Redundancy Pay: How to Calculate

redundancy pay

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Redundancy pay is one of the statutory entitlements for most employees being made redundant.

In this guide for employers, we explain how to calculate redundancy pay and the rules on who is entitled.

 

Right to redundancy pay?

 

Whilst it’s lawful for an employer to bring an employee’s contract of employment to an end by reason of redundancy — provided there’s a genuine redundancy situation, for example, where there’s been a complete organisational restructure or a reduction in the requirement for work undertaken by the employee in question — you have to ensure you follow a fair and lawful redundancy procedure, or you risk unfair dismissal claims.

The employee will also have certain statutory rights when they’re made redundant. These rights include receiving any money owed to them, such as unpaid wages; any outstanding bonus, commission or expenses; any unused holiday pay; and a minimum paid notice period. In some cases, the employee may also be entitled to a redundancy payment.

By law, an employee will be entitled to redundancy pay if, prior to the date on which their employment comes to an end, they’ve accrued 2 years’ continuous service with you. The individual must also satisfy the criteria as an ‘employee’ rather than a ‘worker’.

All employees are workers — they’re effectively a sub-category of worker — but an employee has additional employment rights that don’t apply to workers who are not employees, including the right to statutory redundancy pay. In broad terms, an employee is someone who is required to work a minimum number of hours and be paid for that work under a contract of employment, whilst there’s no obligation for workers to either be offered or accept work. A worker provides services personally to an organisation, but typically under an arrangement that’s looser than employment, with no guaranteed or regular hours.

It’s important, however, not to confuse workers with part-time employees, who are entitled to a statutory redundancy payment in the same way as full-time employees. Further, it’s unlawful for employers to treat part-time workers less favourably than comparable full-time workers, where a part-time employee should also benefit from any enhanced contractual redundancy payment, calculated in the same way as any payment made to a full-time employee.

 

How much is redundancy pay?

 

Provided an employee satisfies the continuous service requirement, they’ll be entitled to a minimum amount based on their gross weekly pay, age and length of service with you.

The Employment Rights Act 1996 sets out how statutory redundancy payment should be calculated. This is done by determining the period of continuous employment, which runs up until the date of contract termination. The number of complete years’ service are then counted back from the last day of employment falling within that period.

The relevant date of termination, from which the length of service should be calculated, is the date on which any notice expires. If an employee is made redundant without the statutory minimum notice, for example, if they receive pay in lieu of notice, the relevant date is the date on which the statutory minimum notice would have expired had it been given.

The legislative formula for calculating redundancy pay is:

 

  • 0.5 week’s pay for each year the employee was under the age of 22 in your employment
  • 1 week’s pay for each year they were aged between 22 to 40 in your employment
  • 1.5 week’s pay for each year they were aged 41 or more in your employment.

 

When working out how much statutory redundancy pay an employee is entitled to, their length of service will be capped at 20 years, with their weekly pay subject to a maximum of £700 from 6 April 2024. Any years of service or earnings over these amounts aren’t included in the calculation. This means that the maximum statutory redundancy pay an employee can get is £21,000 from 6 April 2024. Their contract of employment may make provision for a much higher payment although, by law, any contractual redundancy pay cannot be less than the statutory minimum. This is because you cannot contract out of an employee’s basic legal rights.

An employee’s weekly pay is the average they’ve earned per week over the 12 weeks before being given notice. A week’s pay is calculated based on the employee’s normal working hours, or average hours in a 12-week period if their hours vary. This figure should include any regular overtime, and bonuses or commission, if the contract makes provision for these.

You must notify the employee in writing how their redundancy pay has been worked out. You can use the redundancy pay calculator on GOV.UK to check your figures. You should also tell the employee when they’ll get their redundancy pay and how this will be paid, for example, in their monthly pay packet or a separate payment.

Any redundancy payment due should be made on or before the employee’s final pay date. If agreement is reached as to a different date, this should also be put in writing.

 

What is an employee’s entitlement to redundancy notice?

 

When making an employee redundant, in addition to any entitlement to a redundancy payment, they’ll also be entitled to a minimum period of paid notice. Much here will depend on the terms of their employment contract, and whether that contract makes provision for a contractual notice period. However, even in the absence of any enhanced contractual right to notice, as a statutory minimum an employee will be entitled to:

 

  • at least 1 week’s notice if they’ve been employed by you between 1 month and 2 years
  • 1 week’s notice for each year they’ve been employed by you between 2 and 12 years
  • 12 weeks’ notice if they’ve been employed by you for 12 years or more.

 

These are the absolute minimum periods required by law, where you cannot give an employee any less than this, even if the contract of employment makes provision for a shorter length of time. However, as with redundancy pay, the contract can provide the employee with an enhanced right to a longer notice period. If this is the case, then the contractual right to notice must be honoured. If payment in lieu is provided for in the employee’s contract, their employment can be ended without notice, but you must pay them for this period instead.

Where an employee works their notice period, they’ll be entitled to payment of their wages as normal under the terms of their contract. If the contract allows for payment in lieu to be made, or the employee agrees to this, this should still be based on the employee’s normal rate of pay, including any contractual entitlements, such as pension contributions or private health care insurance. The ‘pay in lieu’ calculation will be based on the minimum statutory notice periods of between 1 to 12 weeks, unless the contract provides for longer.

 

Time off work to find a new job

 

Prior to being made redundant, if an employee has been continuously employed for 2 years by the end of their proposed notice period, they’ll be entitled to a reasonable time off work to look for another job, or even to arrange training to help them find alternative work.

