LRD guides and handbook September 2011

Redundancy law - a practical guide

6. Redundancy pay, insolvency, taxation and state benefits

This Chapter explains employees’ rights under the statutory redundancy payments scheme. It also looks at the law governing contractual redundancy schemes and in particular, the impact of age discrimination legislation. Finally, it covers insolvency and the tax and benefits implications of a redundancy pay award.

Contrary to widely held beliefs, there is no European Union scheme to pay workers who are made redundant and there are no plans for one. Redundancy pay depends entirely on what is in the employment contract (see below). In the absence of an enhanced contractual redundancy entitlement, employees will be reliant on the discretion of the employer or, at worst, the statutory scheme.

Compared to other European countries, the UK’s statutory scheme is not generous and as a result, the UK is one of the cheapest countries in the developed world in which to carry out redundancies. According to the OECD employment protection indicator, the UK provides the third least stringent employment protection regulation of all its members, behind only the United States and Canada (www.oecd.org/document/11/0,3343,en_2649_33927_42695243_1_1_1_1,00.html#latest_update).

In an analysis of 156 redundancy policies submitted to the Labour Research Department (LRD) in late 2006, just 21 paid only the basic statutory entitlement. A number of policies reserved the right to pay more than the statutory entitlement, others contained no details of entitlement to redundancy pay at all, leaving it up to unions to negotiate if redundancies are announced. In total, 78 of the policies contained details of enhanced redundancy pay schemes. These results provide further tangible evidence of the benefits unionisation can bring, as amongst non-unionised private sector employers, redundancy exercises involving payments limited to the statutory minimum entitlement are far more prevalent.

Redundancy pay under the statutory scheme

Under section 135 of the Employment Rights Act 1996 (ERA 96), an employee who has worked continuously for the same or an associated employer for at least two years, regardless of the hours that s/he works in a week, has the right to statutory redundancy pay unless s/he:

• has accepted or unreasonably refused suitable alternative employment (see Chapter 5);

• was dismissed for gross misconduct; or

• was dismissed for taking strike action prior to the statutory notice period (section 143 of the ERA 96).

The following workers are specifically excluded from the right to statutory redundancy pay by sections 155-161 of the ERA 96:

• employees with less than two years’ continuous employment;

• the self-employed;

• individuals without a contract of employment (e.g. temporary agency workers or casual workers);

• civil servants and other public employees, including NHS workers, who are covered by their own agreements;

• foreign government employees;

• seafaring workers paid by share of the catch;

• domestic workers employed by close relatives; and

• employees who are married to their employer.

As of 1 October 2006, an employer can no longer reduce a redundancy payment to an employee because s/he is in receipt of a pension.

Employees lose the right to claim statutory redundancy pay if they leave work before the redundancy notice has been issued. But employees under notice of redundancy can agree with their employer to extend their notice (in the hope of work picking up, for example) without jeopardising their redundancy entitlement (Mowlem Northern v Watson [1990] IRLR 500).

The European Court of Justice (ECJ) held, in the case of Barber v Guardian Royal Exchange [1990] IRLR 240, that statutory redundancy payments are a form of pay. This means that employees can use the Equal Pay Act 1970 to pursue claims relating to redundancy pay if the payments discriminated on grounds of their sex.

Calculating entitlement

Statutory redundancy pay is worked out using a statutory formula based on the employee’s age and length of employment, multiplied by a “week’s pay”, which entitles employees dismissed by reason of redundancy to:

• half a week’s pay for each year the employee was aged up to 21;

• a week’s pay for each year s/he was aged 22 to 40;and

• a week-and-a-half’s pay for each year s/he was aged 41 or over.

The maximum number of years of employment that can be taken into account is 20.

The Department for Business, Innovation and Skills (BIS) provides an online “ready reckoner” for calculating redundancy pay at: www.direct.gov.uk/redundancy.dsb. There is also a redundancy table for calculating redundancy entitlement at: www.direct.gov.uk.

