What is Redundancy Pay?

When an employer needs to make redundancies, there are certain requirements they need to fulfil.

Redundancy pay is one of them. This financial pay must be given to the right employees - in the right manner.

If you neglect statutory rights during this time, you could end up facing compensation fines and business losses.

In this guide, we'll look at what redundancy pay is, different types of payments, and how to pay employees being made redundant.

What is redundancy pay?

Redundancy pay is given to eligible employees when they're being made redundant.

There are two types of redundancy pay: statutory and contractual redundancy pay.

Statutory redundancy pay

Statutory redundancy pay (SRP) is a payment some employees are legally entitled to when they're made redundant.

Only employees with at least two years of service are entitled to statutory redundancy pay. They also need to have an 'employee' status outlined in their employment contract.

Redundancies should only be used as a last resort. Instead, you can provide suitable alternative work if it's available. However, if an employer offers this and it's rejected, the employee may lose their right to statutory redundancy pay.

Contractual redundancy pay

Contractual redundancy pay is a payment that employees are contractually entitled to when they're made redundant.

This payment is usually agreed to in a written statement. For example, an employment contract or staff handbook.

Contractual redundancy pay cannot be less than the statutory minimum amount. (Although this may be allowed for short-service employees). It’s usually paid as a bigger lump sum or as a payout - regardless of employment status or service years.

How much redundancy pay can you get?

Currently, the most statutory redundancy pay you can get is £643 per week. This is the maximum weekly amount employees can get.

The maximum statutory redundancy pay that an employee is entitled to is £19,290. This is considered the statutory legal minimum.

The maximum length of service years needed to get statutory redundancy payment is 20 years. Meaning, if an employee had the same job for 21 years, they'll only claim money for 20 of them.

When is redundancy payment given?

Usually, redundancy pay is paid after an employee's notice period. It's paid on their last day of employment or on an agreed date.

A notice period can be one week (statutory notice) and maybe 12 weeks. It depends on how long it’s agreed to within their contract.

Employees are also entitled to notice pay. They usually get this paid to them all at once (directly to their bank account).

How do you calculate redundancy pay?

When you're calculating redundancy pay, you need to consider a few things.

The redundancy payment calculation is given based on an employee's age, service years, and weekly pay before tax, or 'gross pay'. (Weekly pay also includes regular overtime, bonuses, and commission).

Let's look at how much redundancy pay you can get as an employee:

If they're aged between 17 and 21 years old

• Half a week's pay for each full year they've worked.

If they're aged between 22 and 40 years old

• One week's pay for each full year they've worked (from age 22).
• Half a week's pay for each full year they've worked (before age 22).

If they're aged 41 years old or over

• One and a half weeks' pay for each full year they've worked (from age 41).
• One week's pay for each full year they've worked (between ages 22 to 40).
• Half a week's pay for each year they've worked (between ages 17 to 21).

What is the law on redundancy pay?

Employees must receive redundancy money from their former employer if they're eligible. If not, they could raise an unpaid redundancy claim to the employment tribunal (ET).

These employment disputes are carefully reviewed with both parties present (with an employee representative if invited).

If the claim is upheld, you could be forced to pay the statutory amount in full. You could even face paying unlimited compensation if you weren’t paid due to unlawful discrimination.

Let's take a look at employment rights during redundancies:

Discrimination

Employees are legally protected from unlawful discrimination during redundancy procedures. You cannot treat employees unfavourably against their protected characteristics. For example, you can't make them redundant because of their age or for being on maternity leave.

Notice period

Redundancy is considered another form of dismissal. So, if employees are facing redundancy, they have a legal right to a notice period. Along with redundancy payment, they're also entitled to notice pay during this time as well.

Holiday pay

Employees can still accrue statutory holiday pay during their redundancy process. If an employer owes holiday pay, they must pay it or let employees use it before being made redundant.

Paid time off to look for work

Only employees with two years of service can get paid time off to look for new work. It doesn't matter if they find a new job or not; they're legally entitled to this form of temporary leave.

Pay in lieu of notice (PILON)

During a redundancy notice period, an employer may offer pay in lieu of notice (or PILON). Pay in lieu of notice is given to employees to end their contracts without having to fulfil their statutory notice period.

How to manage redundancy pay in the workplace

Every employer must follow a fair and legal redundancy process.

Redundancy pay isn't always straightforward as you'd. That's why you've got to make sure you pay it properly - without causing financial losses for employees or your business.

Let's take a look at how to manage redundancy pay in the workplace:

Decide on an agreed termination date

Once you've selected people for redundancy, you need to decide on a termination date.

Both you and your employees must be aware that this relevant date is their final day of employment. Employers must provide redundancy pay on their last day; or on an agreed relevant date afterwards.

Mention the tax deductions

It's important that employees know how much statutory redundancy pay is subject to tax deductions.

Tax payments are usually highlighted in payslips, but it's good to let them know in person. Remember, there are separate rules for differing amounts.

If redundancy pay is under £30,000, it's considered to be tax-free. Anything over this amount will be taxed just like their normal pay. Usually, this tax is paid through HM Revenue and Customs. For example, through an Income Tax or National Insurance contribution.

Highlight who can't claim statutory redundancy pay

Remember, not all employees can get statutory redundancy pay - even if they have certain requirements, like status or service years. SRP isn't available for:

• Employees with less than two years' service.
• Self-employed people.
• Public sector jobs (like police officers or the armed forces).
• Crown servants and parliamentary staff.
• Employees of a foreign government.

Contact the Redundancy Payments Service (RPS)

Sometimes, a business might need to make redundancies for things beyond its control. For example, having to close the business due to financial struggles.

Employers can seek financial support if they're made insolvent. You can make a claim online or in writing to the Redundancy Payments Service (RPS). This governing body helps businesses fulfil any unpaid redundancy claims.

Be aware, there is a limit to how much redundancy pay you get from the insolvency service.

Is redundancy the same as lay-offs or short-time working?

No, redundancy isn't the same as lay-offs or short-time work.

A lay-off is used when an employee is given no work for a set time, like a full day. Short-time working is when an employee's work hours have decreased - but not completely stopped. Both of these are temporary measures, while redundancy is permanent.

Eligible employees may claim redundancy payment when they're temporarily laid off. This is when they have gone without pay or received less than half a week's pay for:

• At least for four weeks in a row.
• At least for six weeks (non-consecutive) during a 13-week period.
• But your staff must write to you to start this process.

Get expert advice on redundancy pay with Croner

There are certain legal rules on how much redundancy pay you get. That's why it's vital employers follow the right process.

If you neglect any steps, you could end up paying missing payments and even compensation.

But you don’t need to deal with this alone. Croner offers expert legal advice on redundancy pay. Our team of HR advisors are here to help.

Need more advice on your redundancy pay? Speak to a Croner expert in regards to any HR or UK law issue on 0800 470 2589.