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Redundancy - pay

Redundancy pay is determined entirely by the terms of an employee’s contract of employment or, if it is silent in that respect, by the statutory provisions.

Statutory Redundancy Pay

This is calculated by taking into consideration the employee’s age and length of employment and then calculating how many weeks pay they have the right to. It is increased annually, with the new rate coming into effect for dismissal on or after 1 October. The number of weeks pay is determined by age at the time of redundancy.

Pay is calculated as half a week’s pay for each year up to age 21, one week’s pay for each year between 22 and 40, and one-and-a-half week’s pay for work over the age of 41. Pay depends on what the employee is earning at the time of the redundancy, or the statutory limit, whichever is the lower.

Employees who have moved from full-time to part-time work cannot include their years of full-time employment in the redundancy pay calculation.

For the purposes of calculation, a week’s pay cannot exceed £400 (as at 1 October 2010) and the maximum number of years of employment that can be applied is 20. Therefore the maximum statutory redundancy pay is £12,000. Redundancy pay (either statutory or contractual) is tax free up to £30,000.

The employer is obliged to provide an employee with a written statement explaining how redundancy pay is calculated (section 165 ERA 96) and must also notify the representative of how it is calculated. Employers can be penalised a small sum for failure to comply with this obligation.

In deciding who qualifies for redundancy pay employers cannot use discriminatory criteria, although case law has determined that first in, last out which is likely to be age discriminatory is permissible if it only one of a number of criteria. In certain circumstances employees may also have redundancy pay offset against periodic occupational pension entitlement (section 158 ERA 96).

The pay entitlements of employees on annual hours’ contracts are occasionally disputed when the contract ends during the year of calculation.

In one case the Court of Appeal ruled that employees on annualised hours cannot have their salary, for redundancy pay purposes, calculated to take account of the fact that they would have averaged more than 40 hours a week had their employment extended to the full year.

Many employees will have superior entitlements based on agreements reached with employers. However, it needs to be remembered that in one case it suggests that where an employer has on previous occasions paid redundancy at an enhanced rate, but excluded from their contractual terms, there was no custom and practice to guarantee the right to the payment in a later round of redundancy.

Tribunals will often conclude that an occupational redundancy pay scheme, even if commonly known and adhered to previously, still does not constitute a contractual term. The reasoning is that they are reluctant to regard something, which in the future may or may not occur, as qualifying as a contractual term. If the employer makes an enhanced redundancy payment this will be deducted from any compensatory award for unfair dismissal.

If the employer cannot pay redundancy compensation due to insolvency it becomes payable, under section 182 ERA 96, from the secretary of state. To claim you will need documentary proof of the employer’s insolvency. If an employer is declared insolvent it is recommended to submit claims for redundancy pay as soon as possible and claims should be submitted in the country where the employee is working. The secretary of state will only make a statutory redundancy payment and will not honour any enhanced contractualrights.

The right to payment from the secretary of state also applies to basic awards:

  • For unfair dismissal
  • Arrears of pay (to a maximum of eight weeks)
  • Holiday pay (six weeks’ maximum)

But in these cases a "week’s pay" is calculated as for the basic award for unfair dismissal. A payment made by the secretary of state breaks continuity.

Even if employees subsequently transfer to a new employer they will have lost their right to count previous service. If the secretary of state fails to make any payment then a claim should be lodged, within three months, to a tribunal. If additional money is owed from an employer it is dealt with either as a priority debt or an unsecured debt. Any payment made under a protective order can be offset against what is due from the secretary of state.

In cases of insolvency an employee is required to obtain the consent of the administrators or the court before commencing any tribunal proceedings.

State Benefits

Employees who have lost work through unfair dismissal or redundancy will normally qualify for jobseekers allowance. If an employee is dismissed without notice pay and compensation is awarded by a tribunal, any state benefit already received will be offset.

Employees cannot claim Income Support, however, if personal resources (which will include redundancy pay or unfair dismissal compensation) exceed £16,000 (2010). There are particular rules that can deprive an individual of entitlement to state benefits if it is believed that a lump sum redundancy payment has been spent rapidly to qualify for a state benefit.

Rep Action List

If a rep is alerted to a possible redundancy situation they should contact their organising team immediately

Remember the company you work for may have its own specific redundancy procedure in place but this only complements and does not supplant the statutory requirements

The briefs in this section provide guidance and some basic details of employment rights. They do not attempt to be comprehensive, and should not be taken as an authoritative statement of the law.