Redundancy is a type of dismissal used when a role is no longer needed or no longer exists in an organisation. It can occur as companies restructure or reduce their workforce, or when technology solves the tasks to perform. But regardless of your reasons, companies must give redundancy pay when dismissing an employee.
Even when redundancy is not related to an employee’s performance, it’s important to make sure the reason for dismissal is acceptable and fair. Otherwise, your company could face legal claims relating to unfair dismissal.
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In this post, we will discuss what’s considered a fair dismissal, and how it differs from severance pay. In addition, we provide guidelines so you can calculate it and identify whether your employees are entitled or not.
What Is Statutory Redundancy Pay?
Redundancy occurs when organisations no longer need to cover a particular role.
The UK Law states that employers have to pay their employees a basic amount when they make them redundant. This minimum is called statutory redundancy pay. But you can choose to offer more than the minimum statutory redundancy pay if this fits with your company’s culture.
Who Is Not Entitled to Redundancy Pay?
Redundancy pay is a right for employees who worked at least 2 years in the company. It is not intended to compensate employees who have been fired due to their misconduct, but to help those who lose their jobs as part of a company restructure or because their role is no longer necessary. Moreover, it doesn’t apply to employees who were forced to terminate their contracts early. In such cases, you need to provide severance pay.
Anyone who hasn’t worked long enough to qualify for statutory redundancy pay won’t be entitled to it. However, if you’re over 18 and have worked continuously for your employer for at least one month and less than two years, you might be eligible to claim a redundancy payment under the Employment Rights Act 1996.
Certain employees aren’t entitled to receive a redundancy payout, including staff members who worked for the company for less than 2 years and employees who accepted a suitable alternative position.
How Much Is Statutory Redundancy Pay?
The minimum amount of redundancy pay will vary according to your employees’ length of service, weekly pay, and age. Still, for those employees who become redundant after April 6 2021, the weekly copped is £544, and the maximum statutory redundancy pay you must pay is £16,320.
The government states that entitled employees have the right to receive:
- Half a week’s pay for each full year the employee was under 22.
- One week’s pay for each full year the employee was between 22 and 41.
- One and half week’s pay for each full year the employee was 41 or older.
A Guide to Statutory Redundancy Pay [Infographic]
How to Calculate Your Employees’ Redundancy Pay
Redundancy pay is calculated by multiplying the number of weeks of service by the statutory weekly amount.
You can calculate redundancy pay by using the Government online redundancy calculator.
Making Staff Redundant
Dismissal through redundancy is a potentially fair reason for dismissal. But an employer must demonstrate that it had a genuine need to reduce its workforce and that the dismissals were carried out fairly.
Before getting to the point of dismissing an employee, you must consider changing working hours and offering a different role inside the company.
Employers should also ensure that the affected staff members are involved in a consultation process and that a legal notice of termination is given. An employee who is asked to retire or resign for redundancy has the right to a written statement that sets out the amount of payment and how you worked out redundancy pay.
Voluntary Redundancy Pay
Voluntary redundancy pay is meant to compensate employees for loss of job security. It is a sum of money that the employer pays to the employee in exchange for leaving the company. Many companies use this payment as an incentive for employees to leave rather than fire them.
How Does It Work?
The company decides on a voluntary redundancy package, which it offers to employees who are willing to leave. The aim here is usually to reduce staff, avoiding compulsory redundancies, which are more expensive and riskier for the company.
Some companies plan a fixed number of positions that will be made redundant within a certain period (e.g., two months). The employer then offers voluntary redundancy packages to those who wish to leave and presents them with an option: either accept the voluntary redundancy package or risk being made compulsorily redundant later on.
Unfair and Constructive Dismissal
Unfair dismissals occur when an employee is fired from their job in a way that’s wrong, unjust or unreasonable. The employer must have a fair reason for the dismissal.
If your employees believe they have been unfairly dismissed from work, you may receive a claim. This process is called a constructive dismissal claim, and it’s different from firing for misconduct or a disciplinary reason.
The five potentially fair reasons for dismissing an employee are:
- Illegality; or
- Some other reason that directly affects your company and you can prove.
For a dismissal to be considered unfair, it must first be a dismissal as defined by the Fair Work Act 2009, and secondly satisfy one of the following criteria:
- The dismissal was harsh, unjust, or discriminatory.
- The person had not an opportunity to respond to the reasons given by the employer for dismissal.
- There was not a valid reason based on the need for the employer to restructure its workforce or business operations.
- There was not a “genuine redundancy”. When a person’s job no longer exists due to changes in workplace operation or technology, this is considered a legitimate redundancy.
Offering a Suitable Alternative Employment
If you need to dismiss an employee purely because they are redundant, you must also consider whether it may be possible to offer an alternative role inside your organisation.
When an employer refuses to offer an employee suitable alternative employment and dismisses them anyway, the dismissal can be found unfair, and the employee will be able to claim compensation for unfair dismissal (subject to qualifying criteria) even though they were in fact redundant.
Managing dismissal properly can be a challenge. Not only because you need to ensure law compliance, but also because changing the workforce dynamics can impact performance and productivity. To help you calculate redundancy pay and manage communication channels with ease, we built an all-in-one HR system you can use to simplify the process.