How Voluntary Redundancy Works In The UK

If you’re restructuring or tightening budgets, offering voluntary redundancy can be a sensible way to reduce headcount while maintaining trust with your team.

Handled well, it can lower legal risk, preserve morale and help you avoid drawn-out disputes. Handled poorly, it can undermine essential business capability and expose you to claims.

In this guide, we break down how voluntary redundancy works under UK law from an employer’s perspective - including when to use it, the steps to follow, what to include in the package, and the key risks to manage.

What Does Voluntary Redundancy Mean For Employers?

Voluntary redundancy (VR) is when you invite employees to volunteer to be made redundant, usually in exchange for a financial package that’s as good as, or better than, their statutory entitlement. It’s still a dismissal by reason of redundancy - not a resignation - so the usual redundancy rules and protections apply.

From your side, VR is a way to reduce roles that are no longer needed because of business closure, workplace closure, or a reduced need for employees to do particular work (the core definition of redundancy under the Employment Rights Act 1996). It often sits alongside (or before) compulsory redundancies as part of a fair process.

A common question is how VR differs from compulsory redundancy in practice. The headline difference is choice: in VR, employees come forward; in compulsory redundancies, you select employees following a fair selection process. If you’re weighing up the two approaches, it can help to compare voluntary vs forced redundancy at a high level before you start.

Do You Have To Offer Voluntary Redundancy Before Compulsory Redundancies?

There’s no general legal requirement to offer voluntary redundancy before compulsory redundancies. However, offering VR can be good evidence that you followed a fair process, especially in wider restructures where you’re consulting collectively.

Considerations that often push employers to offer VR include:

• Risk and fairness: Inviting volunteers can reduce the number of compulsory selections and demonstrate meaningful consultation.
• Morale and brand: Employees may perceive VR as more humane, which matters for retention and future recruitment.
• Capability: You need to retain the skills and roles your business must have to operate - so reserve the right to decline volunteers where necessary.

If you have a contractual redundancy policy or a collective agreement that says you’ll consider volunteers first, you should follow it. Likewise, where 20 or more redundancies are proposed at one establishment within 90 days, the collective consultation rules under TULRCA 1992 are triggered (minimum 30 days if proposing 20–99 dismissals, 45 days if 100+). VR can form part of that consultation plan, but it doesn’t replace your duty to consult properly with employee representatives and individuals.

The Voluntary Redundancy Process: Step-By-Step For Small Businesses

Every business is different, but a clear, transparent process will help you manage risk and keep your team informed. Here’s a practical sequence you can adapt.

1) Build Your Business Case

Define the genuine redundancy situation and which functions or roles are affected. Document your rationale, the numbers in scope, and the anticipated timeline. This is the foundation of a fair process and helps you explain decisions to staff during consultation.

2) Check Contracts And Policies

Review each relevant Employment Contract, any redundancy policy, collective agreements, and custom and practice. Identify notice clauses, PILON (pay in lieu of notice), any enhanced redundancy terms, and how bonus/commission, holiday and benefits should be handled on exit.

3) Decide Your Selection Pools And Critical Roles

Even with VR, you should identify logical “pools” of employees doing similar roles so you understand where volunteers can come from without harming operational capability. Flag roles that are critical to retain and make clear in your invitation that management reserves the right to decline applications to protect business continuity.

4) Set Your Package And Budget

Work out the financial terms before you invite volunteers. Most employers will offer at least statutory redundancy pay (for eligible employees with 2+ years’ service), plus notice pay or PILON, accrued holiday, and possibly an enhanced payment. Decide whether you’ll offer a standard enhancement (for example, an extra number of weeks per year of service) and whether you’ll cap the total. If you’re considering a more generous package to encourage volunteers, read up on enhanced redundancy pay and how to structure it.

5) Plan Your Consultation

Even when you invite volunteers, you still need to consult. If the collective thresholds are triggered, arrange elections for employee representatives (if they’re not already in place) and start collective consultation. You’ll still consult individually with affected employees, including volunteers, to discuss options, alternatives and the proposed terms.

