Making employees redundant is an HR hot potato. It’s essential to handle the process competently, especially when it comes to redundancy pay.

Molly Monks FIPA, licensed insolvency practitioner and director of Parker Walsh, said: “When a company is faced with making redundancies it can be an incredibly difficult time. In smaller businesses the staff are often loyal, long-serving members of the team.”

The first point to note is that the same redundancy rules apply to all sizes of business. Read on to ensure that you pay the correct redundancy pay sum t0 the correct employees.

What is statutory redundancy pay?

Your employees may be entitled to redundancy pay under statutory redundancy payment. They must be an employee with two continuous years of service and have been dismissed, laid off or put on short-time working.

If you offer alternative work to an employee and they refuse without a good enough reason, they wouldn’t be entitled to redundancy pay.

What about termination pay?

This is the final pay your employee will receive on leaving the business. The termination payment is made up of:

• Statutory redundancy pay
• Holiday pay
• Unpaid wages
• Company benefits

Statutory redundancy pay rates are based on age and length of service, as we’ll talk about in a minute.

Even if they aren’t eligible for statutory redundancy pay, they’re still entitled to holiday pay and notice period pay.

How much is redundancy pay?

Under redundancy pay rules, employees get:

• 1.5 weeks’ pay for each full year of employment after their 41st birthday
• A week’s pay for each full year of employment after their 22nd birthday
• Half a week’s pay for each full year of employment up until their 22nd birthday

The length of service is capped at 20 years. The money they get is based on the average pay the employee received in the past 12 weeks. Weekly pay is capped at £751, with a maximum payout sum of £22,530.

It should be paid when the employee leaves, or soon after.

They also have the right to a written statement about the amount of redundancy pay they’re getting and how that’s calculated.

You have the option to give staff extra if you choose, or reduce the statutory two-year period before employees are entitled to redundancy pay.

You should not be deducting tax from the first £30,000 of redundancy pay. That includes any enhanced redundancy pay and non-cash benefits. Tax and national insurance deductions depend on the employee’s termination payment. If any of the pay is from earnings, it will be taxed.

What if I don’t pay up?

If you don’t make your redundancy pay, or the sum is inadequate, an employee can take you to the employment tribunal. A claim must be made by the employee within three months of the redundancy. Even if the employee doesn’t claim on time, a tribunal still has six months to decide whether they should get a payment.

Perhaps you’re reluctant to pay redundancy as it’ll knock you into the red. If your business is at risk of becoming insolvent because of redundancy pay, contact the Insolvency Service’s Redundancy Payment Service. Email them on [email protected].

Mistakes to avoid

It’s easy to make mistakes during the redundancy process. Keep clear of these oft-made errors.

Trying to disguise something else as redundancy. “One of the biggest mistakes employers make is assuming that if they cannot afford redundancy pay, they can simply dismiss staff for another reason,” said Bobby Ahmed, managing director and solicitor at Neathouse Partners. If it’s really a redundancy, trying to label it as poor performance or misconduct can lead to costly unfair dismissal claims.

Forgetting the process beyond redundancy pay. Another common error is focusing only on statutory redundancy pay and overlooking the wider process, Ahmed told Small Business. Employees with at least two years’ continuous service may be entitled to statutory redundancy pay, but employers also need to carry out a fair consultation, use objective selection criteria where there is a choice of employees, consider suitable alternative roles and give the correct notice. “Getting the process wrong can create far greater financial exposure than the redundancy payment itself,” he added.

Overlooking key legal terms. Small businesses should also check employment contracts carefully. Some contracts provide enhanced redundancy terms that go beyond the statutory minimum, and failing to honour those promises can lead to breach of contract claims.

Aleesha Amjad, employment senior associate at Knights, implores small businesses to keep track. “To ensure best practice, keep clear records of how redundancy payments have been calculated with a transparent audit trail necessary in helping to address any employee queries whilst reducing the risk of any challenges.

“If there are any unusual circumstances, seek the necessary advice, as employees with fluctuating hours, variable pay, long service or complex contract arrangements can make any calculations more difficult.”

Neglecting certain employees. Employers may overlook the requirement to consult with employees on long-term absence, including those on maternity or sick leave, leading to discrimination claims. “Special rules apply to these employees, and they should be considered carefully,” Annie Gray, employment partner at Schofield Sweeney, told Small Business.

Avoidance. “In some cases directors delay making a decision out of fear but unfortunately this can often deepen losses,” said Monks. “It’s important to seek professional help at the first sign of difficulty. This ensures business owners can make informed decisions which protect them legally and ensure members of staff are treated as fairly as possible.”

Planning ahead

The best advice is to plan ahead rather than wait until cashflow becomes critical, said Ahmed. You must be demonstrating that the redundancy decision was genuine, fair and properly documented. “Spending a little time taking advice before starting the process is usually much cheaper than defending a tribunal claim later,” he added.

Offering employees the right to appeal redundancy decisions is also a smart idea. Monks points out that it’s good practice and can remedy any earlier mistakes in the procedure.

Read more

Settlement agreements in the redundancy process – Solicitor Ethan Diver explains the circumstances in which settlement agreements are appropriate during the redundancy process

How should insolvent SMEs handle redundancy? What are your obligations to your staff if you’ve gone insolvent? How should insolvent SMEs handle redundancy?

Zero hours contract redundancy – How do you go about redundancy for somebody who’s on a zero hours contract?