What is statutory redundancy pay?

Statutory vs. contractual redundancy pay

Contractual redundancy is the monetary compensation offered to an employee who has been made redundant, exceeding the statutory minimum. Employees can familiarize themselves with the availability and terms of contractual redundancy in the employer's redundancy policies or as outlined in their contract of employment. 

Enhanced redundancy pay is another term for contractual redundancy payments. These payments are usually part of companies' voluntary redundancy packages, where employees agree to leave their roles for better terms than statutory redundancy.

Statutory redundancy rules

Employers must adhere to redundancy rules to ensure lawful and fair redundancy pay and avoid redundancy-related disputes.

Eligibility for statutory redundancy pay

Length of service and type of employment determine an employee's entitlement to statutory redundancy pay. Additionally, the industry and service provided may influence whether they qualify for redundancy pay. 

Who is eligible for redundancy pay?

One can receive redundancy pay if they:

• Are classified as an employee (not a worker or contractor)
• Have been made redundant after at least two consecutive years of continuous employment
• Are being made redundant due to legitimate reasons, such as a reduction in the workforce or if an employer has gone out of business

Employees on fixed-term contracts

Employees on fixed-term contracts can be made redundant if, for instance, their role is no longer needed for the company's functionality. That classifies as genuine redundancy. If reasons for making these employees redundant are justified, they may be eligible for redundancy pay if:

• They had a fixed-term contract lasting two or more years
• They had multiple shorter consecutive fixed-term agreements that, when combined, total at least two years of continuous service

Who can't receive a redundancy pay?

The list of jobs or vocations where employees won't receive statutory redundancy pay includes:

• Police officers
• The members of the armed forces
• Holders of public office
• Crown servants
• Domestic staff (if they are immediate family members of an employer)
• Self-employed individuals
• Parliamentary staff
• Employees of foreign governments
• Any employee who has not been working for at least two continuous years for an employer before being made redundant

Losing the right to statutory redundancy pay 

Even if an employee is eligible for redundancy pay, they can lose the right to it in the following situations:

• They are dismissed for gross misconduct before the redundancy takes effect
• They unreasonably turn down a suitable alternative job offered by an employer
• They decide to leave for another job right before the notice period ends without justifiable reasons

Other rules 

These rules are not directly related to statutory payment. However, adhering to some can prevent employees from losing the right to a statutory redundancy payment.

• Consultation requirements: Employers should consult with their team regarding their redundancy situation, particularly in the cases of collective lay-offs.
• Notice periods for redundancy: Employers are required to provide at least the statutory notice period for redundancy to employees who have been made redundant based on the length of their service.
• Alternative employment offers: Employers should provide suitable job alternatives to employees who will be made redundant.
• Trial periods for new roles: If an employee accepts the alternative role, they might be allowed a trial period to adjust to new conditions
• Time off to look for alternative employment: Employers may be eligible for time off during the redundancy notice period to seek new jobs and attend interviews.

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How to calculate statutory redundancy pay 

Redundancy pay rates depend on various factors. 

Length of service

Length of service is one factor determining the amount of redundancy pay. Employers will only consider the last 20 years of continuous service, starting from the end of an employee's redundancy notice, also known as the "relevant date."

For instance, if Josh has worked for a company for the last 29 years before being made redundant and his redundancy notice is due on 31 October 2024, his employer will calculate his redundancy pay from 31 October 2024 backward for the last 20 years. 

If Sarah has worked for the last 10 years before being made redundant, her employer will count all those 10 years to calculate Sarah's redundancy pay.

20 years is the maximum length of service that employers consider when calculating redundancy payments. 

Determine an employee's weekly pay

To calculate an employee's weekly pay (if they work regular hours), an employer should use the 12-week period. That means summing up gross earnings from the past 12 weeks and dividing that total by 12 to determine the average. 

Calculating average weekly pay is essential for enforcing employment rights outlined in employment contracts, including:

• Holiday pay
• Pay during the notice period
• Guarantee pay for work
• Compensation awarded by the Employment Tribunal
• Redundancy pay

An employer also takes into consideration an employee's age to determine the portion of the weekly pay they are entitled to after being made redundant: 

• Employees under 22 at the time of redundancy are entitled to half a week's pay for each full year of employment.
• Employees between 22 and 40 are entitled to 1 week's payment for each full year they have been in the company.
• Employees aged 41 and over are entitled to one and a half week's pay for each full year of service.

As of 6 April 2024, the maximum weekly pay used to calculate redundancy is £700, and the maximum statutory redundancy pay an employee can receive is capped at 30 weeks' pay, meaning the maximum payout is  £21,000 (30 x £700), and is tax-free. 

Employers (or employees themselves) can use the gov.uk redundancy pay calculator to easily determine the compensation employees are entitled to after redundancy

When can employees expect the payment?

Employers must specify the payment terms, meaning how and when they will pay redundancy. Generally, they must pay it when an employee receives their final pay. If that’s impossible, both parties can agree on alternative payment dynamics in writing. 

Pay in lieu of notice

Employers are required to give an employee who has been made redundant one week's notice for every full year of service, up to a maximum of 12 weeks.

Many employees may continue to work during the notice period unless an employer offers pay in lieu of notice (PILON), compensation for ending the employment early.

While PILON payments are subject to Income Tax and National Insurance deductions, whether part of an employment contract or not, any additional termination payments up to £30,000 are tax-exempt.

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What if an employer doesn't pay redundancy?

If an employer cannot pay redundancy, employees can contact the employer to inform them about the issue. They should ask for reasons for the delay and when they can expect the payment. If an employer doesn't stick to the agreed terms, an employee can file a claim with the Employment Tribunal. 

Suppose an employer becomes insolvent. In that case, employees can claim redundancy payment from the RPS (Redundancy Payment Services), a UK Government Insolvency Service responsible for processing and paying statutory redundancy pay to employees whose employers have become insolvent because of liquidation or bankruptcy. 

Finally, employees and employers can turn to the Advisory, Conciliation, and Arbitration Service (ACAS), an independent organization that helps management and their workforce understand their workplace rights and responsibilities, including those related to redundancy pay. 

FAQs about redundancy payment

What if an employee believes a redundancy pay is unfair?

Employees who believe their redundancy was unfair can file a claim with the Employment Tribunal for unlawful dismissal. If the Tribunal finds in favor of an employee, they will require the employer to pay adequate compensation to the employee. Otherwise, an employer may risk legal costs and other penalties. 

How does redundancy pay affect pensions? 

Statutory redundancy pay doesn't directly affect employees' pension contributions. However, redundancy payments affect one's financial stability, which could disrupt their ability to contribute to their retirement account.

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