A “week’s pay”

Under the statutory scheme, the level of redundancy pay depends on an employee’s gross earnings at the date of dismissal, but the calculation of a “week’s pay” is subject to a statutory cap that is revised on 1 February of each year. From 1 February 2011, the statutory cap is £400. Anyone whose gross weekly earnings are less than £400 receives statutory redundancy pay based on actual gross earnings. The statutory redundancy entitlement of anyone earning over the maximum week’s pay is calculated by applying the statutory cap of £400.

Full-time/part-time employment

An employee who has previously worked full-time but has transferred to part-time work will have the whole of his/her redundancy pay entitlement calculated at the part-time rate. The fact that s/he has previously worked full-time will not be reflected in the redundancy calculation (Barry v Midland Bank [1998] IRLR 138). It is therefore crucial that employees who agree to work reduced hours at lower pay to try to avoid redundancy, negotiate to ensure that any redundancy pay is calculated by reference to their full-time pay, should redundancies later become unavoidable.

The right to a written statement

Under section 165 of the ERA 96, the employer must give the employee a written statement setting out how redundancy pay has been calculated. If the employer fails to do this, the courts can impose a small fine.

Example of statutory redundancy pay calculation

An employee aged 45, with gross weekly pay of £450.00 per week and 15 years’ full service would receive £6,800 statutory redundancy pay calculated as follows:

Step one: 1.5 weeks x 4 years full service aged 41 or above: 6 weeks

Step two: 1 week x 11 years service aged under 41: 11 weeks

Step three: 6 weeks + 11 weeks= 17 weeks x £400*

Total: £6,800 statutory redundancy pay

*£400 is the maximum week’s pay under the statutory cap

Contractual redundancy schemes

Many employers offer redundancy schemes that are much better than the statutory scheme. Several examples are discussed in Chapter 1 of this booklet, and LRD has details of many such policies on its online Payline database available to subscribers (go to: www.lrd.org.uk/index.php?pagid=18 for details).

Contractual redundancy and age discrimination

Any scheme that uses age-based calculations has the potential to be discriminatory under the Equality Act 2010. However, there is an automatic exemption for schemes that are based on the statutory entitlement. Under rparagraph 13 Schedule 9, an employer’s redundancy scheme will not amount to age discrimination if it has amended the statutory scheme in any of the following ways:

• by increasing or removing the maximum amount of a week’s pay;

• by multiplying the amount for each age band; or

• by multiplying the total amount by a figure of more than one.

For example, it is lawful for an employer to calculate redundancy payments based on one week’s pay per year of service for those aged 21 and under, two weeks’ pay for each year between the ages of 22 to 40 and three weeks’ pay for each year when aged 41 and over. The employer can also decide to base the payments on a week’s actual pay rather than applying the statutory cap (see above), and/or multiply the amount of weekly pay by some fixed amount.

An employer is free to devise its own redundancy scheme, but if this scheme is based on different criteria from those in the statutory scheme, the employer will have to be able to objectively justify it if challenged (MacCulloch v ICI plc [2008] IRLR 846 EAT). If an employer has a policy that pays the same for everyone, so that every employee is entitled to a month’s pay for each year of service, regardless of age, for example, there is no need to justify it, as there will be no age discrimination.

The abolition of the default retirement age

The abolition of the default retirement age (DRA) represents a particular problem for employers, especially those with generous contractual redundancy schemes, put together at a time when it was assumed most employees would retire by 65. The recent case of Kraft Foods UK Limited v Hastie [2010] UKEAT 0024, although decided before the removal of the DRA, nevertheless provides a good illustration of these challenges:

Mr Hastie took voluntary redundancy from Kraft aged 62 after nearly 40 years working in the coffee processing department, under a long-established contractual voluntary redundancy scheme, agreed with the unions. The Kraft scheme paid 3.5 weeks’ pay for each year of service, but under the terms of the scheme, the maximum amount that could be paid to any employee taking voluntary redundancy was not allowed to exceed the amount s/he would have earned by staying on at work earning his or her normal rate of pay until the age of 65. The practical effect of this provision was to reduce Mr Hastie’s contractual redundancy payment by around £13,000.

