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Making Redundancies - A Guide For Employers

We look at how Employers should calculate statutory redundancy pay and some other key considerations when making redundancies.

How is redundancy pay calculated?

If an employee is dismissed for reason of redundancy, then they may be eligible for a redundancy payment. This is calculated on the basis of the employee gross weekly wage (capped at a maximum of £479), the formula for the payment depends on the employees age and length of service. If the employee earns less than £479 the payment will be that of their actual gross weekly wage, if they earn above £479 the payment is capped at £479 gross weekly wage.

In order to be eligible for a redundancy payment, the employee must have at least 2 years’ continuous service and only the last 20 years’ continuous employment will be taken into account.

Due to age discrimination legislation, the prior upper and lower age limit for entitlement to a redundancy payment of 65 and 18 were abolished the same as the tapering provision for the final year before retirement at the age of 65. Although as mentioned the variable multiplier by age and length of service remains the same as well as the 2 year qualifying service and 2 years’ service cap.

 The application for the formula is as follows:

  • ½ weeks pay for each year worked up until the age of 22.
  • 1 weeks pay for each year worked between 22 and 41 years of age.
  • 1 ½ weeks pay for each year worked after 41 years of age.

What is the current maximum statutory amount an employee could receive through redundancy pay?

The maximum redundancy payment which can be paid to an employee who earns over £479 per week gross and has 20 years’ continuous service and older than 41 is 30 x £479 which equals £14,370. The payment for an employee with 2 years’ service and under 41 years of age is £958.

Discrimination risks with providing enhanced Redundancy pay!

Employers are allowed to give an enhanced redundancy payment above the statutory by disregarding the cap on the weeks pay or multiplying the amount allowed for each year of service or both of these options. However, due to age discrimination legislation employers can’t usually remove the weekly cap for some age bands and not other or adopt multipliers for the age bands which are not straight forward multiples of the statutory age band multipliers.

Although, some variation of the statutory may be justified. Within the Kraft Foods v Hastie UKEAT /0024/10, the company had a generous contractual redundancy scheme which provided for redundancy payments to be capped at the sum that individual would have earned had they worked at the company until the usual retirement age. The intention was to prevent employees receiving a windfall of more monies than they would have earned had they continued in employment. Even though the cap amounted to indirect discrimination (as older workers were more likely to have their redundancy payments reduced as a result) it was justified as a balanced way of meeting the legitimate aim of preventing “windfall payments”.

Risks in paying enhanced Redundancy Pay - Custom and Practice is found to be a Breach of Contract

Usually unless there is a written policy or contractual provision that states an enhanced redundancy scheme, employees will only be entitled to receive a statutory redundancy payment, calculated as stated above. However, sometimes if there has been a custom & practice of paying enhanced redundancy payments, this entitlement may exist even if there is no written policy/ contractual provision. Within Peacock stores v Pergrine & Others UKEAT /0315/13 the company paid employees based on the statutory calculation however they based the payments on actual weekly pay and length of service and did not apply the statutory caps on weekly pay or length of service for nearly 30 years. The Employment Appeal Tribunal held that calculating redundancy payments in this way amounted to custom and practice for Peacock Stores and therefore inferred an implied contractual term that employees would receive enhanced redundancy payments. Even though the company stopped calculating payments in the enhanced way, there would need to have been sufficient evidence of an intention to vary the contract in order for the implied term to be no longer applicable. Therefore, in calculating payments in the statutory minimum way, Peacock stores had breached the contract of the employee. 

Risks of Discrimination / Unfair Dismissal Claims!

It is obvious that the compensation an employee can be entitled to for redundancy is mostly significantly less than they could potentially receive for unfair dismissal. As a result, from an employee’s perspective it may be tempting to try and determine that their redundancy wasn’t a genuine redundancy either due to the redundancy situation being non-existent or as they were wrongly chosen for redundancy / has been offered an alternative post which is unsuitable. It could also be argued that no effort was made by the employer to establish alternative employment, or that alternative jobs were available but weren’t offered. Additionally, the law provides that there should be efficient consultation with the employee before any decision of redundancy is made. If the employer fails to do this, then if the employee is subsequently dismissed they might be able to argue it was unfair dismissal. The starting point when determining whether a redundancy dismissal is fair is whether a redundancy situation has arisen. 

EmployEasily Legal Services - Redundancy Experts

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