Redundancy pay: Entitlement/obligations
Sadly, we are seeing an increasing number of redundancies. There is a wider legal framework for getting a redundancy ‘right’, however, the scope of this note focuses purely on financial entitlements/obligations.
Financial ‘compensation’ in a redundancy situation has two main elements: notice and redundancy pay. Taking each in turn:
All employment contracts should contain notice provisions. This is the ‘contractual notice entitlement’. Underpinning this, there is also a statutory minimum notice entitlement that an employer must give to an employee. This is at least one week’s notice where an employee has been employed between one month and 2 years then one additional weeks’ notice for each complete year of service up to a maximum of 12 weeks’ notice where an employee has been employed for 12 years or more. An employee being made redundant is entitled to the greater of their contractual or statutory minimum notice entitlement.
An employee can be required to work their notice period or be paid in lieu (i.e. instead of it). Strictly speaking, an employee should have a payment in lieu of notice provision (often referred to as a PILON) in their employment contract to be paid in lieu. However, in reality, few employees will object to being paid in lieu as it means they get paid for their notice but have left and so are free to work elsewhere. That said, employers should proceed with caution and seek advice particularly if the contract contains no PILON but restrictive covenants.
While paying in lieu of notice was typically quite common in a redundancy situation (e.g. their job is redundant so what are they going to do in their notice period?), the furlough scheme has changed this because, if the employee concerned is on furlough leave (and so furlough pay), the employer can use this towards paying the employee during their notice period; thus saving costs.
What pay is the employee entitled to receive during their notice period?
This isn’t as straightforward as it sounds. Recent Government changes mean that, where the employee is being paid statutory notice, they are entitled to their full pre-furlough pay. However, where contractual notice is being paid, if that contractual notice exceeds the individual’s statutory notice entitlement by more than one week, the employee may be able to pay the employee their contractually varied pay. We say ‘maybe’ because there are many arguments that, while this is the case on the face of it, it is not within the spirit or intention of the furlough scheme which is to save jobs and protect employees. We therefore expect there to be legal challenges in the future if employers take this approach. For this reason, many employers are paying pre-furlough pay irrespective of whether it is contractual or statutory notice.
Providing they give sufficient notice, employers can ask employees to take some or all of any accrued but untaken holiday during their notice period. This avoids paying in lieu of it at the end. This must be paid at pre-furlough pay rates.
Notice pay and pay in lieu of notice or holiday is subject to taxation as normal.
There is a statutory formula for working out an employee’s statutory redundancy entitlement. It applies to all employees with two complete years’ of service or more and is calculated by reference to the employee’s age, length of service and weekly pay (capped at the current level of £538 per week). The Government website contains a calculator: https://www.gov.uk/calculate-your-redundancy-pay
Employers may have a contractually enhanced redundancy pay scheme or indeed simply choose to voluntarily enhance an employee’s redundancy entitlement.
Regarding furloughed employees, as with statutory notice entitlement, the Government has made it clear that pay must be based on the employee’s pre-furlough rate.
Redundancy pay (up to £30,000) can be paid tax-free.
This is a brief, general overview so do not hesitate to contact our employment law/ HR specialist Rebecca Ryan (firstname.lastname@example.org; 01480 442040) if you require more tailored advice and support.