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”.

Starting at the termination date and counting backwards, statutory redundancy pay is calculated as follows:

• 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 on 1 February. It is currently £450 (2013-14). The maximum number of years of employment that can be taken into account is 20.

Redundancy pay is based on an employee’s earnings at the time of the redundancy dismissal. An employee who has previously worked full-time but transfers to part-time work will have all their statutory redundancy pay calculated at the part-time rate and the fact that s/he previously worked full-time is not reflected in the redundancy calculation. In Barry v Midland Bank [1998] IRLR 138, the House of Lords (now Supreme Court) confirmed that this practice, although indirectly discriminatory against women, is nevertheless lawful. It is therefore crucial that employees who agree to work reduced hours and/or for lower pay to try to avoid redundancy negotiate an agreement that any eventual redundancy payment is based on their full-time pay, should redundancies prove unavoidable.

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.

Employers can offer enhanced redundancy pay, better than the statutory scheme. Any scheme using age-based or length of service-based calculations is potentially unlawful under the age discrimination provisions of the Equality Act 2010 (EA 10), but there is an automatic exemption for schemes that are based on the statutory formula. For more information see Chapter 6: Discrimination.