How does redundancy work?

Employer making an employee redundant | How does redundancy work - IRIS
By Anthony Wolny | 19th April 2021 | 10 min read

Sadly, one of the repercussions of the COVID-19 pandemic has been an increase in redundancy as businesses across the UK have been forced to make some incredibly difficult decisions.

But, with a topic as delicate as making an employee redundant, employers need to ensure they’re conducting it with great care.

So, do you know exactly how you need to manage redundancy and the subsequent payments?

To help businesses, employers, and HR professionals across the country, we’ve covered how redundancy works in great detail so you can ensure compliant and correct processes.

Please Note - This guide is for informational purposes only and if you are seeking legal advice you should consult a solicitor or HR Advisor.

As this is quite a comprehensive article, you can use the menu below to quickly jump to a particular area of interest in this blog if you're looking for an answer to a specific question.

But before we get started, let's find out what redundancy is.

What is redundancy?

In essence, redundancy is when an employer formally dismisses an employee from their job, typically due to circumstances such as a need to reduce their workforce or the business is closing.

Redundancy should not be confused with firing someone, in which an employee is asked to leave due to misconduct, for example, stealing or fighting at work.

For an employee to qualify for redundancy, they must be employed for a minimum of two years.

Conducting redundancy correctly is crucial as non-compliance can result in a formal complaint, claims of unfair dismissal, or an employment tribunal.

[Voluntary redundancy is also an option in which employers offer a package – usually consisting of a financial incentive – to employees in return for them terminating their contract. We’ll cover this type of redundancy further in the next section.]

What is voluntary redundancy?

As briefly mentioned earlier, as well as redundancy there is also voluntary redundancy. Voluntary redundancy is when employers offer an incentive for workers to terminate their employment voluntarily.

How does voluntary redundancy work?

Typically, voluntary redundancy is offered in an attempt to reduce costs without instigating compulsory redundancy, which can often shake morale and engagement. It can be seen as a less negative approach and allows for those who would rather be made redundant to opt for it as opposed to making somebody redundant who would prefer to keep their job.

As an employer, it’s also important to remember that it’s your decision as to which employees’ applications you take.

Just because an employee applies for voluntary redundancy does not mean you need to accept.

For more information, read our in-depth article - What is voluntary redundancy?

Who pays redundancy pay?

When it comes to paying redundancy pay, it’s an employer’s legal obligation to provide their employees with redundancy pay.

If the business goes into liquidation, then all the assets will be sold, and this money will be used to pay outstanding debts such as redundancy pay.

Since the COVID-19 pandemic, a lot of questions have arisen regarding furlough and redundancy pay. If a furloughed employee is made redundant, they’re still entitled to all the same rights as a working employee, including redundancy pay.

What is a redundancy package?

A standard redundancy package can mean employees are entitled to quite a few different pay-outs.

To start, you have the statutory redundancy pay, which is calculated based on age, length of service and weekly pay.

Some employers also offer contractual redundancy pay, which is more than the statutory redundancy pay.

Finally, you’ll need to pay employees for their notice period, and if they’re not working their notice period, a payment in lieu of notice must be provided for the time they should have had.

Is redundancy pay taxable?

Redundancy pay – including any severance pay under £30,000 – is not taxable. However, tax and National Insurance contributions will need to be deducted from any wages or holiday pay that is owed.

Who is not entitled to redundancy pay?

If an employee has not been with the business for two years, they’re not entitled to statutory redundancy pay.

Additionally, if you offer to keep an employee on and they reject, or you propose suitable alternative work, and they refuse without good reason, then they lose their right to statutory redundancy pay.

Employees are also not entitled to statutory redundancy pay if they fall into one or more of the following categories:

  • A domestic servant who is a member of the employer’s immediate family
  • Apprentices who aren’t employees at the end of their training
  • Former registered dock workers or share fisherman
  • Crown servants
  • Members of the armed forces or police service

Are you still entitled to redundancy pay after the retirement age?

With more people working past the retirement age due to financial circumstances, the question often arises whether they are still entitled to redundancy pay after retirement age.

The answer is yes – those over the retirement age are still entitled to redundancy pay.

However, the maximum amount of statutory pay they could receive is capped up to 20 years of service.

How much is redundancy pay?

Statutory redundancy pay is based on the average an employee earns over a 12 week period before the day they get their redundancy notice.

[For employees that are earning less due to furlough, their average pay is based on what they would be earning normally.]

Once the average is determined, the employee’s age and work history are then used to calculate how much they get.

Employees receive (based on a minimum of 2 years service):

  • Half a week’s pay for each full year at the business under the age of 22
  • One week’s pay for each full year at the business between the ages of 22 and 41
  • One and a half week’s pay for each full year at the business over the age of 41

There is no minimum statutory redundancy pay, but as of 6th April 2021, the weekly pay is capped at £544, and the maximum they can get is £16,320. You can figure out an employee’s redundancy pay on this handy calculator.

How much notice is required for redundancy?