The reason for the reduced payment was clearly his age and as a result, the rule would amount to unlawful age discrimination, unless it could be justified objectively as a “proportionate means of achieving a legitimate aim”.

The company explained that the reason for the rule was to prevent employees who took voluntary redundancy from receiving a “windfall”. The basic purpose of the voluntary redundancy scheme was to compensate employees who volunteered to give up their jobs for the loss of the wages they would have earned if they had remained employed. At that time, Kraft could have forced Mr Hastie to retire at 65 and the rule was designed to ensure that Mr Hastie could not earn more by volunteering for redundancy than he would have earned by staying at work until 65. The EAT held that the rule, although indirect age discrimination, was nevertheless a proportionate means of achieving a legitimate aim: the aim of preventing an employee who takes voluntary redundancy from earning a “windfall”, by doing better out of redundancy than those employees who stay in their job until 65.

However, since the abolition of the DRA, the kind of rule seen in Hastie can no longer be lawful, because forced retirement is itself unlawful age discrimination, unless (rarely) it can be objectively justified. The danger for unions is that generous schemes, like the Kraft scheme in the Hastie case, may end up being cut in order to compensate for the risk of liability for higher payments to those employees who are made redundant beyond the age of 65. And there is an added risk of some employers using age discrimination-based arguments as a pretext for forcing through cuts to redundancy packages.

LRD survey results: contractual redundancy pay

In 2011, LRD conducted a survey of reps, collecting updated information about recent changes to redundancy procedures and payments (see Chapter 1). The survey results confirm that unsurprisingly, redundancy pay terms are often modelled on the statutory scheme summarised above, although they often disregard the maximum cap on a week’s pay.

Payments to employees with less than two years’ service

Even though there is no statutory entitlement to redundancy pay for employees with less than two years’ service, the LRD survey revealed that some employers do make provision for these employees. For example, Age UK offers a tax-free termination payment equivalent to four weeks salary for staff with less than two years service, and redundant employees with at least one year’s continuous service are entitled to a redundancy payment at Connexions Nottinghamshire.

Reported changes in redundancy pay during the downturn

Where details were given by reps, more than one in 10 survey respondents reported cuts in the level of redundancy pay (or discretionary payments) in response to the economic downturn. Examples included:

• actual-salary based redundancy pay cut down to statutory redundancy pay at Cornwall College;

• three-times statutory redundancy pay cut to one-times (without the statutory ceiling on earnings) for voluntary redundancy, at the London Fire and Emergency Planning Authority (non-fire fighting staff) and statutory redundancy pay only for compulsory redundancy;

• three-times statutory redundancy up to 60 weeks, cut to 1.5 times up to 40 weeks at Surrey County Council; and

• four-times statutory redundancy pay cut to 2.5 times statutory redundancy pay for voluntary redundancy, and statutory for compulsory redundancy, with caps, at Wiltshire Council.

However, there were still plenty of examples of better-than-statutory provision, for example:

• the higher of the following two calculations at Age UK: Either ignoring the statutory earnings limit and applying a multiplier of 1.75; or applying the statutory earnings limit and doubling payment;

• a minimum severance payment of £6,000 “where insufficient volunteers are forthcoming” at BAe Systems;

• 15% of salary for each year’s service at the Bank of England, up to a maximum payment of three years’ salary, subject to two years’ minimum service (with out-placement support or a payment in lieu of £4,000).

Establishing a contractual right

Employees will only be entitled to enhanced redundancy pay if it is a contractual right, either specified in an individual’s contract of employment, or incorporated into the contract via a collective agreement. This can be either expressly, or by implication through custom and practice (see below). Where an individual contract of employment clearly provides for the payment of contractual redundancy pay, this will be a contractual entitlement. However, in practice, the position is often unclear, especially where either the redundancy policy is contained in a collective agreement or staff handbook; or there is nothing in writing.

