What Employers Need to Know About Redundancy Pay

Redundancy Pay

In an ideal world, companies would carry on growing indefinitely, employing more people and evolving over time. Unfortunately, in the real world, tough economic and financially uncertain times necessitate drastic measures, including the need to make staff redundant. This blog post covers the essentials that British employers need to know about redundancy pay.

 

In the UK, the process around redundancies / layoffs / terminations is quite clear, particularly the rules around consultation periods and information requirements, as well as what happens if 20 or more staff are made redundant at the same time (known as collective consultation). But it’s important for companies to get it right since employees can go to an employment tribunal if the rules are not followed correctly and hefty fines (up to an unlimited amount!) can be levied if employers do not notify the redundancy payments service (RPS) before a consultation starts.

A helpful guide on handling large-scale redundancies is also available from acas if you want more information.

When Are Employees Entitled to Redundancy Pay?

If an employee has been working for your company for two years or more, continuously, they will be entitled to statutory redundancy pay.

Redundancy pay must be paid over and above the employee’s notice period, as stated in their contract. Employees can be required to work their notice period, or they could be given payment in lieu of notice. The statutory redundancy notice periods are at least one week’s notice if an employee has worked more than one month and less than two years. Thereafter, it goes up to one week’s notice per year until 12 years’ service, when 12 weeks’ notice is required regardless of the number of years over and above 12 years.

As an employer you may provide more notice than the statutory minimum, but not less.

How Much Notice? Find Out in a Flash!

Digital Employee Files on Different Devices

Get all the details related to an employee’s time at your business: from contracts to notice periods, sick leave to holiday allowance in a few clicks. Find out how to keep employee data right at your fingertips!

 

It is also worth noting that if an employee is dismissed with notice that notice period may take their number of years of service into a new year, they must be compensated for this year. In addition, according to nidirect government services, “statutory redundancy pay is also due when a fixed-term contract of two years or more expires and is not renewed because of redundancy”.

How Much is Statutory Redundancy Pay in the UK?

How much redundancy pay an employee is entitled to depends on their salary, length of service, and age. Once they have worked as an employee for more than two years and are under the age of 22, they must receive half a week’s pay for each full year. If they are between 22 and 41 years’ old they receive one week’s pay. Over the age of 41 they receive 1.5 weeks of pay. If this seems confusing, or they cross various age thresholds, you can use the gov.uk statutory redundancy pay calculator to work out how much to pay them.

There are also caps on how much employers are required to pay. Length of service is capped at 20 years. As of 6 April 2020 the maximum amount of a ‘week’s pay’ to calculate redundancy pay increased from £525 to £538. However, you can give your staff extra redundancy pay if you want to, or have a qualifying period of less than 2 years. It is also worth noting that redundancy pay (including any severance pay) under £30,000 is not taxable.

What is the Difference Between Redundancy Pay and Severance Pay?

A severance package or a layoff package is a financial offer made by an employer when letting an employee go which can be provided as an alternative to a redundancy package, or in other circumstances. It usually includes: statutory redundancy pay and payment in lieu of notice. It can also include pension payments, stocks or shares and additional (negotiated) bonuses or discretionary amounts.

There is no ‘average severance package’ value as it depends entirely on the employee’s contract, the nature of the dismissal and the employee’s seniority, however severance pay packages (particularly in the case of voluntary redundancy) are often larger sums than statutory redundancy pay.

Do You Have to Give an Employee Redundancy Pay?

There are some circumstances where redundancy pay is not mandatory. If an employer offers to keep an employee on with the company and offers suitable work which an employee refuses, then there is no need to make redundancy payments.

In addition, if an employee has worked less than two years or is a former registered dock worker, a crown servant, a member of the armed forces or police services, an apprentice who does not become an employee at the end of their training or a domestic servant who is a member of the employer’s immediate family then they do not need to be given redundancy pay.

What Happens if You Can’t Afford to Make Statutory Redundancy Payments?

According to gov.uk, “If your business would become insolvent as a result of making the statutory redundancy payments, the Insolvency Service’s Redundancy Payments Service may be able to help.” You can call the Redundancy Payments Helpline on 0330 331 0020 for more information.

Employees’ Rights: What Do Employers Have to Do?

Employees have certain rights when they are under notice of redundancy, including the right to reasonable time off to look for a new job or arrange training and the right not be unfairly selected for redundancy, as well as entitlement to redundancy pay under certain circumstances. Employers also have to take steps to avoid compulsory redundancies and offer alternative work (with a four week trial period). You are also required to give your employees a statement showing how their redundancy payment was calculated.

Regardless of the circumstances surrounding redundancies it is not only important to follow the rules and guidelines laid out by the government as well as your company’s own policies and conscience, it’s also critical to document the process!

All Documents Right at Your Fingertips

Digital Employee Files

HR document management software like Personio can make it far easier to create processes, produce documents, ensure these are signed, tracked and stored for the right amount of time.