Redundancy Pay

  • Redundancy
Overpayment of Wages
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Peninsula Group, HR and Health & Safety Experts

(Last updated )

In this guide, we'll discuss redundancy pay, how much you need to provide, and what to do if you cannot afford to pay.

Redundancy pay is a big area that you must get right. When making staff redundant, you need to make sure that eligible employees get the money they’re entitled to. 

If they don’t then they may raise claims against you. Causing extra stress in what is already a difficult period. This can lead to extra financial costs and reputational damage to your business

In this guide, we'll discuss redundancy pay, how much you need to provide, and what to do if you cannot afford to pay.

What is redundancy pay?

Redundancy pay is a statutory right that employees can receive when facing redundancy.

This payment is aimed at making the process easier, giving your employees time to find new employment.

What is statutory redundancy pay?

Statutory redundancy pay is the legal minimum amount your employees must receive if they've been made redundant. Meaning you can't pay them less than this amount.

They should never have to claim statutory redundancy pay, it should be received in the same way as their wages - straight into their bank account.

Are all employees entitled to statutory redundancy pay?

No, not all employees are eligible to claim money following redundancy. They must ha e been employee for at least two years.

Only employees can receive this payment, meaning self-employed staff or workers aren’t eligible.

Statutory redundancy pay entitlement

How much statutory redundancy pay employees can receive depends on the following information:

  • Their age.
  • How many years of service.
  • Their weekly pay before tax (gross pay).

You must provide the following:

  • Under 22 years old: Half a week's pay for each full year worked.
  • Between 22 to 40 years old: One week's pay for each year of service.
  • 41 years old or more: One and a half weeks' pay for each year of service.

Is there a limit to how much redundancy pay an employee can receive?

Yes, there are limits to how much redundancy pay an employee can get. The maximum weekly amount an employee can receive is £571, even if they earn more. The maximum statutory redundancy pay someone can receive is £17,130.

However, these rates are increasing in April 2023.

It's important to remember that redundancy pay is only paid for up to 20 years of work.

How to calculate weekly pay

You have a legal requirement to provide redundancy pay to entitled employees. So you need to know how to calculate redundancy pay correctly. This is done by finding out an employee's weekly pay.

To calculate someone's weekly pay, divide their annual salary by 52. For example, £20,000 ÷ 52 = £384.61.

Can employees lose their right to statutory redundancy payment?

Yes, employees can lose their right to receive a statutory redundancy payment. This could be down to one of the following reasons:

  • Turning down suitable alternative work without good reason.
  • Wanting to leave their job before it's due to end, for example after finding new employment.
  • Being dismissed for any other reason than redundancy.

Acceptable reasons for turning down alternative employment are the job being lower paid, health issues, or difficulty getting there due to travel.

Is statutory redundancy pay taxable?

No, employees aren't required to pay income tax or National Insurance contribution on any statutory redundancy payment they receive. This is up to £30,000, however, holiday pay or pay in lieu of notice is taxed as pay.

Redundancy pay for fixed-term contracts

You may have employees on a fixed-term contract when redundancies occur. Those on a fixed-term contract will receive a payment if it isn't renewed or cut short because the job doesn't exist anymore (or any reason that falls into redundancy). But either of the following requirements must be met:

  • They had a fixed-term contract for more than two years.
  • They had shorter contracts following each other, which added up to two years or more. However there should be no gaps between them.

Calculating redundancy pay if employees are paid in lieu of notice

Payment in lieu of notice (also known as PILON) is when employment ends, but the employee still gets paid for their statutory notice period.

However when calculating their redundancy pay, it needs to be based on a "relevant date". In most cases, this is when their employment ends.

For example if an employee has worked for you for eight years and 11 months, they would be entitled to eight weeks of statutory notice. If you provide them with PILON, you must add those eight weeks to their length of service. giving them nine years and one month of employment. For this, you must provide them with redundancy pay for nine years of service.

Enhanced/Contractual redundancy pay

Contractual redundancy pay is a more generous package that can be offered when making redundancies. The amount provided may be greater than the statutory minimum amount, or be given from the first day of employment not after two years.

This form of redundancy pay is part of employee benefits and should be included in the employment contract.

If you're providing this option to your employees, you should make it clear how you'll calculate their entitlement and when they'll receive it.