A statement in a collective agreement or staff handbook can form part of each individual’s contract, but only if it has been “incorporated” into it. If the contract refers expressly to that document (for example, if the contract of employment says “your redundancy entitlement is as set out in Section 3 of the Agreement/Policy”), the collective agreement will have been incorporated and is a contractual entitlement. But often it is not obvious whether the term has been incorporated into the individual contract. A term is more likely to be viewed as contractual if it relates to redundancy pay rather than procedure. This is because a term must be “apt for incorporation”. In other words, it must be something that is capable of being a contractual term to benefit an individual, as opposed to a class or group of employees. Employees have lost out on negotiated rights over this. For example:

MG Rover employee Kulvinder Kaur was threatened with compulsory redundancy, but claimed this was unlawful under the terms of her contract because of the provisions of two collective agreements. One stated: “Employees who want to work for Rover will be able to stay with Rover. Necessary reductions in manpower will be achieved in future, with the co-operation of all employees, through retraining and redeployment, natural wastage, voluntary severance and early retirement programmes.” The second said: “There will be no compulsory redundancy.”

But although the agreements appeared unequivocal, the Court of Appeal held that they were not legally binding. Some provisions are not intended to give rise to legally enforceable contractual rights, it said. Even if the collective agreement is expressly incorporated into the employment contract, it is still necessary to look at the content and character of the relevant term in order to ascertain the contractual intention of the parties. The court concluded that the wording of the agreement was “aspirational” and was not intended to amend the individual contracts of employment of staff within the bargaining unit.

Kaur v MG Rover [2004] EWCA Civ 1507 [2005] IRLR 40

However, in the following case relating to redundancy pay, a provision set out in a staff handbook was found to be legally binding:

Christopher Keeley had a written statement of employment terms, which set out his main terms of employment and made reference to company handbooks containing further information. The staff handbook stated: “Employees with two or more years’ continuous service are entitled to receive an enhanced redundancy payment.” The Court of Appeal held that if a written term is “put in clear terms of entitlement”, it is capable of being part of the contract, even if other terms in the same document are not. It also pointed out that, since a redundancy entitlement is an important part of an employee’s remuneration package, this statement was particularly apt for incorporation. It held that Keeley was entitled to an enhanced redundancy payment, and rejected the employer’s argument that the term was too uncertain to form part of the contract because it did not say how the redundancy pay was to be calculated.

Keeley v Fosroc International Ltd [2006] EWCA Civ 1277

An employee may also be entitled to enhanced redundancy pay if the employer has always paid it on previous occasions but it has never been written down. This is what is usually known by the shorthand “custom and practice”. The test the courts apply to establish whether something has become a contractual term through custom and practice is that the custom must be “reasonable, notorious and certain”. “Notorious” means “well-known”, and a crucial part of the test is that the employees must have been made aware of the term.

The following case provides a useful example of the factors that will be taken into account when deciding whether redundancy payment arrangements are a contract term:

Albion Automotive bought Volvo’s Farington site in 1995 and took over the business and employees in a TUPE transfer. Before the transfer, Volvo had carried out six redundancy exercises on the site over a period of years involving several hundred employees. Enhanced redundancy terms had been negotiated by Volvo with the unions following industrial action. The enhanced redundancy terms had been approved by Volvo’s parent company and had been applied on all six occasions. Following the TUPE transfer, Albion made redundancies but refused to pay the enhanced terms, instead paying only statutory redundancy. None of the employees had a written contract of employment or a statement of terms and conditions. The collective agreements negotiated each year with the unions were silent on the redundancy terms as these were not re-negotiated annually.

The EAT agreed with the tribunal’s conclusion that Albion was contractually obliged to pay the enhanced redundancy, emphasising a number of key factors that are likely to be important in assessing whether or not a policy had acquired contractual status. These are worth reproducing in full and include:

• Whether a policy was drawn to the attention of employees.

• Whether it was followed without exception over a substantial period.

• The number of occasions on which it was followed.

• Whether payments were made automatically.

• Whether the employer’s choice of language when communicating with employees about the policy over this period suggested that the employer intended to be contractually bound to follow it.

