When does redundancy happen?

Redundancies are not uncommon. They are the results of market changes, economic outlooks and business performances. Below are some examples of when and why companies might choose to start this process:

The work is no longer required

Even if the business is operating, a specific role in the company might no longer be needed because of reduced workload or due to a skill set being no longer required.

Enhanced processes have been implemented

Technology can sometimes replace the work done by employees. If a change in a process means that the work of an employee is no longer required, redundancy can be engaged.

Other teams are doing the work

It may happen that the work still needs to be completed, but will be done by another team in the business or another employee.

The organisation is relocating

If the relocation is outside the area where staff are currently employed, the business may need to consider redundancies.

A branch of the business or the full business is closing

If a branch of the business closes or if the business shuts down in its entirety, redundancies will be inevitable.

All of the above are examples of situations where making staff redundant may apply. Organisation development may also result in waves of redundancies. When it comes to making staff redundant, look into each situation thoughtfully and prioritise alternatives where possible. As an employer, remember to consider offering alternative employment within the organisation to affected employees before proceeding with redundancy.

Statutory redundancy and contractual redundancy explained

This section provides more details on the two types of redundancy pay.

Statutory redundancy pay

This is the legal entitlement to redundancy pay for employees in the United Kingdom. Employees are entitled to statutory redundancy if they meet the qualifying criteria. To qualify for statutory redundancy pay, an employee must have been continuously employed for at least two years. 

Employees on a fixed-term contract may also qualify for statutory redundancy pay if their contract ends due to redundancy. How much statutory redundancy pay an employee receives depends on their length of service, weekly pay (before tax and other deductions), and the employee’s age, subject to statutory caps. 

The law sets a maximum statutory redundancy and a maximum statutory redundancy pay limit each year. For example, an employee receives half a week’s pay for each full year of service aged under 22, one week’s pay per year for years of service aged between 22 and 41and one and a half weeks’ pay per year for each full year of service aged 41 or over. 

The calculation of redundancy pay caps the length of service at 20 years. If an employee does not meet the qualifying criteria or refuses suitable alternative employment without good reason, they may lose their right to redundancy pay.

For more information about redundancy pay, please visit the UK government website.

Contractual redundancy pay

Staff who cannot get statutory pay as they do not fit the criteria may still be entitled to contractual redundancy pay. The employee’s contract will determine if additional redundancy pay is due. Individual contracts should be checked to establish whether contractual redundancy pay applies. Contractual redundancy pay may be greater than the statutory pay amount. See our article on temporary workers and agency workers for more information on this topic.

In any case, fair reasons for an employee to be made redundant apply. Clearly communicate the rationale behind redundancy to the employee in question.

Employee entitlement to statutory redundancy pay

The UK Government provides clear information on statutory redundancy pay. Employees who have been continuously employed by a business for two years or more are entitled to statutory redundancy. Employees who believe they are entitled to statutory redundancy can claim statutory redundancy pay from their employer. 

As an employer, if you do not pay voluntarily, employees can make a statutory redundancy pay claim by submitting a formal request.

The amount of entitlement varies depending on the number of years an employee has worked for your company. It is clustered as follows:

• One week’s pay per full year employed
• Length of service is capped at 20 years
• Weekly pay is the average the employee earned per week over the 12 weeks before the day of the redundancy notice and is capped

The employer’s responsibility is to provide written notice of redundancy and pay the correct amount based on the employee’s circumstances.

The above information varies for the years that an employee has worked for your company under 22 years old and above 41 years old. There are also exceptions. Employees may lose their entitlement to statutory redundancy if, for example:

• The employer offers to keep the employee and suggests a suitable alternative in writing that is refused by the employee
• The employee is being dismissed for misconduct reasons
• The employee does not follow the statutory redundancy pay claim process

See the UK Government website for more details.

The relevant date for redundancy: why it matters

The relevant date for redundancy is a key factor in determining an employee’s entitlement to statutory redundancy pay. This date is used to calculate both the length of service and the weekly pay, which are essential for working out the correct statutory redundancy payment. In most cases, the relevant date is the day an employee’s notice period ends.

Employers may have to ensure they use the correct relevant date when calculating redundancy pay, as errors can impact the amount paid and may lead to disputes or claims. Understanding the relevant date helps both employers and employees ensure that statutory redundancy payments are calculated accurately, reflecting the true length of service and weekly pay at the time of redundancy.

A step-by-step guide to redundancy for employers

Managing redundancy is never a pleasant or easy task for employers and employees alike. In the section below, we list some key steps to make this process as smooth as it can be.

Step 1: assess staffing and ensure that any redundancies are necessary

Redundancy usually happens when a position is no longer needed. Employers might make this step if a department or section of the business is closing, the type of roles is changing or the location is changing. Before moving to mandatory redundancy, you may want to consider voluntary redundancies, a change of working hours, letting go of contractors, stopping overtime work and pausing recruitment. 

Employers might also want to consider offering suitable alternative employment to employees at risk of redundancy, in line with legal requirements. Consider whether the redundancies are necessary and if they will solve the issue that needs to be addressed. You may need to pay particular attention to the fact that discrimination has no place in this, and offer voluntary redundancies first to as many employees as possible.

Step 2: establish the process with the HR department

There are some steps to take when launching a redundancy process. It is typically the human resources team’s role to ensure that they have the right policies in place and an appropriate collective agreement with the applicable trade union(s). A fair redundancy process includes consultations with members of staff. Employers can seek volunteers to represent groups of employees. 

Collective consultations may also be deployed if there are more than 20 employees at risk of redundancy. It is highly recommended to create a redundancy plan to ensure that all the steps are followed and to make the process as smooth as possible. The plan is to set out the communications to take place with employees about the process, consultation with the employees affected, fair selection criteria for redundancy and more.