6) Invite Volunteers (With Clear Criteria)

Issue a written VR invitation explaining the business case, who can apply, the package on offer, the application window, and that applications can be declined. Be transparent that volunteering doesn’t guarantee acceptance - and set your decision criteria (skills mix, performance, business need) before the window opens.

7) Shortlist And Decide

Review applications using your pre-agreed criteria. Consider whether losing multiple volunteers in the same team would create unacceptable risk. Document decisions and reasons in case they’re challenged later. Where you decline applications, do so respectfully and explain the business reasons.

8) Confirm In Writing And Finalise Terms

For accepted volunteers, issue outcome letters setting out the redundancy terms, payments and timing. For larger packages or higher-risk scenarios, it’s common to use a Settlement Agreement (often structured as a Deed of Settlement) so the employee waives potential claims after receiving independent legal advice paid for by you. This gives both parties certainty.

9) Give Notice And Manage Handover

Serve contractual notice (or pay in lieu). Discuss handover plans, garden leave (if applicable), and return of equipment. Keep lines of communication open - it’s in everyone’s interests for the exit to be smooth and professional.

10) Wrap-Up And Record

Pay final sums accurately and on time, issue P45s, and update payroll and benefits providers. Document the process end-to-end - it’s invaluable evidence that you acted fairly if questions arise later. If you’re unsure whether your process hits all the right notes, our team can provide redundancy advice tailored to your situation.

What Should The Voluntary Redundancy Package Include?

Your package should be clear, consistent and affordable. Typically, it includes:

• Redundancy pay: At least the statutory entitlement for eligible employees with 2+ years’ service, or an enhanced amount if you’re offering more.
• Notice pay: Either working notice or PILON per the contract (remember, PILON is taxable as earnings).
• Accrued holiday: Pay outstanding holiday entitlement on termination.
• Benefits and bonuses: Clarify whether benefits continue during notice and how bonus/commission is treated (check your contracts and policies).
• Tax treatment: Statutory and ex-gratia termination payments can often be paid gross up to £30,000 (subject to HMRC rules), while notice and holiday pay are taxable as earnings.
• Settlement Agreement contribution: If you’re using one, provide a reasonable contribution toward the employee’s independent legal advice.

Make sure your letters spell out each element, including calculations and any conditions (for example, returning company property, confidentiality, and ongoing post-termination restrictions that already exist in the employee’s contract).

Legal Risks To Watch (And How To Reduce Them)

Voluntary redundancy is not a “safe harbour” - it’s still a dismissal. Here are the main legal risks and the practical steps to manage them.

Unfair Dismissal

Employees with 2+ years’ service can claim unfair dismissal. Even with VR, you need a genuine redundancy situation and a fair process. Consult properly, consider alternatives to redundancy, and apply your criteria consistently. A structured approach like the one above, paired with a carefully drafted Settlement Agreement, helps. If you need a refresher on the wider dismissal landscape, it’s worth revisiting ending an employment contract fairly.

Discrimination

Don’t allow VR decisions to be influenced by protected characteristics (such as age, disability, sex, pregnancy/maternity). For example, offering “early retirement” as part of VR should be handled very carefully to avoid age discrimination risks. Be cautious around those on maternity or shared parental leave - they have priority for suitable alternative vacancies in a redundancy situation.

Collective Consultation Breaches

If you’re proposing 20+ redundancies within 90 days at one establishment, TULRCA’s collective consultation duties apply. Failing to comply can lead to a protective award of up to 90 days’ gross pay per affected employee. VR can help reduce numbers, but it doesn’t remove your consultation duties until you’re sure the threshold won’t be met.

Process Gaps And Documentation

Inconsistency, missing records and unclear criteria are frequent reasons employers struggle to defend a claim. Keep notes of your planning, consultation, decisions and communications. Our overview of why employers lose employment tribunals highlights the common pitfalls you want to avoid.

Contractual And Policy Conflicts

Check whether your policies promise enhancements or specific processes that go beyond statute. If you intend to deviate (for example, to adjust an enhancement formula), take advice first to avoid breach of contract allegations.