• Whether the policy was adopted by agreement.

• Whether employees had a reasonable expectation that the enhanced payment would be made.

• Whether the terms had been incorporated into a written agreement.

• Whether the terms were consistently applied.

In this case, the terms negotiated were the outcome of extensive high profile negotiations and were applied virtually automatically, with hardly any consultation with the parent company, in all later redundancies. At the time of each redundancy exercise, the terms were drawn to employees’ attention in writing. They were well known to employees. The scheme was followed over a substantial period of time and affected around 750 employees — three quarters of the workforce. Staff had a reasonable expectation that the enhanced redundancy policy would continue to be applied. It had been reduced to writing both by the trade unions and the employer, and the language used by the company, for example its frequent reference in communications to the entire workforce, to the redundancy terms “currently in operation”, was consistent with the company believing itself to be contractually bound to pay these terms ().

Albion Automotive v Walker UKEAT/415/00

In Pellowe v Pendragon PLC (EAT/804/98), the practice of paying enhanced redundancy was invariably followed, without individual decision or discretion, for more than ten years, involving more than 100 redundancies, and might have been in force for at least 20 or 25 years. However, the EAT did not overturn a tribunal’s decision that there was no implied term that enhanced redundancy was to be paid, taking into account, in particular, the fact that the enhanced redundancy policy was a management policy that was not communicated to employees.

If payments are discretionary, so that on any occasion the employer can decide whether or not to make them, there will be no custom and practice. For example, in Quinn v Calder Industrial Materials [1996] IRLR 126, where an employer had on previous occasions paid redundancy at an enhanced rate but had never included it in the terms of employment contracts, there was no custom and practice to guarantee the right to the payment in a later round of redundancy because on each occasion, management met to decide whether to make the payment, making it discretionary rather than an entitlement.

When deciding whether or not to exercise discretion to pay enhanced redundancy, management decisions must not be “irrational or perverse” (Commerzbank v Keen [2007] IRLR 132 CA). In practice, challenging a decision on the basis that it is irrational or perverse is a very high hurdle indeed.

Whether or not a scheme is truly discretionary is a question of interpreting the contract and any collective agreement to decide exactly what the parties intended (Powermarque v Sykes EAT/0954/03).

An interesting new case illustrates how tribunals will not shirk from enforcing clear contract terms even where changed circumstances result in the employer significantly losing out:

Mr. Arkley was made redundant by the Sea Fish Industry Authority (SIFA) aged 51 after 23 years’ service. He had the benefit of a contractual redundancy policy which entitled qualifying redundant employees to an extra ten years of pensionable service (subject to certain limitations), as well as a contractual redundancy payment.

Although the offer of ten years’ extra service sounded very generous, in practice it was less so, because the employer’s pension fund was allowed to “claw back” part of the cost from the pension lump sum payable on retirement. For this reason, the employer offered a choice (accepted by the overwhelming majority of employees) between an extra 6.6 years of pensionable service with a full lump sum on retirement, or the ten years’ enhancement, with a smaller lump sum on retirement (part of the lump sum having been “clawed back”). These complicated arrangements were lawful responses to the high cost to employers of enhancing pension rights. Unfortunately for SIFA, in 2006 the law changed and the “claw back” mechanism was no longer lawful. Mr. Arkley was the first employee to be made redundant after the law changed. The pension fund decided that the employer would have to bear the full cost of the extra ten years’ enhancement, because the pension fund was no longer able to claw back the cost out of the lump sum on retirement. The change meant that Mr. Arkley no longer had to face the option of his ten year enhancement being partially clawed back. Instead, he could claim both the ten year enhancement and the full lump sum pension on retirement.

When the CEO of the SIFA saw the size of the sums payable to Mr. Arkley under the terms of the contractual redundancy scheme, he decided that the extra cost of the full ten year enhancement (around £46,000) was simply too large for the Authority to bear, so he decided to offer Mr. Arkley an enhancement of only 6.6 years, which was the option the vast majority of employees had chosen under the former arrangement. Mr. Arkley brought a claim for breach of contract. Although unsuccessful before the tribunal, the EAT agreed with him. The language of the policy was clear. It was written in clear obligatory not discretionary language, stating, for example, that: “compensation in accordance with the scheme will be payable”. The employer was contractually obliged to make the payment, no matter how expensive it now was.

