objective and non‑discriminatory, and ideally documented.

How does voluntary redundancy pay work?

Employees with at least two years’ service are entitled to at least statutory redundancy pay, based on age, length of service and capped weekly pay, plus notice and holiday pay.

What should go in an “applying for voluntary redundancy” letter?

Typically, an employee’s letter will confirm they wish to volunteer, acknowledge that selection is not guaranteed, and may state any preferred timescales. You can provide a template to keep things consistent, but you should still treat each application individually.

Do I still need to consult if employees volunteer?

Yes. Voluntary redundancy does not remove your duty to consult about the proposals, alternatives and terms, individually and, where required, collectively.

Do I need a settlement agreement for voluntary redundancy?

It is not legally compulsory, but it is strongly recommended, especially where enhanced payments are being made. A settlement agreement gives you certainty that most claims have been waived, in return for the agreed package.

Can offering voluntary redundancy be discriminatory?

It can be if you invite or accept volunteers in a way that disadvantages people because of protected characteristics (such as age, sex, disability or race). You should avoid steering particular individuals towards volunteering and instead communicate openly to all eligible staff.

How Norton Loxley can help

Managing voluntary redundancy is a big step for any business, especially if you do not have an in‑house HR team. The decisions you make now will affect your people, your culture and your ability to grow again in the future.

At Norton Loxley, we support employers like you to design and run redundancy processes that are legally robust, commercially sensible and genuinely compassionate. We can help you:

• Clarify your business case and risk areas
• Help you to determine whether you would be willing to consider voluntary redundancies
• Prepare clear communications, letters and FAQs for your team
• Coordinate consultation, selection and settlement agreements

If you are considering voluntary redundancy or want a second opinion on your plans, get in touch with Norton Loxley for practical, tailored HR support before you make any announcements.