Do small businesses have to pay redundancy payments in the UK?

Redundancy can affect all businesses, no matter their size. Often, redundancy occurs because of a decline in the economy or a decrease in the market share, causing a reduction of customers or clients.

To cope, some businesses must reduce their number of employees. Particularly those whose roles are no longer needed due to a change in a business’s emphasis or as a cost-cutting measure.

Redundancy arises when a business stops trading or diminishes from the market. This can occur if:

  • An employer closes or intends to close their business as a whole.
  • The business owner shuts down the place where the business operation is carried out.
  • The need for that type of work has reduced or ended.

In these instances, you may make your employees redundant.

If you’re a startup company and need help sorting out your business, find a startup lawyer at Harper James Solicitors, to answer all your legal questions.

What are legitimate reasons for redundancy?

Legitimate reasons for making your employees redundant include:

  • To reduce staff numbers to cut costs
  • New technology has removed the need for certain roles
  • The company structure has changed, so some employees are no longer needed
  • The company is closing or moving to another location
  • The business has been sold to another enterprise

To make sure you’re handling redundancy properly, as stipulated by the law, you must follow these four simple steps:

  • Think of all alternatives, including cutting costs in other areas and retraining your employees
  • Monitor the number of redundancies because having over 20 redundancies requires a Collective Consultation
  • Follow the right procedure
  • Make sure you provide redundancy pay

Who is entitled to redundancy payment in the UK?

Any employee who has continuously worked at your company for at least two years legally qualifies for redundancy pay. Also, employees who have a fixed-term contract of two or more years are eligible for a redundancy payment if their contract expires because of redundancy.

As a business owner, it’s essential to note that if your staff doesn’t meet these criteria, then they aren’t entitled to receive redundancy pay. Rather, they’re entitled to holiday pay and notice period pay, which you owe them.

What is statutory redundancy payment?

As the owner of a small business in the UK, if you make your employee redundant, under the law you must pay them the following amounts:

  • Half a week’s payment for every year of full employment for which the employee was under the age of 22 years.
  • One week’s full payment for every full year of employment in which the employee is aged below 41 years.
  • One and half week’s payment for each full year of employment for which the employee was aged 41 or older.

The average number of years that is considered is twenty years. If an employee became redundant on or after the sixth of April, 2021, their weekly redundancy pay is capped at £544. The maximum statutory redundancy pay that this employee can get is £16,320. However, if the employee became redundant before 6 April 2021, their redundancy pay will be lower.

An employee isn’t entitled to statutory redundancy pay if their employer offers to keep them on or offers them suitable alternative work, which they refuse for no good reason.

Further, if you dismiss an employee because of misconduct, that employee isn’t entitled to any redundancy pay.

The following categories of employees aren’t entitled to statutory redundancy pay:

  • Share fishermen and former registered dock workers who are covered by other arrangements
  • Members of armed forces or police services
  • Crown servants
  • Apprentices who don’t become employees at the end of their training
  • Domestic servants who are an employer’s immediate family members

Final Thoughts

With the inevitable difficulties small businesses face, there may be times when small business owners need to let go of some of their employees. It’s essential for all business owners to note that if an employee has been in the same position for at least two years, they must pay them redundancy money. So, every business in the UK, even small businesses, must pay redundancy money.

For further reading, check out our other articles like Business angels: advantages and disadvantages or Average settlement (compromise) agreement pay-outs.


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