Most employees who are dismissed for redundancy are entitled to a redundancy payment under the Employment Rights Act 1996, provided they have been continuously employed for two years or more. (The rules on calculating continuous service are explained elsewhere ( Calculating qualifying periods ).)
Where an employee is working under a contract that states that it will expire on a specified date, after a specified period or on completion of a specified task, and the employer decides not to renew the contract when it expires, the law views that as a dismissal. So if the reason that the employee's contract was not renewed falls within the definition of redundancy (defining redundancy), the employee will be entitled to a redundancy payment, if he or she has two years' service.
A statutory redundancy payment is calculated by reference to the employee's age, length of service and weekly pay. There are complex rules for calculating an employee's week's pay, which are summarised elsewhere ( Calculating a week's pay ). There is also an upper limit on the amount of a week's pay that can be taken into account. This is reviewed annually in line with the Retail Prices Index and stands at £330 from February 2008.
Reckoning backwards from the end of the employee's employment, a redundancy payment is:
- one-and-a-half weeks' pay for each complete year of employment in which the employee was aged 41 or over; plus
- one week's pay for each complete year in which the employee was under 41 but not under 22; plus
- half a week's pay for each complete year in which the employee was aged 21 and under.
The maximum number of years that can be taken into account is 20. This means that the maximum statutory redundancy payment is currently £9,900 (since February 2008). A ready reckoner is included elsewhere in this Guide ( redundancy ready reckoner ) to help with the calculation of redundancy payments.
The company must give the employee a written statement showing how his or her statutory redundancy payment was calculated. It is a criminal offence to fail to provide this statement without reasonable excuse.
Many companies give employees more generous redundancy payments than those provided for in the statutory scheme. These commonly base the payment on the employee's actual week's pay, without limit, or apply a higher multiplier for years of service than the statutory scheme. Employees may be legally entitled to these enhanced redundancy payments under a term in their contract of employment, perhaps incorporated from a redundancy procedure or a collective agreement that the company has reached with a trade union. Or the company may simply decide to offer the payments, without legal obligation, in the course of a particular redundancy exercise.
To the extent that they are based on age and length of service, redundancy payments, whether made under the statutory scheme or under an enhanced employer’s scheme, could potentially amount to age discrimination. The age discrimination legislation, however, provides exceptions so that redundancy payments made under statute do not involve unlawful discrimination. Enhanced payments are not unlawful either, provided they are calculated in broadly the same way as statutory payments – that is, they are based on an employee’s week’s pay and length of service, but they do not cap the employee’s week’s pay and/or they use a multiplier of more than one for each year’s employment. Enhanced payments are also lawful if they are calculated by using exactly the same formula as the statutory scheme but then multiplying that figure by more than one. Enhanced payments that are based on age and/or service but are not calculated in the same way as statutory payments will need to be justified (Indirect discrimination).
Under the Regulations on fixed-term work (equal treatment principle ), fixed-term employees must not be treated less favourably than permanent employees unless there is objective justification for doing so. The Government guidance on the Regulations ( Contracts of employment links ) suggests that where companies offer enhanced redundancy payments to compensate employees for the unexpected loss of their jobs, it may be possible to justify excluding those on fixed-term contracts, if they were recruited on the basis that there was no reasonable prospect of their contracts being renewed.
The first £30,000 of a redundancy payment is exempt from income tax, whether it is a statutory or a non-statutory payment, provided it is genuinely and solely due to redundancy. Other payments made in the context of a redundancy exercise may, however, be taxable in full, as income from employment. For example, payments made for meeting production targets or doing extra work in the period leading up to the redundancies are likely to be taxable in full, as are payments that are conditional on an employee continuing in employment for a specified time after receiving his or her redundancy notice. If companies are in any doubt about the tax status of the payments they intend to make to employees who are to be made redundant, they can contact the Inland Revenue for advance clearance of the payments.
The rules on taxation of termination payments are summarised in elsewhere in this Guide (tax).
In some circumstances, summarised in the list below, employees are not eligible for a statutory redundancy payment, or are entitled to only a reduced payment. Most of these cases are complex, and companies that are considering refusing to pay a redundancy payment or reducing a redundancy payment in these circumstances are advised to contact their Association for guidance.
Exclusions and reductions apply if:
- Employees lose the right to a redundancy payment if they have unreasonably refused an offer of suitable alternative employment, or unreasonably terminated their contract during a trial period in suitable alternative employment (trying the new job ).
- An employee who has committed an act of gross misconduct may lose his or her right to a redundancy payment. However, if the employee is dismissed for gross misconduct after receiving notice of dismissal for redundancy, he or she can apply to an employment tribunal, which may order the company to pay the employee the whole or part of the payment, if it considers that fair in the circumstances.
- An employee who takes part in strike action after being given notice of dismissal for redundancy does not lose his or her right to a redundancy payment. The company may, however, write to the employee asking him or her to extend his or her employment by the same number of days as were lost through the strike action. If the employee does not agree, the company may refuse to make a redundancy payment. However, the employee can then apply to an employment tribunal, which may order the company to make the payment if it considers that the employee was unable to meet the company's request to make up the lost days, or it was reasonable in the circumstances for the employee not to comply with it.
- If an employee resigns after being given notice of dismissal for redundancy but the company asks the employee to work on until the end of the period of notice given by the company, the employee may lose the right to a payment if he or she does not do so.