Employment Law
Statutory Redundancy: What You Need To Know
Author
Barbora Korcova
Author
Barbora Korcova
November 26, 2024
Employment Law
In the UK, redundancy is a form of dismissal of an employee by an employer on the basis that the employee’s role is no longer needed.
Employers may make an employee “redundant” due to changes in its business, such as closure, downsizing or restructuring. Accordingly, an employer may not always be entitled to dismiss employees on the basis of redundancy.
This blog post will explain what redundancy is, the process of redundancy payments and the statutory rights that employees are entitled to, including the exceptions where statutory redundancy payments may not apply.
What is redundancy?
Redundancy is defined by the Employment Rights Act 1996 (the Act).
A dismissed employee should be considered dismissed by reason of redundancy if the dismissal is wholly or mainly attributable to:
(a) the fact that his employer has ceased or intends to cease:
(i)to carry on the business for the purposes of which the employee was employed by him; or
(ii)to carry on that business in the place where the employee was so employed;
or
(b)the fact that the requirements of that business
(i) for employees to carry out work of a particular kind; or
(ii)for employees to carry out work of a particular kind in the place where the employee was employed by the employer,
have ceased or diminished or are expected to cease or diminish.
A redundancy dismissal must be genuine, meaning the employer has no other reasonable alternative to ending the employee’s contract for the reasons described above.
A “genuine” reason could include situations such as where a business is not attracting enough customers, new technologies are introduced that replace the employee’s functions, the business is reorganising or targeting new sectors in which the existing employee has no experience and so on.
If a redundancy is genuine, then that would constitute ‘fair’ dismissal for the purposes of the Act and the employee would not be able to claim against the employer for ‘unfair’ dismissal.
An employee cannot be made redundant because of age, gender, disability or pregnancy. Dismissal for these reasons could be unfair dismissal.
Similarly, if an employee is underperforming or is simply difficult to get on with, then the employer would not be able to just make them redundant. Other procedures under the Act (and the employee’s contract of employment) would have to be followed.
That said, it is potentially lawful to rely on an employee’s individual characteristics when considering whether to make them redundant as opposed to other employees that are also being considered for redundancy. Individual characteristics must be used with caution, as an employer runs the risk of an unfair dismissal if the characteristics themselves are unfair. For example, an employer may choose to make redundant the employees with the shortest amount of time with the company first. This could have unintended effects, such as targeting one specific group of people hired at the same time over others.
In addition, employers must follow correct procedure when making employees redundant, including consulting with employees and, where applicable, considering alternatives to redundancy (such as retraining or redeployment).
Redundancy payments
When an employee is made redundant, they may be entitled to the redundancy pay. This can be made up of:
- Statutory redundancy pay – the minimum amount of compensation set by the government
- Contractual redundancy pay – some employers may offer a more generous redundancy package than the statutory minimum
Statutory redundancy payments
Under UK employment law, employees who have been continuously employed for at least two years are entitled to statutory redundancy pay.
Statutory redundancy is calculated based on the employee’s age, length of service and weekly gross salary (subject to a maximum limit). It is important to note that redundancy pay is separate from other payments such as notice pay, holiday pay, or pay in lieu of notice, which an employee may also be entitled to.
Specifically, the amount of redundancy is calculated based on the following:
- Half a week’s salary for each full year the employee was under the age of 22
- One week’s salary for each full year the employee was aged 22 or older but under 41
- One and half week’s salary for each full year the employee was aged 41 and older
The weekly salary used to calculate redundancy pay is capped at £700 per week (for employees made redundant on or after 6 April 2024), regardless of the employee’s actual earnings. The maximum number of years for which an employee can be paid statutory redundancy is capped at 20 years.
This means that the maximum amount that an individual could receive is £21,000 (one and a half week’s salary at the £700 maximum multiplied by 20). Most individuals would receive less. For example:
An employee aged 45 with 10 years of continuous employment and a weekly salary of £600 would receive:
- 3 years of redundancy pay at one a half weeks’ salary per year (for being over 41 years old) = 3 x 1.5 x £600 = £2,700
- 7 years of redundancy pay at one week’s salary per year (for being between 22 and 41 years old) = 7 x 1 x £600 = £4,200
- Total statutory redundancy pay: £6,900
Redundancy pay is tax-free up to £30,000. This tax free benefit includes both statutory redundancy pay and any additional redundancy pay given to you by your employer.
Exceptions
While most employees are entitled to statutory redundancy pay, there are several important exceptions. An employee will NOT be entitled to redundancy pay in the following situations:
- Less than two years of continuous employment: employees with less than two years of service are not entitled to statutory redundancy pay. However, they may still be entitled to other payments, such as payment in lieu of notice or holiday pay (as should provided for in their contract or otherwise set out in law).
- Voluntary redundancy: if an employee voluntarily agrees to leave the company as part of a redundancy program, they may not be entitled to statutory redundancy pay unless the employer confirms that they are being dismissed as a result of redundancy (as opposed to the employee merely deciding to resign).
- Self-employed individuals: workers and self-employed contractors do not have the right to redundancy pay, as redundancy provisions apply only to employees.
- Dismissal due to retirement: if an employee is retired by their employer, this does not count as redundancy and statutory redundancy pay will not apply. Dismissal due to reaching retirement age was outlawed in 2011, but it can still apply in certain situations (for example, the Judicial Pensions and Retirement Act 1993 states that most judges must retire at age 75).
- Fixed-term contracts: employees on fixed-term contracts who are not offered a permanent position when their contract ends do not qualify for redundancy payments unless their contract is terminated earlier than expected due to a redundancy situation.
- Employees who reject an offer of suitable alternative employment: if an employee is offered alternative employment that is deemed suitable and they refuse it, they may lose their entitlement to redundancy pay.
Conclusion
Redundancy can be a challenging and stressful experience for employees, but UK law ensures that employees are compensated through statutory redundancy pay if they meet the eligibility criteria. While most employees with at least two years of service are entitled to redundancy pay, it is important to understand the exceptions and specific conditions that apply.
Employers must ensure they follow the correct legal procedures and employees should seek professional advice if they believe they have been unfairly dismissed or their redundancy rights have not been properly followed.
If you are an employer that wants to ensure it follows correct procedures or an employee that needs advice regarding a redundancy situation, please do not hesitate to contact us here and our employment law experts will be more than happy to help.
