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Redundancy Pay

Employers on Contractual/Discretionary Scheme

An employer may choose to operate their own scheme for assessing and making redundancy payments. In such cases the employer needs to decide if the scheme is to be a contractual or discretionary one. If they adopt a contractual one then they will be bound to use it when any redundancy arises. If they adopt a discretionary one they will not be bound to use it, but will still have to ensure that any discretion they exercise is not affected by any unlawful discrimination.

Statutory Redundancy Pay Scheme

In most cases employers are required to implement, as a minimum requirement, the statutory redundancy pay scheme when making employees redundant. Furthermore, most contractual or discretionary schemes are based on the statutory scheme (albeit with some top-up).

Conditions of Entitlement

Before an individual can claim the right to a statutory redundancy payment they must fulfil certain conditions, which are:-

i. They were an employee (as opposed to being a “contractor” for example),

ii. They had been continuously employed for at least 2 years by the employer, and

iii. They have lost their job on the grounds of redundancy.

In calculating the period of employment it is the END of the notice period from which you should work backwards to see if the employee has the full 2 years of employment. If no notice was given, the relevant date to work backwards from is the date on which the dismissal actually took effect.

If the employer provides an alternative role to the employee that employee has a statutory right to a 4-week trial period, to try it out and decide if it is genuinely suitable. If the employee decides the new role is not suitable and chooses to leave that role within the 4 week period he will keep the right to the statutory redundancy payment assessed for the loss of the previous role.

Sometimes an employee that has been given notice on grounds of redundancy may wish to leave to take up a new job before the notice period expires. If the employer objects to the premature departure then the employee may lose his/her entitlement to the statutory redundancy payment. The employer and employee may however agree a new termination date, in which case the employee will not lose the right to the statutory redundancy payment.

Amount of the Payment

The statutory redundancy payment entitlement is fixed under a set formula. Under this formula three figures are multiplied:-

a) A figure for the number of COMPLETE years of employment service with the employer,

b) A figure reflecting the age of the employee, and

c) The employee’s gross weekly pay (subject to a capped amount set out on the 1st February each year).

The effect of the cap on the figure for the “weekly pay” element of the calculation is that statutory redundancy payments are only very modest figures. If the employee earns less than the weekly cap figure, their actual (lower) rate of pay will be used in the calculation.

However, employers are of course required to pay the employee’s notice pay(unless they require the individual to work the notice period as normal, in which case they will have to continue paying that employee as normal) and any accrued but untaken holiday pay entitlement as usual IN ADDITION to a statutory redundancy payment. Furthermore, the statutory redundancy payment can be paid free of tax (within limits).

With the rise in the "weekly pay" figure to £643 from the 6th April 2023 the maximum statutory redundancy payment rose to £19,290.


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