Out-Law / Your Daily Need-To-Know

What are employees entitled to receive on redundancy?

Out-Law Guide | 10 Aug 2011 | 12:00 pm | 1 min. read

This guide was last updated in August 2011.

An employee who is dismissed as redundant is entitled to receive:

  • a statutory redundancy payment (SRP), provided he has worked for the same employer for two years or more;
  • notice of dismissal – the statutory minimum notice period or the contractual notice period, if greater – or a payment in lieu of notice if he is not required to work during his notice period; and
  • any enhanced redundancy payment provided for in the contract of employment, in a collective agreement with a trade union or otherwise at the discretion of the employer.

Statutory redundancy pay

SRP is calculated as follows (subject to a maximum 20 years' service):

  • 1.5 weeks' pay for each complete year of service after reaching the age of 41;
  • 1 week's pay for each complete year of service between the ages of 22 and 40 inclusive;
  • 0.5 week's pay for each complete year of service under the age of 22.

The week's pay is subject to a statutory minimum, which is reviewed annually. There is a useful calculator on the Directgov website for working out redundancy payments.

If the employer is insolvent and cannot pay the redundancy payment then the employee is entitled to claim that amount, as well as certain other unpaid sums, from the state out of the National Insurance Fund.

Contractual redundancy pay

An employer could be contractually obliged to make an additional redundancy payment. This obligation could arise from the written contract of employment, a collective agreement with a trade union, a letter given to employees (perhaps as a loyalty incentive in uncertain times) or as an implied contractual term through custom and practice – however, this is much more difficult for employees to establish than is often claimed.

There may be a policy of paying enhanced redundancy payments which is not contractual.

'Ex gratia' or non-contractual redundancy pay

An employer may choose to pay an enhanced redundancy package for a variety of reasons:

  • preserving the goodwill of both departing and remaining employees;
  • matching market rates or industry norms for such payment;
  • as an incentive for departing employees to sign a compromise agreement.

When fixing or agreeing an enhanced package, regard should be had to other relevant laws including discrimination laws - the age discrimination law in particular.

Tax on redundancy payments

Statutory, contractual and non-contractual redundancy payments are exempt from tax up to a limit of £30,000. However, any payment in lieu of contractual sums earned during employment, such as bonuses or accrued holiday pay, will be subject to tax and National Insurance Contributions (NICs). Likewise, if there is a provision in the employment contract which allows the employer to make a payment in lieu of notice the payment in lieu will normally be subject to tax and NICs.