How Does Redundancy Pay Work In The UK?

Redundancy pay is an important part of UK employee work rights. Understanding these rights is a critical part of HR when dealing with redundancies for individual employees or large teams.

This article looks to help highlight the key things HR teams need to know about redundancy pay highlighting key facts and information.

What is redundancy pay in the UK?

Redundancy pay in the UK is a payment made by an employer to their employee who is being made redundant. It is intended to compensate the employee for the loss of their job and to help them financially during their period of unemployment.

Redundancy pay is a legal entitlement for employees who have worked continuously for their employer for at least two years. The amount of redundancy pay an employee is entitled to is based on their length of service, age and weekly pay, subject to a statutory cap.

The current statutory redundancy pay entitlement varies depending on the employee’s age.

If they are under 22, they receive half a week’s pay for each full year they have been at the company. If they are between 22 and 41 they receive a week’s pay for each full year they have been at the company. If they are over 41 they receive one and a half week’s pay for each full year they have been at the company.

The maximum length of service that can be taken into account is 20 years, and the weekly pay used to calculate the redundancy pay is subject to a statutory cap, which is currently £544 per week.

Employers may offer enhanced redundancy pay above the statutory minimum, and this will be set out in the employee's contract or in a collective agreement with the employee's trade union.

Who is eligible for redundancy pay in the UK?

To be eligible for redundancy pay in the UK employees must have been employed for at least two continuous years by the same employer. Secondly, they must have been made redundant, meaning that their job has ceased to exist, and they have not been offered suitable alternative employment within the company. Thirdly, employees must have been dismissed due to no fault of their own, such as due to business closure or a reduction in workforce.

However, certain exclusions apply to redundancy pay eligibility. For instance, employees who have voluntarily resigned from their job or have been dismissed due to gross misconduct are not eligible. Similarly, employees who are self-employed or agency workers are not entitled to redundancy pay.

There are also differences in eligibility for redundancy pay between fixed-term and permanent employees. Fixed-term employees who have been employed for at least two years and whose contracts have expired or have not been renewed due to redundancy may be eligible for redundancy pay. However, if the fixed-term employee has a contract that ends on a specified date or event, they are not entitled to redundancy pay if the contract ends on that date or event.

How much redundancy pay is an employee entitled to?

The amount of redundancy pay an employee is entitled to varies depending on their age, length of service, and weekly pay.

The minimum redundancy pay entitlement is half a week's pay for each completed year of service within one company, up to a maximum of 20 years.

However, the amount of weekly pay that is used to calculate redundancy pay is capped at £544 per week (as of April 2021), so an employee who earns more than this will not receive redundancy pay based on their full weekly pay.

Different rates of redundancy pay may apply to different employees, depending on their employment status and contract terms. For example, employees who are on fixed-term contracts that end naturally are not entitled to redundancy pay, but those whose contracts are terminated early due to redundancy are.

The maximum amount of statutory redundancy pay an employee can receive is £16,320 (as of April 2021), which is calculated by multiplying the employee's weekly pay by their length of service, up to a maximum of 20 years, and then multiplying the result by 1.5. However, if an employee's weekly pay is less than the statutory cap of £544, their redundancy pay will be based on their actual weekly pay.

It's important to note that some employees are not entitled to statutory redundancy pay, such as those who have been employed for less than two years or who are dismissed for gross misconduct. In these cases, the employer may still choose to offer a discretionary redundancy payment.

How is redundancy pay calculated in the UK?

In the UK, the calculation of redundancy pay is based on a number of factors, including the employee's length of service, age and weekly pay - as mentioned above. The calculation is subject to certain statutory caps and limits.

After considering the requirements, the formula A x B x C is used to calculate the amount of statutory redundancy pay an employer is entitled to.

Within this formula A = Length of service in complete years, B = Multiplier based on the employee's age and C = Weekly pay (subject to the statutory cap).

For example, an employee aged 35 with 8 years' service and a weekly pay of £450 would be entitled to:

8 x 1 x £450 = £3,600

It's worth noting that some employers may offer enhanced redundancy pay above the statutory minimum, and this will be set out in the employee's contract or in a collective agreement with the employee's trade union.

Redundancy pay exceptions in the UK

There are several exceptions to redundancy pay in the UK. Employees who have been employed for less than two years, are self-employed, or are dismissed for gross misconduct are not entitled to redundancy pay. Additionally, employees who refuse suitable alternative employment offered by their employer may not be entitled to redundancy pay.

Employers may not have to pay redundancy pay if they offer suitable alternative employment to employees whose jobs are at risk of redundancy and the employees refuse the offer without good reason.

Additionally, if an employer goes out of business and is unable to pay redundancy pay, employees may be able to claim from the National Insurance Fund.

Finally, if an employer offers to renew an employee's fixed-term contract or re-employs them within four weeks of termination, they may not have to pay redundancy pay.

How is redundancy pay paid in the UK?

In the UK, redundancy pay is usually paid as a lump sum to the employee. The payment is made by the employer within a certain period of time after the employee's last day of work, in accordance with the terms of the employee's contract or a collective agreement with their trade union.

The timing of the payment will depend on whether the employer chooses to make the payment in lieu of notice, which means paying the employee for their notice period instead of requiring them to work it. If the employer does make a payment in lieu of notice, the redundancy pay will usually be included in this payment.

If the employer does not make a payment in lieu of notice, they must pay the redundancy pay separately, within the statutory notice period. This is usually:

• At least one week's notice for employees who have been employed for less than two years

• One week's notice for each year of service, up to a maximum of 12 weeks' notice, for employees who have been employed for two years or more

Employers are also required to deduct tax and National Insurance contributions from the redundancy pay, in the same way as they would for any other earnings.

If an employer is unable to pay the redundancy pay, for example, because they have gone out of business or become insolvent, the employee may be able to claim the payment from the National Insurance Fund. This fund is maintained by the government and provides compensation to employees who are owed money by insolvent employers.

Key takeaways

The five key takeaways from this article are:

1. Redundancy pay is compensation paid to employees who are made redundant due to a business closure or reduction in the workforce.

2. The minimum statutory redundancy pay entitlement is one week's pay for each complete year of service, up to a maximum of 20 years. However, the amount of weekly pay that is used to calculate redundancy pay is capped at £544 per week (as of April 2021).

3. Different rates of redundancy pay may apply to different employees, depending on their age, length of service, and weekly pay.

4. Employees who have been employed for less than two years, are self-employed, or are dismissed for gross misconduct are not entitled to redundancy pay.

5. Employers may not have to pay redundancy pay if they offer suitable alternative employment to employees whose jobs are at risk of redundancy and the employees refuse the offer without good reason.

It is important for both employers and employees to understand redundancy pay because it helps to ensure that the redundancy process is fair and transparent for all parties involved.

For employers, understanding redundancy pay similar to understanding share codes helps them to comply with legal requirements and avoid potential legal disputes. It also helps them to plan for the costs of redundancy and to make fair decisions about who should be made redundant and how much redundancy pay they should receive.

For employees, understanding redundancy pay helps them to know their rights and entitlements, and to negotiate fair redundancy terms with their employer. It also helps them to plan for their future financial situation and to make informed decisions about their next steps.