The story begins as Dr. Watson drops in on his friend Sherlock Holmes to find him in conversation with a man named Mr. Jabez Wilson. Wilson has come to Holmes with a problem concerning an organization for which he was working but that has mysteriously disappeared. Wilson owns a pawnshop but had for the last two months been employed part-time. At Holmes’ urging, he tells his story.
Wilson’s assistant Vincent Spaulding had pointed out a job notice in the newspaper to Wilson. It was a job sponsored by the Red-Headed League, and only men with red hair need apply. Spaulding convinced Wilson to go to the interview, and because of the bright color of his hair, Wilson was hired. His job was to copy the Encyclopaedia Britannica from ten o’clock in the morning until two o’clock in the afternoon. He was not to leave the room at all, or he would lose his job. Wilson enjoyed the extra money he made, but one Saturday, when he showed up at work, he saw a sign that said the League was dissolved. Wilson set out to discover what had happened to the League, and his well-paying job, but could learn nothing. Spaulding advised that he wait until the League got in touch with him, but Wilson came to seek the advice of Sherlock Holmes.
Holmes asks a few questions about Spaulding, finding out that he has been with Wilson for only three months, that he works for half the wages of anyone else, that he develops photographs in the pawnshop’s cellar, and that he has a mark upon his forehead. Holmes gets excited at the last bit of information, and it seems that he recognizes Spaulding. Holmes then sends Wilson home, saying he will give him advice in a few days. After reflecting for an hour, Holmes, accompanied by Watson, goes to the square in which Wilson’s shop is located. Holmes examines the neighborhood, thumps upon the pavement in front of the shop with his walking stick, and then knocks on the door. A young man, presumably Spaulding, answers, and Holmes asks directions of him. However, he is most interested in observing the knees of the shop assistant’s trousers; he sees there what he had expected to see. The two men then walk around the block to see what businesses are behind Wilson’s shop. There is a tobacco store, a newspaper store, a restaurant, a carriage-depot, and the City and Suburban Bank.
The two men attend a concert that afternoon. Afterwards, Holmes tells Watson that a serious crime is about to be committed and that he needs Watson’s help that evening. Watson returns to Holmes’ residence at ten that evening, where police agent Peter Jones, of Scotland Yard, and Mr. Merryweather, of the City and Suburban Bank, are already gathered. Holmes explains that they are going to meet the master criminal John Clay this evening. The men take carriages to the bank and wait in the vault. Merryweather realizes that Clay is about to attempt to steal a large reserve of gold. The four men then quiet down and wait.
After more than an hour, one of the stones on the floor begins to move. John Clay emerges through the hole in the floor. He pulls his partner, a man with fiery red hair, up after him. Holmes springs out from his hiding place and uses his hunting crop to knock the gun out of Clay’s hand. Meanwhile, the accomplice has dashed back through the hole, but Holmes had warned Jones to put guards in front of Wilson’s house, where the tunnel leads. Jones leads Clay outside to take him to the police station.
In the early hours of the morning, Holmes explains to Watson how he solved the crime. He realized immediately that Wilson’s job copying the encyclopedia was simply a ruse to get him out of the pawnshop for several hours a day. Holmes figured that Spaulding, who spent so much time in the pawnshop’s cellar, was digging a tunnel leading to a nearby building. By thumping his walking stick on the pavement, Holmes determined Wilson’s cellar stretched behind the house, so he walked around the block to see what businesses were there. When he saw a bank, the tunnel’s destination was obvious. Holmes also looked at the knees of Spaulding’s trousers to see that they were worn and stained from hours of digging out a tunnel. He knew Spaulding would rob the bank that evening, Saturday, because he would thus have an extra day before the robbery would be discovered and he could make his escape. After solving the problem mentally, Holmes called Jones and Merryweather to help catch the thieves.
Watson openly admires Holmes, but Holmes merely says that solving the case saved him from boredom, a boredom which is already beginning to settle on him again. He says that his life is simply an attempt to “escape from the commonplaces of existence.” Watson points out that he helps people as well. Holmes agrees, noting that man himself is nothing, but that his work is everything.