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Do you know how to calculate redundancy pay accurately? – We can help

Redundancy may be a growing consideration for many businesses during this difficult period, especially as the Coronavirus Job Retention Scheme (CJRS) draws nearer to closing at the end of April 2021.

Once you have conducted the necessary consultations and agreed a redundancy pool with your staff you will need to calculate redundancy pay for those affected.

You must pay redundancy to employees who have an employment contract and worked for the business for two full years.

However, the following types of work do not qualify for redundancy pay:

  • armed forces
  • crown servants
  • domestic service, where they are a member of the employer’s immediate family
  • police
  • apprentices who are not employees at the end of their training.

You must pay at least the statutory (legal minimum) amount to your employees, but how much redundancy pay each employee receives will depend on:

  • their age
  • how long they’ve worked for you (redundancy pay is capped at 20 years of service)
  • their weekly earnings before tax (gross weekly pay).

Working backwards from the day of their redundancy notice, you must pay:

  • 5 week’s pay for each full year they were 41 or older, plus
  • 1 week’s pay for each full year they were 22 or older, but under 41, plus
  • half a week’s pay for each full year they were under 22
  • The maximum for a week’s pay is £538. The maximum total amount of statutory redundancy pay is £16,140.

However, you should check your employment contracts as you might need to pay more than the statutory amount.

You can also choose to pay higher amounts if you want to encourage voluntary redundancies.

Where an employee’s pay changes from week to week, you will need to calculate the average weekly pay for the previous 12 weeks from the date you make them redundant.

If they did not work for a whole week during that time – for example, they were on holiday or sick – replace it with an earlier week.

Your employee’s weekly pay should also include:

  • regular overtime, if the employee’s contract says they must get paid for it
  • any bonuses or commission.

You must share in writing with employees how you’ve calculated redundancy payments.

The impact of furlough

With effect from 31 July 2020, any furloughed worker that loses their job is eligible for redundancy pay based on their normal wage rather than the reduced rate paid under the Coronavirus Job Retention Scheme (CJRS).

New legislation ensures that workers get the full rate of redundancy pay after it emerged that a small number of employers had taken advantage of the Coronavirus crisis to pay employees the same rate they received under the CJRS for redundancies.

The new rules on redundancy also apply to statutory notice pay, which covers the period before a worker’s employment ends. This paid notice period typically varies from one to 12 weeks’ depending on an employee’s length of service.

Under the new legislation, notice pay must be based on an employee’s normal wages rather than the lower wages they may have been paid under the CJRS.

The legislation also ensures that basic awards for unfair dismissal cases are based on full pay rather than the reduced wages under the furlough scheme as well.

To find out how we can help with calculating redundancy pay and any liabilities that may arise from it, please speak to our payroll team.

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