The length of time an employee can take will depend on their circumstances, including how long their notice period is, whether you can run the business in their absence and how far they’ll need to travel to find work. However, unless the contract of employment provides differently, you’re only obliged to pay an employee 40% of one week’s pay — regardless of how much time they take off work. For example, if the employee works a 5-day week and they take 4 days off in total, you’ll only have to pay them for the first 2 days’ leave.

As with any other rights surrounding redundancy, the employee may have greater rights to paid time off under their employment contract — otherwise, the employee will be limited to the statutory minimum period of paid leave to look for another job.

 

Exceptions to the right to redundancy pay?

 

There are various exceptions to the general rule that an employee with 2 years’ service will be entitled to statutory redundancy pay. For example, an employee could lose their entitlement to redundancy pay if they’re summarily dismissed for gross misconduct, or if they take early retirement or want to leave before their job is due to end because they’ve found other work.

The right to redundancy pay can also be lost where you offer an employee suitable alternative work which they refuse without good reason. Whether a job is deemed ‘suitable’ will depend on things like how similar the work is to the employee’s current role and the terms of the position being offered, including the pay, benefits, hours, location and status. The employee’s skills, abilities and circumstances in relation to the role can also be taken into account.

For an offer of alternative employment to be valid, the following conditions must be met:

 

  • it should be an unconditional offer in writing
  • it must be made prior to the employee’s current contract coming to an end
  • it should illustrate how the new job differs from the old job
  • the job must be offered to the employee, where they shouldn’t have to apply
  • the new job must start within 4 weeks of the old job ending.

 

Employees who accept an offer of alternative work are entitled to a 4-week trial period. This period can be extended if the employee needs training, or if a longer period is deemed appropriate, although any extension must be agreed in writing before the trial period starts.

Once the trial period has started, the employee is then under an obligation to notify you if they decide the job isn’t suitable for them. If you both agree that it’s unsuitable, they can still claim statutory redundancy pay. Otherwise, provided their refusal is reasonable in all the circumstances, this won’t affect their right to a redundancy payment. If, however, you think that the job is suitable, but the employee refuses to take it, they might lose any entitlement.

The employee will also lose the right to redundancy pay if they fail to give you notice that they’re refusing the job offer within the 4-week trial period.

 

What could happen if the correct redundancy pay isn’t paid?

 

If you fail to make a statutory redundancy payment where an employee meets the qualifying conditions, or if there’s a dispute about the amount, an employee is entitled to refer the matter to an employment tribunal. Equally, if you fail to pay any unpaid wages, holiday pay and pay in lieu of notice, they can ask the tribunal to make a determination. The employee may also have a claim for breach of contract, either before the tribunal or the civil courts.

When calculating any final pay, you’re entitled to deduct tax and National Insurance from any wages, holiday pay and pay in lieu of notice owed. However, any redundancy pay under £30,000 isn’t taxable. To avoid any potential dispute, an employee’s final pay packet, including any redundancy payment, should always be carefully calculated.

Further, if you’re refusing to make a redundancy payment where an employee is potentially eligible, for example, because they’ve refused an offer of alternative employment, you should seek legal advice from an expert in employment law.

 

Need assistance?

 

When dealing with workforce issues, it is important to consider the full legal risks and rights of your workers. DavidsonMorris’ employment lawyers are on hand to help you assess the circumstances and understand the options that are in your best interests, not least to avoid unwanted tribunal claims and damage to reputation.

As employment law specialists, we can assist if you have any queries relating to redundancy, changing contract terms and working arrangements or settlement agreements, particularly in complex situations. Speak to our experts today for advice.

 

Redundancy pay FAQs

 

How much is redundancy pay in the UK?

UK redundancy pay will depend on how much an employee gets paid, how old they are and the number of years in the job. For example, a 35 year old employee with 5 years’ service will get 5 weeks pay.

How is redundancy calculated in UK?

Unless the contract provides otherwise, redundancy pay is calculated using a statutory formula based on an employee’s age, their gross weekly pay (capped at £700 from 6 April 2024) and length of service (up to a maximum of 20 years).

How is a redundancy calculated?

The way in which redundancy pay is calculated will depend on whether the employee is entitled to the statutory minimum, for which a set formula must be applied, or whether they have enhanced redundancy rights under their contract of employment.

Last updated: 8 May 2024

Author

Founder and Managing Director Anne Morris is a fully qualified solicitor and trusted adviser to large corporates through to SMEs, providing strategic immigration and global mobility advice to support employers with UK operations to meet their workforce needs through corporate immigration.

She is a recognised by Legal 500and Chambers as a legal expert and delivers Board-level advice on business migration and compliance risk management as well as overseeing the firm’s development of new client propositions and delivery of cost and time efficient processing of applications.

Anne is an active public speaker, immigration commentator, and immigration policy contributor and regularly hosts training sessions for employers and HR professionals

About DavidsonMorris

As employer solutions lawyers, DavidsonMorris offers a complete and cost-effective capability to meet employers’ needs across UK immigration and employment law, HR and global mobility.

Led by Anne Morris, one of the UK’s preeminent immigration lawyers, and with rankings in The Legal 500 and Chambers & Partners, we’re a multi-disciplinary team helping organisations to meet their people objectives, while reducing legal risk and nurturing workforce relations.

Legal Disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct at the time of writing, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.

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