Arkley v Sea Fish Industry Authority UKEAT/0505/09/101

The introduction of new pension regulations in 2006 would have provided the Sea Fish Industry Authority (SFIA) with good justiification for approaching employees to negotiate a variation of the contractual redundancy policy. And any employee unreasonably refusing to agree to a variation, after proper consultation, might have been fairly dismissed. But SIFA failed to take this step. As a result, when made redundant, Mr. Arkley was entitled to insist on his contractual entitlement to a full 10-year pension enhancement, and his employer was in breach of contract by withdrawing it without his consent. Mr. Arkley was entitled to damages for the loss of the extra enhancement to his pension.

Use of compromise agreements

Where employers offer enhanced redundancy payments, it is widespread industrial relations practice to make the non-statutory part of the payment conditional on an employee signing a compromise agreement, the basic effect of which is to waive the employee’s right to bring claims against the employer in the Employment Tribunal (with some narrow exceptions).

Employees must take independent legal advice on the nature and effect of the compromise agreement for it to be valid, and in large-scale redundancy consultation exercises, it is not unusual for the employer to arrange for one firm of solicitors to attend at the workplace for the purpose of advising on the compromise agreements. Typically, this may take the form of a group presentation, followed by short individual meetings.

Where Mirror Group Newspapers had engaged in a practice of making all employees since 1993 sign a compromise agreement releasing the employer from tribunal claims in return for an enhanced redundancy payment, the practice was well-established, and Mr Garratt was well aware of it before being made redundant. The requirement had become a term of the contract of employment, implied through custom and practice, and Mr Garratt’s refusal to sign a compromise agreement entitled the employer to refuse to pay the balance of his redundancy payment that exceeded the statutory entitlement.

Garratt v Mirror Group Newspapers Ltd [2011] EWCA Civ 425

Insolvency

If an employer cannot pay redundancy compensation because of insolvency, it becomes payable by the Department for Business, Innovation and Skills (BIS) under section 182 of the ERA 96, but payments are capped at the level of the statutory redundancy scheme. For employees to qualify for the payment, there must be documentary evidence that the employer has been declared insolvent, in the form of a winding-up order, an administration order, a resolution for voluntary winding-up or the appointment of a receiver. Only employees qualify for these payments (BIS v Studders UKEAT/2011/0571).

The employee must show that s/he is entitled to statutory redundancy pay and that s/he has taken all reasonably practical steps to recover it. This may include having submitted a tribunal application.

If an employer is declared insolvent, it is important to lodge claims for redundancy pay as early as possible. If an employee is out of time to claim it from the employer, s/he may not be able to claim it from the Secretary of State. Applicants need to fill in Form RP1, Claim for payments from the National Insurance Fund. This asks for information on the employer, the hours the employee worked, the rate of pay and what the employee’s service has been.

Employees can also claim certain other debts from the National Insurance Fund. These include:

• statutory notice pay;

• arrears of pay (up to eight weeks);

• holiday pay (up to six weeks); and

• the National Minimum Wage, if the employee was paid below the minimum rate.

“Arrears of pay” (capped at eight weeks) is deemed to include any statutory guarantee payment, any payment for time off for trade union duties, any pay for suspension on medical or maternity grounds and any pay awarded under a protective award. The implications of this were seen in the recent award made in favour of employees of the collapsed Jarvis group, whose awards were capped at eight weeks’ pay even though a tribunal found that there had been no consultation at all (Leeds Employment Tribunal, 22 August 2011, unreported).

As the RMT commented, the statutory award, “came nowhere near compensating the millions still owed in back pay”.

The amount of a week’s pay for all these debts is capped at the statutory maximum (£400 per week for dismissals on or after 1 February 2011).

