Whether a member of staff is entitled to a redundancy payment will depend on their employment status, their length of continuous employment and the terms of their employment contract. Below is a guide to redundancy pay and how it is calculated.
Contents:
- Does your employee have a right to a redundancy payment?
- How is statutory redundancy pay calculated in the UK?
- Are there any exceptions to the right to redundancy pay?
- Are redundant employees entitled to their notice period?
- What are the risks associated with redundancy pay?
- What if we cannot afford to make the redundancy payments?
- Summary
Does your employee have a right to a redundancy payment?
There are two types of redundancy payment a ‘statutory redundancy payment’ being the legal minimum for qualifying employees and a ‘contractual redundancy payment’, which an employment contract or policy document may provide for and must be at least as generous as the statutory redundancy payment.
To qualify for a statutory redundancy payment your employee will need to:
- be an employee, as opposed to a worker or self-employed.
- have at least two years continuous service when made redundant.
- have been dismissed on the grounds of redundancy, which must be a genuine redundancy after a fair and lawful redundancy process has been followed, more guidance can be found here, or laid off or kept on short working and so become eligible.
Check employment contracts and your business’ policy documents for any entitlements which employees may have over and above a statutory redundancy payment. If you are unsure, our employment experts can review your employment documentation and advise of your business’ legal obligations where contractual redundancy payments are concerned.
How is statutory redundancy pay calculated in the UK?
Provided that an employee qualifies under the above criteria, they are entitled to a minimum redundancy payment based on their gross weekly pay (capped at a statutory maximum which is altered in April every year, currently £571 per week until 5 April 2023), age, and length of continuous service which is counted in complete years as at the date on which their employment terminates). Only a maximum of 20 years’ service will be considered, so if an employee has longer than 20 years’ service, the earlier years are disregarded).
For each complete year of service where an employee is aged 41 or over, they should be paid 1.5 weeks’ pay. For each complete year where an employee is aged 22 or over but under 41, they should be paid 1 week’s pay. For each complete year of service, the employee is aged under 22 they should be paid 0.5 of a week’s pay. This means that the maximum statutory redundancy payment which can made up until 5 April 2023 is £17,130.
A weeks’ pay is normal pay for normal working hours including any guaranteed bonuses or overtime payments. If working hours are the same but pay varies due to volume or particular times worked, an average over 12 working weeks including any commissions or similar over that time is calculated as the week’s pay. Similarly, an average of the last 12 weeks’ pay including commission or other payments varying in amount is used where there are no normal working hours. If there are weeks with no pay, they are ignored and the next earlier weeks when payments were made are considered instead.
Statutory redundancy payments are paid without deductions as they fall within the £30,000 tax free exemption. Your employee is entitled to a written statement showing how their redundancy payment has been calculated and failure to provide this amount to a criminal offence attracting a fine. There is also an aggravated offence if you fail to comply with an employee's written request for a statement. If you need assistance with calculating a statutory redundancy payment, you can use this calculator or one of our employment solicitors can help.
Generally, employers will pay redundancy payments in the next payroll run after the employee’s employment is terminated, but there is no statutory requirement to pay a redundancy payment within a certain time. However, an employee may bring a claim for an unpaid statutory redundancy payment if it is unpaid.
Are there any exceptions to the right to redundancy pay?
There are some exceptions to having to pay statutory redundancy payments, as follows:
Unreasonable refusal of an offer of suitable alternative employment by the employee. If objectively, considering the nature of the job offered, its status, content and terms (e.g. wages, hours and location) are appropriate, and the job is a suitable match for the employee in their circumstances, this would generally be considered a suitable alternative role. The reasonableness of the refusal looks at the subjective reasons the employee has for rejecting the alternative role. The employer has the burden to prove that the role is a suitable alternative and the refusal is unreasonable to avoid paying a statutory redundancy payment. A trial period of 4 weeks should be put in place for both the employee and the business to assess the suitability of the alternative employment before it is confirmed.
If, following a trial period, an employee accepts the suitable alternative employment, they are not dismissed and will begin their new role from the date the previous role ended and so will not be entitled to any statutory redundancy pay. If, however, an employee reasonably refuses suitable alternative employment, they are considered as having been dismissed on grounds of redundancy and will be entitled to statutory redundancy pay. If an employee unreasonably refuses an offer of suitable alternative employment, they are considered as having been dismissed on grounds of redundancy but lose their entitlement to statutory redundancy pay. If you are in doubt as to whether an employee is entitled to be paid their redundancy pay, our employment solicitors can help.
