Redundancy Pay

18 June 2020

Redundancy is a complex topic that many businesses find daunting. One of the most difficult aspects of the process is finalising redundancy pay.

As an employer, you must understand how to correctly manage redundancy payment.

If you don’t handle payments properly, it could lead to negative consequences for your business. Such as reputational damage, poor employee relations, and compensation claims.

In this guide, we'll discuss redundancy pay, employees' rights for the payment, and how manage it during terminations.

What is redundancy pay?

Redundancy pay is a statutory right employees receive when facing job termination.

Employees who have served for two years or more are entitled to statutory redundancy pay, as well as notice. (However, you can provide it to non-qualifying employees through individual contract terms).

Redundancy benefits aren’t available for certain workers. For example, self-employed, armed forces, and public office workers.

Why do you need to offer redundancy pay?

If your business closes, or you need to reduce the number of employees working in your business, it’s likely you'll need to make the affected employees redundant.

From allowing employee representation to offering notice periods–you must follow the correct, legal procedures when actioning redundancies.

This means providing their redundancy notice pay, which is the amount payable to them when working their notice as normal.

Who is entitled to redundancy pay?

To receive the payment, you need to be entitled to a redundancy notice period. Employees are entitled to this through the following means:

  • Between one month and two years’ service: One week's notice.
  • Between two- and 12-years’ service: One week's notice plus one more for each year served.
  • 12 years or more service: 12 weeks' notice (which is capped).

These are the minimum periods that are necessary by law, for both voluntary and compulsory redundancies.

An employer can't give staff a lower redundancy notice period than the legal amount.

Some writing on a notepad.

How do you calculate redundancy payment?

UK laws on redundancy pay are outlined under the Employment Rights Act 1996 (ERA).

Keep in mind that if your employee has worked continuously for over two years, they're entitled to the minimum amount. But their age, length of service, and weekly pay (which is capped) are also considered.

The basic rule for calculating redundancy pay is as follows:

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

As of 2022, the maximum statutory redundancy payment an employee can get is £17,130. Their weekly pay should be capped at a maximum of £571.

Individual employment contracts may define a much higher amount–but it cannot be lower than the statutory minimum.

Remember, when calculating statutory redundancy pay, an employee’s service count is limited to 20 years.

Is redundancy pay taxable?

Yes, redundancy pay is taxable.

National insurance contributions must be made if the payment exceeds £30,000 at 15.3%. This means the first £30,000 of statutory redundancy pay is free from income tax.

When you're calculating final pay, you must deduct appropriate tax (like National Insurance) from wages, holiday pay, and pay in lieu of notice that you owe.

What happens if you don’t provide redundancy pay?

If you fail to provide redundancy pay, employees may raise a grievance claim to an employment tribunal.

Here, you could be asked to discuss the payment issue and have sanctions enforced onto you. This can include paying compensation, legal fees, and other financial benefits (like holiday pay or PILON).

Throughout the entirety of the case, you could also suffer from business losses, employee turnover, and reputational damages.

Man sitting on a sofa.

How to manage redundancy pay in the workplace

As an employer, if you want to keep costs down and avoid tribunal claims, managing redundancy pay correctly is critical.

When your employees claim statutory redundancy pay, follow the necessary procedures and adopt the correct process. Here are ways to manage redundancy pay in the workplace:

Provide a redundancy notice period

The first step to take is provide employees with a redundancy notice period.

Only give notice of redundancy once you've finished holding the necessary consultation and selection process. Talk with every employee who’s at risk of redundancy and explain the details of the situation.

Outline details in a redundancy statement

Once you’ve talked to employees in person, outline all details through a redundancy statement.

Your statement should include the following:

  • When their notice period will take place.
  • How much redundancy money they’ll receive.
  • If they’re entitled to other financial benefits (like holiday pay).
  • Any other pay owed to them, such as holiday pay.
  • Ways to appeal redundancy decisions.

Calculate the amount of redundancy pay

Next, you need to calculate the full amount of redundancy pay employees will receive. This is calculated through the following means:

  • Their age.
  • Their service length.
  • Their weekly pay.

Remember, redundancy pay is capped at 20 years, even if they’ve served beyond this.

Provide redundancy payment on time

Redundancy payment should be made no later than the employee's final day. Provide the payment through their wages, which is paid straight into their bank account.

The payment can be made later if you both agree to this in writing. In this case, make it clear to them when and how they will get statutory redundancy pay.

If you fail to pay employees on time, they could file a claim with an employment tribunal.

Get advice on redundancy pay from Peninsula

You must be aware of the rules when it comes to redundancies. This includes employment rights, pay, and notices–all the way to their last day of work.

Poor management of redundancy payments can damage your business reputation; as well as leave you facing tribunal claims.

Peninsula offers unlimited 24/7 HR advice which is available 365 days a year. Our HR experts can help you with managing redundancy payments and resolving employment disputes based on the specific circumstances of your business. Want to find out more? Contact us on 0800 051 3687.

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