The statutory notice period required differs quite a lot, depending on how long employees have been at the business:

  • At least one week’s notice for those who have been employed between one month and two years
  • One week’s notice for each year if they’ve been employed between two and 12 years
  • 12 weeks’ notice if employed for 12 years or more

It’s worth noting that the above is the minimum. However, employers can offer a longer notice period as a contractual obligation either as a perk or to safeguard leadership roles, but no less can be given.

When does the redundancy notice period start?

The redundancy notice period starts when an employer officially makes an employee redundant, providing them with a finishing date.

Do employees have to work their redundancy notice period?

Unless otherwise specified in their contract, employees are typically required to work their redundancy notice period.

However, as an employer, you can decide that employees don’t have to work their notice period, but you will still need to pay them for it. If an employee refuses to work their redundancy notice period, they’re in breach of their contract, and the employer will not be required to pay notice.

How to make an employee redundant?

Making an employee redundant is never easy and is difficult for all involved. It’s important to not only get it right but to handle it carefully and respectfully.

How to make an employee redundant | How does redundancy work - IRIS

When looking to start the redundancy process, it can typically be broken down into four steps:

  1. Firstly, see if you can avoid compulsory redundancies by instead laying off contractors, reducing overtime, filling vacancies with existing employees or by offering voluntary redundancies.
  2. Identify which employees you’ll make redundant. The Government has outlined that you need to make a fair selection, considering skills, performance, attendance, and disciplinary records.
  3. Hold a consultation with employees covering why they’re being made redundant and if there are any alternatives. If 20 or more employees are being made redundant at the same time, the consultation must abide by the collective redundancy rules.
  4. Provide redundant employees with a notice period. The length of time required for notice periods depends on how long the employee has worked at the company.

Now we know how to make an employee redundant, let's look at some other areas of redundancy.

Can any employee be made redundant?

When selecting employees for redundancy, the decision must be made fairly. The Government has outlined the following criteria as automatically unfair, so you must not make an employee redundant based on these reasons:

  • Pay and working hours
  • Pregnancy and all things relating to maternity
  • Age
  • Disability
  • Gender reassignment
  • Marriage and civil partnership
  • Race
  • Religion/belief
  • Sex and sexual orientation
  • Family, including parental and adoption leave
  • Time off for dependants
  • Being part-time/fixed-term
  • Acting as an employee representative
  • Joining/not joining a trade union
  • Acting as a trade union representative

Employees can be made redundant while on furlough, but not if their job still exists.

While the above states that you can’t be made redundant for being pregnant or on maternity leave, those employees can still face redundancy if there is a genuine reason to make the role redundant. Although, suitable alternative work must be offered if it’s available.

Apprentices can’t be made redundant, but they can be dismissed by mutual consent or for gross misconduct.

For those who are on sick leave, unless the employer can prove there is a genuine reason for redundancy and the correct procedures have been followed, they can’t be made redundant.

Can you put someone on garden leave during redundancy?

Garden leave would normally be a condition in an employee’s contract, so if that’s the case, yes. You can place other employees on garden leave even if it’s not contractual, but they need to agree to it – you just need to write to them.

How soon after being made redundant can an employee start a new job?

Normally an employee needs to finish their notice period before starting a new job. But it can be arranged with an employer to cut that notice period short, enabling them to start earlier.

How to deal with redundancy?

Redundancy can be a difficult prospect to deal with, but the mental health charity, Mind, provided a few useful tips for employees facing redundancy:

  1. Know your rights and ensure the redundancy has been done fairly
  2. Take stock of how you’re feeling
  3. Manage your money
  4. Accept what you can’t control and focus your energy on things you can
  5. Keep busy, or take some time off
female employee dealing with redundancy | How does redundancy work - IRIS

If you are an employer or member of the HR team who is having to make an employee redundant, it may be worth sharing these tips with them.

Can you appeal redundancy?

If an employee thinks there isn’t a fair reason for their dismissal, doesn’t believe there is a genuine reason or suspects it’s due to discrimination, then they can appeal the redundancy.

Claims can be made via an employment tribunal.

Can redundancy be withdrawn?

While redundancy is legally binding, employers can withdraw it if the employee is still in their notice period, but express consent is needed from both parties.

How soon can a job be advertised after redundancy?

There is no strict time that an employer must wait before recruiting for a similar role that was just made redundant. However, to avoid the risk of an unfair dismissal claim, you need to show that:

  • The original redundancy was genuine and not simply getting rid of an employee
  • The redundancy was unavoidable at the time
  • The financial prospects of the business have changed to such an extent that you need to recruit new workers

How can IRIS help?

As we've learned here, getting redundancy right is undoubtedly difficult, even if you’re an expert.

Individual circumstances and changing legislation make it a challenge to keep on top of, which is why we offer a UK HR Advice and Support Service for businesses of all types.

Alternatively, for those looking to streamline their HR, including the process required for compliant redundancy, IRIS HR Pro, our cloud HR software, can help.