Is contractual redundancy pay taxable?

No, any contractual redundancy you provide is tax-free and no National Insurance contributions are required. This is up to £30,000 and will be made up of both statutory and contractual redundancy pay.

Similar to contractual, enhanced redundancy pay is extra money on top of the statutory amount. You may choose to offer this form of payment for several reasons, such as:

  • Helping employees who have been made redundant: An increased rate of pay will help your employees focus on the search for a new job.
  • Rewarding staff loyalty: Enhanced pay will show your employees that you've appreciated their hard work over the years.
  • Encouraging staff to take voluntary redundancy: Offering higher pay may encourage your employees to take voluntary redundancy.

Be aware that younger people may see enhanced redundancy pay as age discrimination, especially if calculations differ depending on employee age or length of service.

How to calculate enhanced redundancy pay

You must calculate all your redundancy packages correctly. You can do this via the following:

  • Increasing or removing the cap on the statutory limit on a week's pay.
  • Multiplying the amount allowed for each year of service.
  • Multiplying the total amount.

Is enhanced pay taxable?

As with other redundancy payments, enhanced redundancy pay is tax-free for up to £30,000. Any money above this will be subject to income tax and national insurance contributions.

Do employees who have been laid off receive redundancy pay?

Yes, employees who have been temporarily laid off can receive redundancy pay.

Employee can claim redundancy pay if their lay off or short-time working has run for:

  • Four or more weeks in a row.
  • Six or more weeks in a 13 week period (where no more are more than three in a row).

The amount is based on their usual weekly pay from their normal working hours. However, this isn't the case if there was an agreed permanent change in working hours.

TUPE and redundancy pay

When a business changes hands, redundancies may be required. However, if the redundancies happen before the transfer then the old employer is responsible for redundancy pay. And vice versa, if after the transfer then the new employer is responsible.

Redundancy payments can be included within the agreement to transfer over the business, but it’s up to the parties to understand. It's vital that both the old and new employers act fairly when deciding if redundancies are required.

Zero-hours contracts and redundancy pay

If you have staff on zero-hours contracts, the redundancy payment calculation may be slightly different than for employees on fixed hours.

Redundancy pay is calculated by someone's weekly pay over a time period. However, with zero-hours contracts, it’s calculated by finding the average pay earned in the 12 weeks before the redundancy.

It's also likely that length of service will be taken as the start date of work, even though there may to be gaps where no work was done.

Do employees get redundancy pay when a company goes insolvent?

If the company goes out of business, employees can still get statutory redundancy pay (plus holiday pay or notice pay). You still have an obligation to provide redundancy payments.

So if you can't afford to pay your employees what they're entitled to, you can apply to the Redundancy Payments Service (part of the Insolvency Service) to make payments.

To apply to the scheme you must show you have tried all other funding options available, a written statement will be required. Be aware that until you enter formal insolvency proceedings, you're still responsible for providing holiday pay, normal pay, and notice pay.

Can all employers apply to the Redundancy Payments Service?

All employers who are not subject to formal redundancy proceedings can apply for the scheme. This includes employers that:

  • Are still trading. 
  • Have stopped trading but have not entered formal insolvency.
  • Are going to stop trading in the future but are not expecting to enter formal redundancy.

What happens if you don't provide redundancy pay?

Failure to provide redundancy pay is against employment law. You have an obligation to provide payment when making redundancies.

Remember redundancies are a stressful time for your employees, so you must follow your legal requirements at all times.

Can you be taken to an employment tribunal over redundancy pay?

Yes, an employee can take their former employer to an employment tribunal over unpaid redundancy pay.

If found culpable, you may have sanctions forced onto you. This can include paying compensation, legal fees, and other financial benefits such as holiday pay. You will also face reputational damages and business losses.

Get expert advice on redundancy pay from Peninsula

As an employer, making redundancies is never an easy process. And, providing redundancy payments is a crucial part of the process.

Redundancy pay is a legal requirement, so failure to do it properly can lead to negative consequences for your company. Such as reputational damages and compensation claims.

We offer expert guidance on all things redundancy pay. Our 24/7 HR advice is available 365 days a year to answer any questions you have to make the process as easy as possible.

Want to find out more? Contact us on 0800 028 2420 and book a free consultation with an HR consultant today.

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