Redundancy - Getting it Right

by Kate Russell

Redundancy payment

To qualify for a redundancy payment, an individual must meet certain criteria. He must be an employee, must have been dismissed for redundancy, and either have at least two years’ continuous service on the date on which his notice expires or, if termination is without notice, the date on which termination takes effect.

Under the age discrimination legislation, the calculation of redundancy payments, which is based on age, length of service and weekly pay, continues to be lawful if the statutory table under the Employments Rights Act 1996 is used.

Redundancy pay is calculated as follows:

  • Up to the age of 21 – 0.5 week’s pay for each completed year of service
  • 22-40 years of age – 1 week’s pay for each completed year of service
  • 41+ years of age – 1.5 weeks’ pay for each completed year of service.

20 years’ service is the maximum to count in calculating the award.

The statutory level for redundancy pay is set annually. Click here to go to the current statutory rates page to see details of the current statutory payments.

Enhanced redundancy pay

Where enhanced redundancy payments have consistently been paid out using the same terms for several years, this is likely to create an implied contractual entitlement for future employees to also receive the same enhanced terms. Where such enhanced terms are consistently paid, it will be difficult to successfully argue that the redundancy payments are genuinely discretionary. This will be the case even if there is no written policy to support the employee's argument that he or she is entitled to the enhanced redundancy payment.

Example

From 1996 to 2002 Peacock Stores gave enhanced redundancy payments and did not cap the amount of a week’s pay nor the number of years’ service to be applied. This meant that an employee with, for example thirty years’ service was credited with ten years’ more service than the statutory scheme allows for.

From 2002 to 2006 the approach taken by Peacock Stores was more sporadic and it enhanced redundancy payments were not always made during this period.

When Mr Peregrine was made redundant he had an expectation that the enhanced scheme would apply to him. His belief derived from a consistently applied and well understood policy of enhanced redundancy payments which he was well aware of.

The Employment Appeal Tribunal found that Peacock Stores’ decision to enhance redundancy payments had been followed without exception for a considerable period of time and therefore had, by virtue of custom and practice, established a contractual term to the effect that enhanced redundancy payments would always be made.

Having established the existence of a contractual term, the fact that Peacock Stores had not complied with that term when calculating Mr Peregrine’s redundancy payment meant Peacock Stores were in breach of contract, entitling Mr Peregrine to pursue his claim for breach of contract alongside any claim for unlawful deductions.

If you are concerned about establishing an implied contractual entitlement then be careful not to pay enhanced redundancy terms using the same calculation each time; vary the method in which enhanced terms are calculated.

Asking employees who receive enhanced redundancy terms to exit by way of settlement agreement with strict confidentiality provisions will be a useful tool but will not prevent custom and practice being established if such terms are well known amongst employees.

Age discrimination

Enhanced redundancy schemes may be discriminatory on grounds of age. Schemes where the payment is based on age differentiate on age grounds and are therefore unlawful.

Schemes that pay out based on length of service are likely to be indirectly discriminatory and therefore unlawful because younger employees are likely to have less service than their older colleagues.

Enhanced redundancy pay made on this basis can be defended if the scheme falls within a statutory exception or if it can be objectively justified. The age discrimination legislation provides an exemption for enhanced redundancy schemes that mirror the statutory redundancy payment framework.

The essence of the special conditions is that the enhanced redundancy pay must be calculated in the same way as statutory redundancy pay, except that there is no limit on the amount of week’s pay which can be taken into account and the amount may be increased (but not reduced) by applying a multiplier, either to the amount of a week’s pay used in the calculation or to the result of the calculation.

Example

National Starch and Chemical Ltd provided paid three weeks’ gross pay for each year’s service under 40 years of age and four weeks’ gross pay for each year above it. The tribunal found that the scheme discriminated against younger staff, did not comply with the statutory exception and was not objectively justified.

In another case, Mr Loxley was excluded from a voluntary redundancy scheme because he had reached the age of 60. Further, there were tapering provisions in place between the ages of 57 and 60. Mr Loxley claimed that the scheme discriminated against him on grounds of age discrimination. The EAT remitted the case back to a tribunal for a rehearing.

The EAT has set out some general guidelines to help determine whether the age discrimination in any particular redundancy pay scheme can be objectively justified. These can be distilled as meaning that the following matters can generally be taken into account in considering justification, although none will be determinative on its own:

  • Creating job opportunities for younger people
  • The amount of pension to which the employee will be entitled
  • Whether a trade union approved the scheme
  • Preventing a cash windfall shortly before retirement
  • Providing extra help for older workers because they may find it more difficult to get other jobs.

Notice pay

Employees are also entitled to receive their notice pay. This is based on their contract or, in the absence of that, statutory entitlement. Statutory entitlement accrues as follows:

Years’ service Weeks’ notice
0-2 years 1 week
2-3 years 2 weeks
3-4 years 3 weeks

Where a payment in lieu of notice is made on or after 6 April 2018, in respect of employment that terminated on or after that date, the payment is subject to tax and national insurance. Provisions in the Finance (No.2) Act 2017 change the rules on the taxation of termination payments to remove the distinction between contractual and non-contractual payments in lieu of notice. The tax exemption on payments under £30,000 will no longer apply to any payments in lieu of notice made under the new rules. The employer must calculate what the employee's basic pay would have been had he or she worked the notice period, using a formula set out in the legislation. Where a termination payment is greater than this amount, the £30,000 exemption can apply to the remainder.

If you make a payment and describe it as an ‘ex gratia’ payment, HMRC will treat it as remuneration and require that tax is paid.

Employees are also entitled to holiday accrued but not taken to the date of termination. They are also entitled to any contractual benefits which will accrue to the end of the notice period (whether worked or not).