Many employers have had to face the dreaded task of making some or all of their staff redundant. Losing major contracts, budget cuts, and sales losses—it can happen in many ways. It can even happen to powerful companies.
With redundancy comes thousands of pounds spent on redundancy pay. You may wonder how much is redundancy pay and which of your employees will need it.
Here's what you need to know about paying your staff when you lay them off.
How does redundancy pay work?
Your employees qualify for statutory redundancy pay (SRP) once they've given you two years of service.
There are two types of redundancy pay you could pay:
- Statutory redundancy pay: what the law entitles employees to
- Contractual redundancy pay: extra money a contract says the employee can get on top of the statutory amount
How Much is Statutory Redundancy Pay?
As of April 6, 2018, the cap for weekly SRP is £508. The maximum redundancy pay an employee can receive in statutory payments is £15,240. They will be eligible for the following minimum redundancy pay:
- Half a week's pay for each full year they worked for you under the age of 22.
- One week's pay for each full year they worked for you between 22 and 40 years old.
- One and a half weeks' pay for each full year they worked for you while 41 or older.
What is contractual redundancy pay?
Law may require you to pay employees more than the statutory redundancy pay if their contract of employment says you will.
There is no obligation to provide contractual redundancy pay but if it is there, you must honour it.
By law, contractual redundancy pay cannot be less than the statutory redundancy pay rate.
Voluntary redundancy pay
Voluntary redundancy is when you ask a member of staff to agree to terminate their contract, in return for a financial incentive.
An employee can volunteer for redundancy. While employees can offer themselves for voluntary redundancy, you are under no obligation to accept the employee's offer.
The fee for voluntary redundancy is often more than the amount offered for statutory redundancy pay. It will take into account factors such as your age, salary, and length of service.
You can’t just offer voluntary redundancy to age groups and specific employees eligible for an early retirement package. This could be unlawful age discrimination.
However, an early retirement package could be one element of voluntary redundancy. The offer could be open to all employees, for certain age groups at least.
Is redundancy pay taxable?
Any redundancy payments you make to your staff under £30,000 are tax-free. This includes severance pay. But if you owe your redundant staff holiday pay or wages, tax and National Insurance (NI) deductions apply as usual like they would be shown on a payslip.
Your staff may ask, is their redundancy pay taxed? The same rules apply to their redundancy payment. It is tax-free up to £30,000. However, tax applies to holiday pay and pay in lieu of notice in the same way as any other pay.
If you want to know how to work out how redundancy pay much you owe (or would owe) your employees, you can use our free redundancy pay calculator. Just input your employees:
- Date of birth.
- The date they began their current job with you.
- The date their employment ended or will end.
- Their average weekly pay.
How is statutory notice pay calculated?
Employers must give their employees a redundancy notice period before their employment ends.
This can vary from at least one week’s notice up to 12 weeks’ notice. The length of the notice period depends on how long they have worked for you.
Alongside this, they should receive redundancy notice pay. We base the notice pay on the average they earned per week over the 12 weeks before the notice period starts.
If you pay them less than usual because they were ‘on furlough’ because of coronavirus, we base the notice pay on what they would have earned normally.
Pay in Lieu of Notice (PILON)
You can pay staff in lieu of a notice period if you choose to, too. The value of the PILON is either:
- The value of the contractual notice period.
- Or one week's notice pay for every year of service, up to a maximum of 12 weeks.
Redundancy and holiday pay
When you make an employee redundant, the law entitles them to any holiday pay for untaken holiday days.
If they have taken more than their entitled days, then you are within your legal rights to dock that from their final pay settlement.
Statutory Redundancy Pay for Short-term or Temporary Lay-offs
Your staff can claim SRP if you've laid them off (without pay or less than half one week's pay) for:
- More than four weeks in a row.
- Or more than six weeks (non-consecutive) during a 13-week period.
- But your staff must write to you to start this process.
Who isn't eligible for redundancy pay?
When a company needs to make cuts and let some staff go, there are always some employees who can keep their job. And for some staff, you'll find an alternative role for them—perhaps in a different team, or one of the other offices.
The staff you keep on are not eligible for redundancy pay. This includes those who stay in their role and those who make a switch, such as to a different department.
If you offer an employee a fair alternative role, and they turn it down, you don't owe them redundancy pay. People in these roles aren't eligible for SRP, either:
- Crown servants.
- Members of the armed forces or police service.
- Apprentices who will not become your employees at the end of their training.
- Share fishermen.
- Someone who is a domestic servant and a member of their employer's immediate family.
Redundancy payments and furlough
As furlough reduces weekly pay, do you use this reduced rate to calculate redundancy pay? If you make furloughed employees redundant, they should receive redundancy pay based on their normal wages. Do not pay them a reduced furlough rate.
These changes also apply to statutory notice pay. During this notice period, you must pay employees based on normal wages. Do not pay them based on their wages under the Coronavirus Job Retention Scheme (CJRS).
Guidance released on 17 July confirms that you can continue to claim for a furloughed employee. This applies to those who are serving a statutory or contractual notice period. However, grants cannot substitute redundancy payments.
The new legislation doesn’t affect enhanced redundancy pay stipulated in an employee’s contract. But it applies to basic statutory redundancy pay entitlements
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