Alternatives Not Considered

Part of a fair process is actively exploring alternatives to redundancy, such as redeployment, reduced hours, or varied duties. Where appropriate, start a genuine consultation about changing employment contracts with employee consent. Showing that you tried to avoid dismissals strengthens your position.

Key Documents And Practical Tips

Getting the documents right keeps your process clean and lowers risk. At minimum, consider the following.

Core Documents

• VR Invitation: Sets out who can apply, the package on offer, how to apply, and the decision process.
• Business Case Summary: A simple explainer you can share with staff to support consultation and answer common questions.
• Outcome Letters: Confirm acceptance or decline, with reasons and next steps.
• Settlement Agreement: Usually implemented via a Deed of Settlement to waive claims (with a contribution to legal advice).
• Redundancy Calculations: A schedule that shows how each element (statutory/enhanced redundancy pay, notice pay, holiday, bonuses) is calculated.
• Updated Policies/Contracts: Make sure your standard Employment Contract and Staff Handbook reflect your approach to PILON, bonuses and benefits on termination.

Process Tips

• Be explicit that you can decline applications to protect critical skills.
• Use objective criteria when deciding whether to accept volunteers - and stick to them.
• Keep consultation genuine and two-way; VR isn’t a substitute for proper consultation.
• Check if any employees have special protections (e.g. maternity leave priority for suitable alternative vacancies).
• Factor in non-salary costs like unfinished commissions, unvested bonuses, or training repayment clauses.
• Set a realistic but clear timeline so you maintain momentum and certainty.

If you’re closing a site or winding down operations, you’ll also need to manage wider obligations like notifying staff, dealing with assets and suppliers, and paying final sums on time. Our guide to employee rights when a company closes down covers the big-ticket items to keep on your radar.

Frequently Asked Questions About Voluntary Redundancy

How Long Should The VR Window Be?

There’s no fixed legal timeframe. Practically, 1–2 weeks is common for small businesses, extending for larger restructures. Ensure the window gives employees a fair chance to consider their options without stalling the business.

Can We Choose Who Is Allowed To Volunteer?

Yes, you can limit eligibility to certain pools or roles, provided the criteria are legitimate and non-discriminatory. Be clear about this in your invitation to avoid misunderstandings.

Do Volunteers Still Get Statutory Redundancy Pay?

Yes, if they have at least two years’ continuous service and meet the usual rules. Many employers offer an enhanced payment to encourage volunteers, but you don’t have to unless it’s promised in a contract or policy.

Is A Settlement Agreement Necessary?

It’s not legally required, but it’s best practice if you’re offering an enhanced package. Using a Settlement Agreement (e.g. via a Deed of Settlement) provides a clean break and reduces the risk of future claims. You’ll usually contribute to the employee’s legal advice costs for signing it.

What Happens If Not Enough People Volunteer?

You can proceed to a fair compulsory selection process. That will involve defined selection criteria, further consultation, and careful documentation. For a structured approach across both scenarios, see our primer on severance vs redundancy and the UK rules that apply.

Key Takeaways

• Voluntary redundancy is still a dismissal, so you need a genuine redundancy rationale and a fair, well-documented process.
• You don’t have to offer VR before compulsory redundancies, but it can support fairness, reduce risk and maintain morale - provided you reserve the right to decline applications to protect critical roles.
• Plan your process: build a clear business case, check contracts and policies, set the package and budget, consult properly, and communicate consistently.
• Packages typically include redundancy pay (statutory or enhanced), notice pay or PILON, accrued holiday and clear tax treatment; many employers also use a Settlement Agreement to draw a line under potential claims.
• Manage legal risks proactively - unfair dismissal, discrimination and collective consultation duties are the big ones. Strong records and objective criteria go a long way.
• Keep your documents tight: invitations, outcome letters, calculations and agreements should align with your Employment Contract terms and any policies in place.
• If in doubt, get tailored support - it’s more efficient than firefighting later. Start with focused redundancy advice to pressure-test your plan.

If you’d like help planning or running a voluntary redundancy process, you can reach us on 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.