How to Calculate Redundancy Pay in England and Wales

As an employer, there are times when you may need to make difficult decisions concerning your workforce. For example, you may need to reduce your overall number of employees and make some employees redundant. Losing a job is a massive change and will undoubtedly impact a person’s life. Therefore, when you make an employee redundant, you must follow certain rules to protect your employees. This article will look at how to calculate redundancy pay, including who may be entitled to it. 

What is Redundancy?

If you need to reduce the number of people working for you, you may have to dismiss some employees. This process is often known as redundancy. There are many rules you must follow when carrying out redundancy, such as:

• selecting those who you are going to make redundant fairly;
• potentially offering those who you intend to make redundant an offer for an alternative job where possible, or time away from work to look for a new job; and 
• offering the correct notice period. 

You may also consider consulting with your employees about the process. 

What is Redundancy Pay?

Redundancy pay is an amount of money you may offer to your employee when you make them redundant. There are rules about the legal minimum amount you must offer, which is termed statutory redundancy pay. 

You may also choose to pay your employees more than the statutory redundancy pay amount. This is particularly helpful if you want to encourage employees to take redundancy, known as voluntary redundancy. However, you should be aware that if you offer higher than the statutory redundancy pay through voluntary redundancy, you must offer it:

• fairly;
• as widely as possible; and
• without pressure.

Statutory redundancy pay is a form of ‘termination payment’, which also includes other pay such as holiday pay, unpaid wages and company benefits. Indeed, not all your workers will be entitled to statutory redundancy pay.

In some lines of work, such as police or armed forces and crown servants, employees are not entitled to redundancy pay. Some examples include: 

• an employee who works as a domestic servant for their immediate family;
• apprentices who are not yet employees as they have not completed their training; and
• share fishermen, fisherwomen, or former registered dock workers (where alternative arrangements cover the latter).

How Much is Statutory Redundancy Pay?

It is a legal requirement to pay those employees who have worked for you for over two whole years statutory redundancy pay.

Working out how much redundancy pay your employees will have the right to is based predominantly on their average weekly pay, age, and the length of time working for you. However, you should note that their length of time working for you is capped at 20 years.

How Do I Calculate It?

Statutory redundancy pay applies for each full year an employee worked for you and will depend on their age. For example, if the employee was under 22 years old, you should pay them half a week of pay. Furthermore, if your employee was over 22 years old, but under 41 years old, you should pay them one week of pay. Finally, for those aged over 41 years old, you should pay them one and a half weeks worth of pay.

To work out what your employees’ weekly wage is when calculating the above, you should look at the 12 weeks before the day in which you intend to give them their redundancy notice. You should then use this to calculate what their average weekly pay is.

However, your employee may have been on furlough during any of this time due to Covid-19. If so, they may have been getting less than their standard pay. If this is the case, you must base your calculations on what their normal wage would have been. 

Your employee’s weekly wage includes:

• any regular overtime which their contract states you must pay them for; and
• any commission and bonuses.

The government offers a helpful tool to help you calculate your employees’ statutory redundancy pay, which you may wish to use to help you.

Essential Rules About Statutory Redundancy Pay

When calculating your employee’s redundancy pay, there are some crucial rules you should remember, including that:

• you must pay an employee’s redundancy pay on their final pay or earlier, and you must communicate to them what the date will be;
• your employee has the right to take you to an employment tribunal should you fail to pay their redundancy pay in time;
• employees made redundant after 6 April 2021 cannot receive more than £544 per week of redundancy pay or £16,320 in total;
• there is no tax due on redundancy pay and any other ‘termination payment’ which is lower than £30,000;
• if you offered an employee a different role as an alternative to redundancy and without a good reason they chose not to accept this, you do not owe them any redundancy pay; and
• you may owe redundancy pay to any employee you have temporarily laid off for over four weeks consecutively or for more than six weeks within 13 weeks, but the weeks are not consecutive.

If you cannot afford to pay your employees’ redundancy pay because it is a risk to your business, you may qualify for help from the Redundancy Payments Service.

Key Takeaways

As an employer, carrying out redundancy may be a stressful and challenging time for both you and your employees. Your employees will rely on the statutory redundancy payment you make. You must make this correctly both in terms of calculating the correct amount owed to each employee and in terms of paying it in time, plus following other rules about It. Not doing so could leave your employees in a difficult situation and could also cause you to face an employment tribunal.

If you need help understanding how to calculate redundancy pay for your employees in England and Wales, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.

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