At the end of July the government’s introduced new legislation that will prevent furloughed workers from being ‘short-changed’ regarding their entitlement to redundancy payments.
This post provides insight into redundancy pay calculations and the changes that were implemented on 31 July 2020.
The questions answered in this post are:
Note: the changes relate only to Redundancy Pay and not to Notice Pay. Please refer to our post on Notice Pay for more information.
As with all of the guidance with coronavirus, we need to remind you that these are unprecedented times and it is unclear as to how employment law will be applied in these exceptional circumstances.
The information that follows has been compiled with input from government websites, Acas and HMRC (the only official resources that we’re happy to use as these are the institutions who will be responsible for enforcing the rules as we move forward), but the reality is no-one really knows for certain how actions that businesses need to take now will be interpreted later.
We strongly advise you to call us on 0203 319 1649 to seek tailored guidance before you take any actions.
1. What is Redundancy Pay?
Redundancy Pay is the financial settlement that an employee gets as compensation when their position is made redundant.
(Notice Pay is the pay given to an employee during their notice period, i.e., after they have resigned and before they leave employment).
The changes made recently by the government are associated with Redundancy Pay.
2. How is Redundancy Pay Calculated?
In its simplest terms, Statutory Redundancy Pay is calculated based on 1 or 1½ weeks’ pay per year of service.
There are two factors that affect this calculation:
- Age during employment
What are the Rules Regarding Age and Redundancy Pay?
Whether someone gets 1 or 1½ weeks’ pay is dependent on their age during employment:
- For every year of service that an employee completes between the ages of 22 and 40, an employee gets 1 week of pay;
- For every year of service that an employee completes when 41 or older, the employee gets 1½ weeks’ pay.
What are the Rules Regarding Actual Pay and Redundancy Pay?
When Statutory Redundancy Pay references 1 or 1½ weeks’ ‘pay’, this is referring to actual pay up to a maximum of £538 per week.
So, an employee earning up to £27,976 pa gets their actual weekly pay per year of service; anyone earning more than £27,976 gets £538 per year of service.
3. What are the Changes to Redundancy Pay from 31 July 2020?
The changes to the Redundancy Pay calculation that was in the press recently only impacts calculations for those employees who are earning up to £27,976.
The new rules are that to calculate redundancy pay, you need to use average pay that an individual was on prior to the world turning upside-down.
You can’t use either furlough pay or the salary that they’ve been earning working reduced hours due to COVID-19 as a basis for completing a redundancy calculation.
It’s important to get redundancy pay calculations right so do seek advice on this.
There is also a great government calculator that you can use which you’ll find here, https://www.gov.uk/calculate-your-redundancy-pay/
As always, if you find yourself dealing with a specific challenge then please do seek our guidance. There are rules and then there are individual circumstances that you need to take into consideration, and you should be ever mindful that it is as yet unknown how employment law will ultimately judge the actions that people take at the moment.