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Getting It Right: Redundancies - Redundancy Pay and Contractual Entitlements

Getting It Right: Redundancies - Redundancy Pay and Contractual Entitlements
Richard Hiron Jan 19,2021
blog post

During the consultation process, you will likely have faced some difficult questions such as:-

  • “When are you going to make me redundant?”
  • “Will I have to work my notice?”
  • “Will I have to take all of my holiday before I leave?”

These are the sorts of questions where you will either have a clear answer available or you may want to take a step back and respond once you have further information. Moreover, each redundancy is very specific to its facts, so working on a timescale before things get to this stage can be helpful for you in answering points such as these (i.e. factoring in any consultation periods, when are you planning on serving notice and when will the employee’s last date of employment be).

When it comes to the redundancy itself, you will want to work out the employee’s projected statutory redundancy pay beforehand, remembering that employees who have two or more years of continuous service are entitled to statutory redundancy pay to the value of:-

  • Half a week’s pay for each complete year that they were employed under the age of 22;
  • One week’s pay for each complete year that they were employed at the age of 22 or older, but under the age of 41; and
  • One and a half week’s pay for each complete year that they were employed at the age of 41 or older.

In the 2020-2021 tax year, weekly pay is capped at 538 and statutory redundancy pay overall is capped at 20 years’ service.

Therefore, if Jessica started her employment with X Limited at the age of 17 and worked for four complete years on a full-time basis until she was 21 years old and her current annual salary is 22,000 before deductions, the calculation would be:-

22,000 divided by 52 weeks = 423.08. This will be multiplied by 0.5 (i.e. half a week) to reach 211.54, before being multiplied by Jessica’s 4 years of complete service to reach a statutory redundancy payment of 846.16.

However, employers should be careful if they have a contractual obligation or a redundancy policy that allows for statutory redundancy pay to be enhanced beyond the statutory minimum or, alternatively, if an employee has asked to take voluntary redundancy, as it may be prudent to enter into a settlement agreement for the security of not receiving a claim from that employee further down the line.

Employers also need to consider the employee’s other contractual entitlements as well, some of which cannot be calculated until the employer has a clear picture of its intentions.

For example, if the employer wants the employee to work his or her notice period, then salary will be paid in the usual way. However, the employer may instead wish for the employee to be paid instead of working their notice (i.e. paid in lieu of their notice period), in which case the monetary value of that notice period (i.e. the pay that the employee would have earned during that notice period) will need to be calculated and the appropriate deductions made.

Similarly, the untaken holiday entitlement that an employee has amassed (or accrued) during the most recent holiday year (subject to exceptions such as when holiday entitlement has been carried over, for example if an employee has been on family leave) will need to be calculated and paid to them in their final salary, subject to the necessary statutory deductions. Although some employers may choose to pay accrued holiday entitlement for an employee’s notice period where they have been paid in lieu of working their notice, they only need to be paid up to the date that their employment actually ended.

For instance, Matthew is made redundant on 12th May. Instead of being required to work a three-month notice period in his contract of employment, his employer pays him in lieu of requiring him to work his notice period. Therefore, his annual leave entitlement is calculated up to the day when his employment actually ended: 12th May.

Alternatively, you may simply wish that they take their annual leave entitlement before their employment ends.

Vitally, employers should note that contractual entitlements such as pay in lieu of notice and holiday pay are quite separate to redundancy pay. It is therefore good practice to set out to the employee in writing what they are entitled to if their redundancy is being confirmed and to separate out the various payments rather than grouping them into one lump sum.

This article is intended for information purposes only and not as a substitute for legal advice. TP Legal does not accept any responsibility for any decisions that you may make as a result of reading this article.