Step 3: communicate with employees and be transparent

Communicate the process with employees as soon as the plan for redundancies is created. It is recommended that all employees be informed, and not just those at risk, as this will increase transparency. The risk of redundancy can be communicated early, together with the rationale for it. Transparency would require that the anticipated number of employees affected, the process and its associated timeline be communicated clearly. Informing employees who are at risk of redundancy in writing is standard practice. Communication is key and deserves a lot of thought.

Step 4: hold consultations

Managing consultations in a meaningful way can avoid any backlash with employment tribunals for unfair dismissal. Consultations can serve as a guide to the actions to undertake, particularly if groups of employees have representatives. Discussing openly the reasons for the changes being implemented is essential in this step. It is important to note that employers meeting with employees who are being made redundant privately is recommended at least once during this process.

Step 5: select employees to be made redundant

Fairness is key when it comes to redundancy. The selection criteria set in the plan are followed throughout the process. In doing so, employers follow their appropriate policies. Selection criteria may include work performance, skill set, disciplinary and attendance records and more. These can form a scoring system that may be used to determine the employees to be made redundant. Always remember that unfair factors for selection, such as age, gender, disability, civil status, ethnicity and other such criteria are excluded from the scoring.

Step 6: assess statutory redundancy pay and give notice

Remember to assess the statutory pay amount according to government guidance. The employer pays statutory redundancy pay and any other relevant additional payments, such as final wages, and any outstanding holiday pay and, in some circumstances, expenses reimbursement. Final wages are typically paid promptly, along with redundancy pay. If an employee is not required to work their notice period, they may receive payment in lieu of notice.

Redundancy pay, notice pay and holiday pay are taxed in the same way as normal earnings, up to the tax-free threshold. Employees offered suitable alternative employment are entitled to a four-week trial period to assess the new role. Examine employees’ contracts as well, as they may be entitled to contractual redundancy pay. 

Remember to give notice in writing to all employees being made redundant. In the United Kingdom, the Employment Rights Act 1996 is to be followed when it comes to the statutory notice period. Employers cannot give less than the minimum required by law and are urged to check individual contracts’ notice periods and comply with them.

Redundancy pay deadlines: what employers must know

Employers may be legally required to make statutory redundancy payments promptly when an employee is made redundant. The statutory redundancy payment should be paid on or soon after the employee’s termination date, or as specified in the employment contract. It is important for employers to meet these deadlines to avoid potential claims or penalties. Employees have up to six months from the date of termination to bring a claim for statutory redundancy pay if they believe they have not received what they are entitled to. 

Missing these deadlines can result in additional financial liabilities for employers, including interest or further payments ordered by an employment tribunal. To stay compliant, employers should ensure all redundancy payments are processed in line with statutory requirements and the terms of the employee’s contract.

Final pay and redundancy: what to include in the last payslip

When an employee is made redundant, their final payslip typically includes all payments owed, ensuring full transparency and compliance. This usually includes statutory redundancy payment, any notice pay due, and payment for any accrued but untaken holiday. Employers should also provide a clear breakdown of how the statutory redundancy payment has been calculated, including the relevant date, the employee’s length of service, and their weekly pay. 

Step 7: look into potential other jobs in the organisation

To minimise the number of employees being made redundant, employers can look at alternatives for such staff. Transferable skills can be examined and matched with open positions in other areas of the business, where possible. Employees are not required to apply for the role. It may happen that an employee who is offered a new role will decline this alternative. If this is the case, the employee presents a valid reason for their refusal. Employees who accept suitable alternative employment are entitled to a statutory four-week trial period to decide if the new role is suitable.

Step 8: provide sufficient support

Redundancy usually affects employees’ lives and can create difficult conversations. It is therefore the employer’s responsibility to care for the staff members and to provide the right level of support to employees being made redundant as well as to managers who are handling the communication and other employees involved in the process. Not only that, but it is advisable to think about offering counselling, financial advice and face-to-face meetings to the individuals concerned. 

When it comes to redundancy, following some key steps can help to ensure that this process goes as smoothly as possible. Organisations benefit from looking at ways to make the process as human and thoughtful as possible.

Tax implications of redundancy payments

Statutory redundancy payments are generally tax-free up to a certain limit, which is currently £30,000 in the UK. This means that some employees will not pay tax on their statutory redundancy pay, making such payments a valuable form of support during redundancy. 

However, if the total redundancy payments exceed this threshold, the excess amount is subject to income tax. Employers must also consider whether any part of the redundancy payment is subject to National Insurance contributions, particularly if additional payments are made beyond the statutory amount. 

Employees may be eligible for tax relief on certain expenses related to finding a new job, such as travel to interviews or retraining costs. Both employers and employees should be aware of these tax implications to ensure compliance and to make the most of any available tax-free allowances.

Employer insolvency and redundancy: what happens if you can’t pay?

If an employer becomes insolvent and cannot pay statutory redundancy payments, employees are not left without support. In these cases, employees can claim their statutory redundancy payment from the Insolvency Service, which will pay out up to the statutory maximum, which is £21,570 according to the UK government website. The Insolvency Service can also cover other payments owed, such as notice pay and outstanding holiday pay, subject to certain limits. 

As an employer facing insolvency, seek advice from a qualified insolvency practitioner to understand your obligations and ensure employees’ rights are protected. Employees affected by employer insolvency are recommended to contact the Insolvency Service or seek further information from a qualified advisor to make sure they receive the payments they are entitled to under the statutory scheme. This process helps ensure that employees are not disadvantaged if their employer is unable to meet redundancy payment obligations.