Deciding to make people redundant is an extremely difficult decision. There are many reasons why a business comes to this juncture, such as an organisation restructure, departmental job cuts, or even the business closing its doors.
Whatever the reason, a business needs to follow the legal guidelines for making redundancies and understanding the amount an employee is entitled to under statutory redundancy pay law. Therefore, it is important to know what statutory redundancy pay is, when it kicks in and how it is calculated prior to making any cuts in the workforce.
What is Redundancy?
Redundancy is a legal form of dismissing an employee from your business. There are a number of reasons why an employer may need to make an employee redundant including:
- job position is no longer required
- reducing costs
- company restructure
- closing the company
- declaring bankruptcy
It is important that when making decisions about redundancy, that all employees are judged on a fair basis for selection. For example, an employee cannot be made redundant due to their age, gender, any disability or other similar factors. This would count as unfair dismissal where an employee would then have the right to take legal action. As an employer, you should make redundancy decisions about your employees based on facts:
- length of service (you may decide to operate on a ‘last in, first out’ basis when making redundancy decisions)
- any changes in the employee’s role or responsibilities
- whether the job role is still required
- the disciplinary record of employees
These factors can help make this difficult business decision more straightforward. If a business is undergoing a restructure and a role is no longer available, an individual can be considered for a new role if one exists in the business or redundancy.
How does a redundancy process work
An employer should follow a fair procedure before it dismisses an employee (including consulting with them about the proposed redundancy) to avoid unfair dismissal claims.
There are collective consultation obligations where an employer proposes to dismiss 20 or more employees for redundancy within a period of 90 days under s.188 Trade Union and Labour Relations (Consolidation) Act 1992.
When making redundancies it is important to understand how much a person is entitled to and this is where statutory redundancy pay comes into play.
What is Statutory Redundancy Pay?
Statutory Redundancy Pay is the amount of money your employees are legally entitled to if they are made redundant from your business. You will have to pay your employees statutory redundancy pay if:
- they have been employed by your business for at least 2 years
- they have been made redundant because there was a genuine need to make redundancies, such as company restructure or job cuts in order to save money
- they are classed as a permanent employee, whether full-time or part-time
Your employees will also be entitled to statutory redundancy pay if you do not renew their fixed contact because the job they had no longer exists, providing they had the fixed-term contract for at least 2 years (this can be in one 2 year contract or shorter contracts that followed on from each other and added up to 2 years in total).
Your employees might lose their right to statutory redundancy pay if:
- they refuse a suitable alternative job offered to them by the company without providing a good reason
- they want to leave before the job is due to end, i.e. found another job elsewhere
- you dismiss them for gross misconduct
How is Statutory Redundancy Pay Calculated?
Statutory redundancy pay is calculated based on an employee’s age, their length of service with the company and the amount they earn in their (average) weekly pay. Weekly pay should also include regular overtime (if the employee’s contract outlines that they should get paid for it) and any bonuses or commission. If an employee has been at the company for more than 2 years this would entitled them to:
- half a full week’s wage for each full year at the company whilst under the age of 22
- one week’s pay for each year at the company whilst in between the ages of 22 - 41
- one and half week’s pay for each year at the company whilst over the age of 41
A full week’s wage is worked out by taking the average amount earned across the 12 weeks, prior to being made redundant from the company.
As the employer, you must make it clear exactly how you have calculated their statutory redundancy pay.
Is There A Maximum To Statutory Redundancy Pay?
The current maximum statutory redundancy pay if an individual was made redundant on or after 6th April 2021 is capped at £544 per month with a maximum total payment capped at £16,320.
All forms of redundancy pay are exempt from being taxed up to the value of £30,000. Any further redundancy amount paid above the statutory level will be added on to the total. Anything exceeding the £30,000 threshold becomes taxable.
As an employer, you will only be required to pay statutory redundancy pay for a maximum of 20 years of service for an employee.
The National Insurance Fund may pay the redundancy pay where employers are insolvent, can’t pay redundancy pay or who do not pay it.
Can Employers Claim Back Statutory Redundancy Pay?
Many businesses are unaware of the amount of statutory redundancy pay they must provide to their employees when making them redundant. You may be wondering whether you as a business owner will be able to claim back any statutory redundancy pay you provide them.
In general, businesses cannot seek reimbursement for statutory redundancy pay. However, the government does provide assistance if you are unable to pay the full amount to your employee(s).
You can get legal assistance from LawBite
When making employees redundant, it is crucial to know what redundancy payments they are entitled to, how statutory redundancy pay is worked out as well as how to calculate an employee's entitlement. At LawBite, our expert employment lawyers, solicitors and mediators can provide clarification regarding statutory redundancy pay and employment law, helping you with your legal issue.
LawBite’s mission is to democratise how SMEs get the expert law they need - easier to access, clearer to understand and much more affordable. We connect you with the best lawyers to give you top-class legal advice. LawBite offers legal advice from our experts regarding statutory redundancy pay and what you need to know about an employee’s legal entitlement. We use our experience to outline everything you need to know about statutory redundancy pay when making employees redundant.
Make an enquiry with us if your business is looking to make redundancies or you wish to find out more information on the legalities surrounding statutory redundancy pay and what your employees are entitled to. LawBite has years of experience in providing businesses with legal advice in employment law and would be happy to guide you in a free 15 minute consultation.
To learn more about redundancies in the age of COVID and the impact this can have on your business, check out our blog post here.