- Failure to work notice period by an employee – Where an employee who has been given notice of dismissal by way of redundancy wishes to leave before the expiry of the notice period (for example, to embark on a new job), the employee will need to give written notice to the employer of their intention to terminate their employment earlier. The employee’s notice must be given within the “obligatory period of notice”. The obligatory period of notice is equal to the minimum notice period (whether statutory or contractual) that the employee is entitled to and, where an employer has given a longer period of notice, it is calculated backwards from the expiry of that longer notice period.
If the employee gives their notice before the obligatory period of notice starts, they will not have the protection of the statutory provisions and will lose their entitlement to a statutory redundancy payment.
However, the employee will also not be entitled to a statutory redundancy payment if, before the employee's notice expires, the employer serves a written notice on the employee which requires the employee to withdraw their notice and remain in employment until the employer's notice terminates and informs them that failure to do so means the employer will contest any liability to pay them a redundancy payment. If the employer serves that further notice, and the employee does not comply with it, they will only be entitled to apply to an employment tribunal for the whole redundancy payment they would have been entitled to, or what the tribunal thinks is just and equitable considering the reasons the employee had for wishing to leave early and the reasons the employer had for requiring them to remain until the end of their notice.
Unfortunately, the legislation does not make clear what notice an employee would need to give in this scenario, but it would be sensible for any such employee to give a minimum of their contractual or statutory notice obligation (whichever is the longer).
- Failure to comply with a notice of extension after a strike - If, while under notice of dismissal for redundancy, an employee takes part in a strike, you may serve a written notice of extension on the employee and if you do this properly, failure to complete the extended notice will mean the employee loses their right to a statutory redundancy payment.
- Contracting out of the right to a statutory redundancy payment – there are limited circumstances where this will not be void, for example under a valid settlement agreement, if there has been collective contracting out or if an employee has become an employee shareholder.
- Certain categories of workers are not entitled to statutory redundancy pay, these are former registered dockworkers and share fishermen, crown servants, members of the armed forces or police services, apprentices who are not employees at the end of their training and a domestic servant who is a member of the employer's immediate family.
Are redundant employees entitled to their notice period?
Employees who have been made redundant are entitled to work their statutory or contractual notice period, have it paid in lieu or be placed on garden leave during their notice period in addition to any entitlement to a redundancy payment. If you would like more information about notice periods, here is an article you may find helpful.
What are the risks associated with redundancy pay?
If you fail to make a statutory redundancy payment, or there is a dispute about the amount, an employee is entitled to refer the matter to an employment tribunal. Unlike with unfair dismissal claims, if you fail to make a statutory redundancy payment there is a statutory presumption that the reason for the employee's dismissal was redundancy unless you can demonstrate the role was not redundant or the role was redundant but that the employee was dismissed for another reason.
To preserve their right to bring a claim in the Employment Tribunal relating to an unpaid redundancy payment, an employee must, within six-months of their termination date:
- make a written claim to you for payment.
- make a claim through ACAS Early Conciliation that they have the right to a redundancy payment (or the amount of the redundancy payment they claim they are entitled to receive); and/or.
- if relevant, present a claim of unfair dismissal to an Employment Tribunal.
If an employee has established their right to claim by contacting you advising of their right to a redundancy payment, the right to make a claim to an Employment Tribunal is preserved indefinitely and could be brought years later. The Employment Tribunal is also able in some limited circumstances to extend the time limit for the initial steps beyond six months.
What if we cannot afford to make the redundancy payments?
If you are unable to (or fail to) pay all or part of the statutory redundancy payments you are liable to pay to your employees, there are various circumstances in which employees may apply to the Secretary of State for their redundancy pay. The sums from the Secretary of State are paid out of the National Insurance Fund.
These circumstances include when the employer:
- refuses or fails to make the payment and the employee has taken all reasonable steps (short of legal proceedings) to recover it. An employer in this situation does not have to be subject to formal insolvency proceedings.
- is insolvent.
The employee's claim is made on Form RP1. The Secretary of State may require the employer to supply any information or documents needed to assist in deciding whether the employee's claim is well-founded. Failure to reasonably comply with these requests can be a criminal offence.
Summary
If you are looking for assistance in knowing more about the process of redundancy and what your obligations are regarding redundancy and redundancy payments our specialist employment lawyers can help. Calculating redundancy payments can be complex and we can guide you with this and how to manage any risks of redundancy or related employment claims, if these arise.
