Who pays for redundancy?

18 May 2021

If you have been employed by the same employer for 2 years or more and are then made redundant, you are legally entitled to statutory redundancy pay. This will be paid to you by your employer, who will be legally obliged to do so.

If you are not sure whether you will receive redundancy pay, or if you feel the amount of your redundancy pay may not be correct, you should seek legal advice as soon as possible.

What is redundancy?

Redundancy occurs when a business/organisation decides that an employee’s role is no longer required by their employer. This can be for one of several reasons: it may be that the company is closing or ceasing to operate in the place where you are employed.

Alternatively, it could be because the particular work that you are doing for the company has either reduced (so fewer employees are required) or has stopped all together. As a result of this, the employer can make the employee redundant.

Regrettably the level of redundancies has risen following the impact of the coronavirus pandemic. In October 2020 the Office for National Statistics reported that redundancies hit a record high since reports began in 1992. Unfortunately this increase is expected to continue, with the Office for Budget Responsibility estimating that unemployment rates could increase to 7.5% after the furlough scheme ends.

How is redundancy pay calculated?

The amount of redundancy pay that you would be entitled to depends on the circumstances of your employment. The factors that will be taken into consideration include your age while employed, how long you’ve been employed continuously and your salary.

Some employers will apply a contractual redundancy payment. In this instance, the redundancy pay calculations would be outlined in the terms in your employment contract. Contractual redundancy payments have to be equal to or higher than the minimum statutory redundancy pay to which you are entitled.

Statutory redundancy pay is the minimum amount that your employer is obliged to pay you, by law. Statutory redundancy payments are calculated based on your age throughout your employment. Currently, the payments are calculated as follows:

  • For every year that you worked for the employer while you were under the age of 22, you would receive half a week’s pay.
  • For every year that you worked for the employer while you were aged between 22 and 40, you would receive 1 week’s pay.
  • For every year that you worked for the employer while you were over the age of 41, you will receive 1 and a half week’s pay.

Since 6 April 2021, the amount of weekly pay has been capped at £544 per week. Employees whose weekly pay is higher than this will not be entitled to the full value of their weekly pay. They statutory redundancy payments scheme also caps the number of years of continuous service that can be counted. Currently this is capped at 20 years, so those who have been employed for longer than 20 years will only have 20 years of their service taken into account.

The weekly pay figure is taken from the employee's average weekly earnings for the 12 weeks up to the day they were made redundant. If the employee was placed on furlough before being made redundant and therefore was on a reduced salary, the weekly pay should be the employee’s full pay (so what they would have received if they were not furloughed). Any outstanding annual leave should also be paid at the full rate of pay.

Pay during your notice period

In addition, you are also entitled to a paid minimum statutory Notice Period. However, your employer may instead offer a paid notice period that’s set out in the terms of your employment. If this is the case then it would need to be equal to or more than the statutory minimum amount.

The amount of statutory minimum notice that you are entitled to depends on how long you’ve worked for your employer:

  • If you’ve been in the employment for over 1 month and under 2 years, you’ll be entitled to 1 week’s paid notice.
  • If you’ve been in the employment for 2 years or more and under 12 years then you’ll be entitled to a week’s paid notice for every year that you’ve been employed (i.e. someone who had been employed for 7 years would be entitled to 7 weeks’ paid notice).
  • If you’ve been in the employment for over 12 years then you’ll still be entitled to 12 weeks’ paid notice.

When calculating your entitlement to statutory notice pay, your employer must calculate this based on your full normal pay. If you've been placed on furlough, they mustn't calculate this based on your reduced furlough rate of pay. So if you have been on reduced furlough pay for the 12 weeks before your statutory notice period, you should be paid your normal full pay whilst working your statutory notice period.

If your employment contract stipulates a notice period that's at least one week longer than the statutory minimum, you'll only be entitled to notice pay at your furlough rate of pay, not your full normal rate of pay.

If you have not been provided with notice pay or you believe that you should be entitled to more, you may have a claim against your employer. It is important to obtain independent legal advice from an employment law solicitor.

What if my employer can’t afford to pay?

If your employer is insolvent (meaning they can't afford to pay their outstanding debts) employees could worry that they might not receive their redundancy pay.

When a company is insolvent, it will often be taken into the hands of an insolvency practitioner. This is the person or organisation that deals with the company’s insolvency. This may also be an administrator who comes in to try to keep the company going (this is known as ‘going into administration’).

On the other hand, the company may go into ‘liquidation’. This means all of its assets will be sold and this money can then be used to pay outstanding debts, including paying redundancy pay to former employees.

Regardless of whether your employer is insolvent, you still have a legal entitlement to a statutory redundancy payment and you can make a claim for the money owed to you through the Insolvency Service. GOV.uk provides more information on your right to claim notice pay, holiday pay and a redundancy pay from the Insolvency Service.

What if my employer offers me a settlement agreement?

If you employer is making you redundant on enhanced redundancy terms, they will usually require you to sign a settlement agreement. This is a legal document which normally provides that you will accept the enhanced payment in return for not bringing any claims against the employer. You will need to get independent legal advice before signing a settlement agreement. Your employer usually agrees to pay for this. Find out more about settlement agreements.

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