Redundancy payments

Statutory redundancy pay is calculated using a statutory formula based on age and length of service, which awards a number of “weeks’ pay”.

This formula entitles employees dismissed through redundancy to:

• half a week’s pay for each full year of employment when the employee was aged below 22;

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

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

The government website GOV.UK has an online “ready reckoner” for calculating statutory redundancy pay, available at: www.gov.uk/calculate-your-redundancy-pay.

The maximum amount of a week’s pay is subject to a statutory cap revised every year in April (previously February). It is currently £475 (2015-16). The maximum number of years of employment that can be taken into account is 20.

Anyone who earns less than the annual weekly statutory cap receives redundancy pay based on their actual gross earnings. Where employees are paid less than the National Minimum Wage, a tribunal will order the employer to pay redundancy pay at the National Minimum Wage rate (see Chapter 4: National Minimum Wage).

Redundancy pay is based on earnings at the dismissal date. An employee who has worked full-time in the past but transfers to part-time work will have all their statutory redundancy pay calculated at the part-time rate. The fact that they previously worked full-time is not reflected in the redundancy calculation (Barry v Midland Bank [1998] IRLR 138). The only exception is where the cut in hours amounts to short-time working (see page 368).

It is crucial that anyone who agrees to work reduced hours or for lower pay to avoid redundancy negotiates an agreement that any eventual redundancy payment, if redundancies cannot be avoided, will be based on their full-time pay and hours.

The employer must give the employee a written statement saying how redundancy pay is calculated (section 165, ERA 96) and must also inform the representative. Employers can be fined for failing to comply with this requirement.