Redundancy can have a significant impact on your employee’s wellbeing. The stress of finding a new job and financial worries that come with unemployment can seem overwhelming.
Statutory redundancy pay will help, but the statutory amount is much lower than employees are used to being paid.
Employers can help those being made redundant by offering enhanced redundancy pay.
In this guide, we will explain what enhanced redundancy pay is, the benefits and potential risks and how to calculate it.
What is enhanced redundancy pay?
Enhanced redundancy pay is where those made redundant receive a higher rate of redundancy pay.
Employers pay the enhanced rate on top of any statutory payments. This is to assist the employee through the difficult transition.
The benefits of offering enhanced redundancy pay
There are several reasons that an employer might choose to make termination payments. They include:
To help employees who have been made redundant
Depending on an employee’s finances, statutory redundancy pay might not last very long. An enhanced pay policy will show that you care for your staff, even after they no longer work for you. It can also help them to focus on their search for a new job.
To reward staff loyalty
Making redundancies is never easy. But it can be particularly difficult when an employee has been with you for a long time. Providing a termination bonus will ease those difficulties and allow you to show appreciation for your staff.
To incentivise staff to take voluntary redundancy
Making redundancies is time consuming. There are a lot of steps you must follow to ensure a fair process. One of the most significant steps is the selection process. This is when you decide on which employees to make redundant.
You can save time and a lot of tough conversations if your employees choose voluntary redundancy.
Businesses can offer a higher level of redundancy pay, or other benefits to employees that choose voluntary redundancy.
Having an enhanced redundancy pay policy will also improve staff wellbeing as employees feel more protected in the event of redundancy.
How to calculate enhanced redundancy pay
There are a few different ways to calculate redundancy packages. They are:
- Increasing or removing the cap on a week's pay for statutory limits.
- Multiplying the amount allowed for each year of service.
- Multiplying the total amount.
You can use other methods of calculating enhanced redundancy pay, but you must follow a fair process.
Enhanced redundancy pay and age discrimination
Younger employees could see your enhanced redundancy pay as age discrimination, if the calculations differ depending on employee age or length of service.
Most options use the legal steps to calculate statutory redundancy pay as a base. Mirroring those guidelines in your additional redundancy compensation will help to protect you from discrimination claims.
Any alternative calculations that you use must be in line with the Equality Act 2010 and must be justifiable.
Is enhanced redundancy pay taxable?
Both statutory and enhanced redundancy payments are tax-free up to £30,000.
The figures are added together, and the combined total is used to calculate whether any tax is due.
Any money above the £30,000 threshold will be subject to income tax and national insurance contributions.
The entire enhanced redundancy payment could be taxable, depending on the contract language.
This can happen if the contract requires employees to meet certain conditions to earn some or all of the enhanced rate.
You should try to avoid setting conditions for being entitled to enhanced redundancy. If that’s not possible, consider separating part of the allowance. Split it into an unconditional redundancy pay and a separate termination bonus on the completion of certain criteria.
Expert support on redundancy pay with Peninsula
You want to do the best by your employees, even when you’re forced to let them go.
An enhanced redundancy pay policy will ease financial worries and allow employees to focus on finding their next role. But confusing calculations and potential discrimination claims are the last thing you needs.
Our expert redundancy team will help you work out the best approach to enhanced redundancy pay calculations and draft fool proof contract terms.
Peninsula clients can speak with our specialists at any time 24/7.
Not a client yet? We’d still love to help. You can still enjoy a free advice call from one of our business experts by calling us on 0800 028 2420