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Operations

Making staff redundant: redundancy pay and entitlement

Melissa Jones  |  06 December, 2017

It’s never easy making staff redundant but sometimes, it’s a necessary evil in business. Whether it’s because the jobs are obsolete, you’re closing or restructuring the business, or you’re going through a tough period, nobody likes letting valued members of staff go. However, if you do find yourself in this position, ensuring that you understand redundancy pay and entitlement can make it run as smoothly as possible. Not only will this help to keep your business on the right side of employment law but it can also mean you and your staff part on amicable terms.  

What is redundancy pay?

Redundancy pay is a payment you make to workers who have lost their jobs. In effect, is a compensation for the loss of work, acting as a cushion between paid employment with you and your workers having to find new employment. Not everyone will be entitled to it and entitlement to redundancy pay will depend on an employee’s age and length of service. 

Statutory redundancy pay 

If you’re planning to lay off one or more staff members, then they will be entitled to redundancy pay provided they meet certain conditions.

  • They have to be an employee, under a contract of employment
  • They have to have worked for you continuously for two years or more 

If your employees meet the above conditions they will be entitled to statutory redundancy pay which equates to 0.5 week’s pay for each full year of service while they were under 22, 1 week’s full pay for each full year’s service between the ages of 22 and 41 and 1.5 years for each full year of service while they were 41 or older.

The amount they are entitled to is capped at 20 years and there is an upper limit on weekly pay as well. From April 2017, the maximum weekly amount has been capped at £489 and the maximum amount of statutory redundancy pay is £14,670.

You won’t have to pay redundancy pay if you subsequently offer to keep them on or if you offer them suitable alternative work which they refuse without good reason.

If you have serious cash flow problems and redundancy payments would jeopardise the future of your business, then you can ask the Insolvency Redundancy Payments Service to make the payments directly to your employees. If your business is already insolvent, the payments will be made from the service and eventually recovered from any assets your business has.

Extra redundancy pay

As well as the statutory entitlement, as an employer, you can decide to offer redundancy pay over and above what is legally required. You can also choose to shorten the qualifying period to less than two years. This will be written into the employment contract so it is clear from the outset what your staff will be entitled to if a redundancy situation should arise. 

Voluntary redundancy pay

Rather than making compulsory redundancies you can ask workers to opt for voluntary redundancy. In this instance, the pay-out you offer will likely be larger than what you are legally obliged to make.

How do you calculate redundancy pay entitlement?

Redundancy pay is worked out on the basis of age, weekly pay and length of service if employees qualify. They will be entitled to:

  • 5 week’s pay for each full year of service under the age of 22
  • 1 week’s full pay for each full year of service over 22 and under 41
  • 5 week’s full pay aged 41 and over 

For example, David is 38 and has worked for your company for ten years and three months, which means he is entitled to 10 weeks’ pay. Chelsea is 24 and has worked for your company for three years from the age of 21 to 24 which means she is entitled to 2.5 weeks’ pay (0.5 weeks for when she was under 22 and 2 weeks for when she was 22 and over). 

How you calculate redundancy pay?

If you have done the calculations above you will know how many weeks’ pay your employees will be entitled to. It is then a case of working out their weekly pay and multiplying it by the number of weeks.

If they work a set number of hours a week this is relatively straight forward. For example, if you take the example of David above, he is entitled to 10 weeks’ redundancy pay. David works a 40-hour week and earns an annual salary of £20,000 which equates to a weekly amount of £387.62. His redundancy pay will be £3876.20. Taking Chelsea’s example, she also earns £20,000 but is only entitled to 2.5 week’s pay which equates to £969.05.

However, if your employees work irregular hours or shifts, then you will need to work out the average number of hours over the last 12 weeks and use that to calculate their average weekly pay. 

Redundancy pay is not subject to tax or national insurance up to £30,000. However, holiday pay or payment in lieu of notice as part of any redundancy package will be taxable. 

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