Employees are under a general duty to mitigate losses by looking for another job and by applying for Job Seekers Allowance (JSA).

In the case of Secretary of State for Employment v Stewart [1996] IRLR 334, the employee had failed to apply for JSA. Even so, the Secretary of State was allowed to deduct the amount of JSA that would have been paid from the sum owed by the insolvent employer. More recently, Bob Crow has commented on the injustice of deducting JSA payments from the awards paid to those former Jarvis employees who have failed to find work.

Advice on how to claim in an insolvency should be sought from the union and/or the Insolvency Service (email:[email protected], tel: 0845 602 9848).

Under section 188(2) ERA 96, an employee has three months from the date of any decision of the Secretary of State to withhold payment to bring a claim in the Employment Tribunal.

In insolvency cases, an employee is required to obtain the consent of the administrators or the court before starting any tribunal proceedings (Carr v British International Helicopters [1994] IRLR 212).

Death of employer

Employment may come to an end abruptly on the death of an employer. Under section 136(5) of the ERA 96, this is deemed to amount to a redundancy. If the deceased employer’s representatives offer alternative work, the situation is as described in Chapter 5, except that there can be an eight-week gap between the two jobs.

Taxation

Redundancy pay is free of tax up to £30,000 (See the Inland Revenue guidance at: www.hmrc.gov.uk/guidance/redundancy-factsheet.pdf). However, negotiators should take care when negotiating settlements and take professional advice if in doubt. The High Court, has held (for example, in the case of Richardson (Inspector of Taxes) v Delaney [2001] IRLR 663), that negotiated settlements are not always payments of damages for breach of contract. They may therefore be liable to tax.

“Ex-gratia” severance payments

The following recent case is useful because it illustrates how tribunals expect employers to use clear language and terms that everyone understands when negotiating redundancy settlement packages, and are likely to hold them to the literal meaning of their chosen language even when it produces an unforeseen result:

Ms O’Farrell was employed as director and corporate head at Publicis Consultants. Her contract of employment entitled her to three months’ notice. In 2009, her role became redundant. In her dismissal letter, the company explained that it was paying holiday pay, statutory redundancy pay and an “ex-gratia payment equivalent to three months’ salary”, paid free of tax and national insurance. After her dismissal, Ms O’Farrell brought a claim for her contractual notice pay. The EAT agreed that her notice pay was still owing, because there was nothing in the dismissal letter to tell the employee that the “ex gratia” payment was meant to be her contractual notice entitlement, as opposed to an additional voluntary severance payment. The ordinary meaning of the words “ex gratia” payment is a “gift or payment made by favour and is not a payment on account of a legal obligation”. This meant that Ms O’Farrell’s three months of contractual notice pay was still outstanding and she was free to claim it in the tribunal.

Publicis Consultants UK Limited v Ms F O’Farrell UKEAT/0430/10/DM

State benefits

Employees who lose work through redundancy are normally entitled to Jobseeker’s Allowance (JSA), if they meet the qualifying conditions and have paid enough National Insurance contributions.

To be entitled to JSA, individuals must show that they are capable of work, available for work and actively seeking work. They must also sign a jobseeker’s agreement stating the work they are seeking. This restricts the period in which they can limit their search to vacancies in their normal line of work and at their previous level of pay.

Failure to comply with all the JSA rules results in loss of the benefit. The fact that a person has received redundancy pay is not a bar to receiving JSA, but if the redundancy package includes pay in lieu of notice there is usually no right to JSA until the notice period expires. Full details of JSA rates and qualifying conditions are in LRD’s annual guide, State benefits and tax credits — see “Further information” at the end of this booklet. If a worker is dismissed without notice and a tribunal awards notice pay, any state benefit already received will be offset against this award (Westwood v Secretary of State for Employment [1984] IRLR 209).

Mortgage Protection Insurance

Employees with the benefit of mortgage protection insurance should carefully check the terms of their policy and also check with their insurer before putting themselves forward for voluntary redundancy, as volunteering for redundancy may mean they cease to be entitled to benefits under the terms of the policy.