Redundancy can be a complicated, unfortunate and stressful process for a business owner. As an employer, you have a legal obligation to follow correct procedures and to ensure you treat all staff fairly.
There are three main reasons for redundancy. It could be due to:
- The employer has stopped (or will stop) running their business.
- The requirements of a specific job aren’t needed or no longer exist.
- The location used for a specific job isn’t needed or no longer exists.
In this article, we are going to look into redundancy, redundancy pay and what you, as an employer, need to do for your employees.
What is redundancy?
Redundancy is a form of dismissal that occurs when employers are in a position where they have to reduce their workforce or expenses.
Including the reasons above, redundancy could also occur when a new technology or system is developed, making certain positions redundant.
Redundancies can fall into two categories:
Individual
This is when you dismiss less than 20 employees from one establishment within 90 days or less.
Collective
This is when you are dismissing 20 or more employees from one establishment in a 90-day period. This is sometimes called mass redundancy.
Each type of redundancy can occur at any time, but collective redundancies often happen when a business or building closes down, relocates or when the company goes through a restructure.
Following the Employment Rights Act 1996, employees’ redundancy rights extend to entitlements when you are considering making them redundant.
They are entitled to;
- Statutory redundancy pay.
- A notice period.
- Reasonable paid time off to look for new work.
- A consultation.
- The option to move to suitable alternative work.
If an employer breaches their redundancy contract terms, their employees could raise an unfair dismissal claim in an employment tribunal.
The Redundancy Process
When you are making employees redundant, you are required to follow certain steps to ensure that the process is completed fairly.
The process should include:
Step 1
Provide the reason for the redundancy, for example,
- Company closure.
- They no longer need a role.
- Company reorganisation.
- Moving the business or transfer of company ownership.
Step 2
Determine which roles are at risk of being made redundant.
Step 3
Inform all employees who will be affected by the prospect of redundancy.
Step 4
Decide the selected criteria, for example,
- Skills, qualifications and aptitude.
- Standard of work or performance.
- Attendance.
- Disciplinary record.
You need to be aware of the criteria that can’t be used as selection criteria.
- Pregnancy – including any reasons relating to maternity.
- Family (including parental leave, paternity leave (birth and adoption), adoption leave) time off for dependants.
- Acting as an employee representative.
- Trade union representative.
- Not joining a trade union, or joining one.
- Being classed as a part-time or fixed-term employee.
- Age, disability, gender reassignment, marriage and civil partnership, race, religion or belief. sex and sexual orientation.
- Pay and working hours (including Working Times regulations, annual leave, and the National Minimum Wage)
Step 5
At this stage, you need to notify the Redundancy Payments Service (RPS) before you start your consultation meetings.
Conducting individual consultation meetings for feedback on the selection criteria with the employees who are affected.
Step 6
Score each employee in the redundancy pool based on the criteria set out above.
Step 7
Follow up with another consultation meeting to run through the scoring process and to collect any information pertinent to their selection for redundancy.
Step 8
Considerations for suitable alternative work within the company.
Step 9
Inform employees of your decision to make them redundant. – remember you need to confirm your decision in writing.
Step 10
Remind employees of their right to appeal.
You need to make sure you follow these steps to avoid an unfair redundancy claim in an employment tribunal.
You don’t necessarily need to follow the ACAS redundancy process, it is best practice to do so to avoid claims of discrimination and unfair dismissal.
Unfair redundancy happens when you haven’t followed the correct process, this is set out in the Employment Rights Act 1996.
As an employer, you need to prove and show that you have followed a fair selection process and prove you haven’t based the decision on an individual’s protected characteristic.
What is redundancy pay?
Once you’ve made an employee redundant, they may be entitled to statutory redundancy pay.
When you’re calculating redundancy pay, you can either use an online redundancy calculator or use the quick calculation below to calculate redundancy pay of your employees.
- A half week’s pay for each full year the employee was under 22.
- One week’s pay for each full year you were 22 or older, but younger than 41.
- One week and a half’s pay for each full year you were 41 or older.
It’s an important point to remember, that you need to take into account a maximum of 20 years of continuous service when calculating their statutory redundancy pay.
If you need to work out your employee’s redundancy pay, you can use an online redundancy calculator.
Are there different types of redundancy pay?
Yes, there are two types, statutory and contractual redundancy pay.
Contractual redundancy pay
This is a payment that as an employer you agree to pay when you’re making your employees redundant. This is usually agreed to within the employment contract or staff handbook.
Contractual redundancy pay is usually paid in addition to the money paid on top of statutory redundancy pay, this can be paid to short-service employees.
Contractual redundancy pay can’t be lower than statutory redundancy pay.
Statutory redundancy pay
This is the legal minimum you must give your employees.
How much redundancy pay will an employee get?
Your employee’s statutory redundancy pay is calculated based on multiple factors. These can include:
- Their age.
- Length of service.
- Average weekly pay.
Is there a cap to how much statutory redundancy pay an employee can get?
Yes, there is a cap to the statutory redundancy payment.
The redundancy payment is capped at £571 per week’s pay, and the maximum statutory redundancy pay is capped at £17.130.
How soon does redundancy pay need to be resolved?
As an employer, you should make the redundancy payment once the employee’s employment ends. Or at an agreed date after.
How do I know if my employee qualifies for redundancy pay?
Not all employees are automatically entitled to redundancy pay. To claim statutory redundancy pay or contractual (unless the business has its own rules regarding contractual redundancy) employees must either
- Have a contract of employment.
- Have at least two years of continuous service.
- Dismissed by reason of redundancy, laid or put on short-time working (this doesn’t mean they are automatically entitled to statutory redundancy pay).
If an employee has opted for early retirement they aren’t entitled to redundancy pay.
Is there a notice period?
As an employer, you need to show that you’ve been thorough when you are selecting employees to make redundant. Through this process, you should give your staff a notice period and a leaving date once you’ve finished the redundancy consultations.
Is there a statutory notice period?
Yes, a statutory notice period is based on when their employment contract started.
For example, an employee who has worked between 1 month and 2 years of service, must be given at least a week’s notice to dismiss.
For any employee with 2 years of service to 12 years of service, you need to give them a week’s notice for every year of service. In short, if an employee has 12 years of service, they have a 12-week notice period.
Is redundancy payment tax-free?
Any redundancy payments paid to employees that are under £30,000 are tax-free and don’t require the employee to pay tax.
If at the time of redundancy, you owe staff members holiday pay or wages and national insurance, deductions apply.
Pay in lieu of notice (PILON)
This term is used when you terminate an employee’s contract with immediate effect and give them notice pay.
This can only apply if there is a contractual clause in the employment contract that allows the employer to do so.
This is simple to calculate. Pay your employee the normal week’s pay, they would have received during their notice period.
During this process, you can decide to pay your employees extra payments, such as pension contributions, or private health care insurance.
How employer advice can help you.
If you are in the position of having to make staff redundant, take a look at our comprehensive guide to redundancy.
Employer Advice has a team of dedicated HR and employment law experts who only work with employers. With over 80 years of experience in helping employers take the stress of handling their HR and employment law obligations. Get in touch with one of the Employer Advice experts on 0800 470 0613.