Small business guide to redundancy pay
What is redundancy?
Redundancy is when you, as an employer, reduce your workforce because jobs are no longer needed.
As businesses restructure and evolve, it’s an unfortunate fact that sometimes roles are no longer required – either due to a change in your business’s emphasis or as a cost-cutting measure. In this instance, you may have to consider making employees redundant.
What are legitimate causes for redundancy?
Causes for redundancy can include:
- Staff numbers need to be reduced to cut costs
- New technology has removed the need for certain employees
- The business structure has changed, so some jobs are no longer required
- The business is relocating or closing down
- The business has been sold to another company
To ensure you’re correctly handling redundancy, you need to follow these four steps:
- Consider all possible alternatives, including retraining and cutting costs in other areas
- Track the number of redundancies, as more than 20 require a Collective Consultation
- Follow the advised procedures (as covered in our free Guide to Small Business Employment Law)
- Ensure you offer redundancy payments
Who is entitled to redundancy pay?
Any employee who has continuously worked for you for at least 2 years is legally entitled to redundancy pay. Employees who’ve had a fixed-term contract of 2 years or more are also entitled to redundancy pay if their contract expires due to redundancy.
If your employee doesn’t meet these criteria, then they won’t be entitled to redundancy pay. Instead they’ll be entitled to notice period pay and holiday pay they are owed.
What is statutory redundancy pay?
If you make an employee redundant, then you legally have to pay them the following amounts:
- Half a week’s pay for each full year of employment in which the employee is under the age of 22
- 1 week’s full pay for each full year of employment in which the employee is aged between 22 and 41
- 1.5 week’s full pay for each full year of employment in which the employee is aged over 41
The maximum number of years that can be taken into account is 20.
It is your responsibility as an employer to make sure your employees automatically receive redundancy pay in the same way they would wages. If you don’t, they can take you to an Employment Tribunal.
Contractual redundancy pay
Whether your employees are entitled to extra redundancy pay will be covered in their employment contract and as part of the benefits package. This will be issued to employees in addition to their full statutory pay.
Managing redundancy pay in software
As incorrectly handled redundancy can result in Employment Tribunals. It’s important that you remain compliant, and KashFlow’s Payroll Software is designed to help keep redundancy payments by allowing you to create a payslip item for redundancy, which will be properly calculated and tax and National Insurance free.
Are part-time employees entitled to redundancy pay?
Provided they have worked 2 years’ continuous service, part-time employees are also entitled to redundancy pay. This is because there is no minimum hours-worked requirement for entitlement to redundancy pay.
How much they will receive will depend on the employee’s weekly pay, alongside other factors. For reference, redundancy pay under £30,000 isn’t taxable.
Calculating redundancy pay
Redundancy pay is calculated using the length of time an employee has worked for you, the age they were when they were made redundant, and the amount they earned per week (this is where part-time employees stand to receive a smaller redundancy payout).
You can use the government’s Redundancy Pay Calculator to work out how much you’ll owe your employees.
Redundancy for casual workers
If your employee is a casual worker, then it may be more difficult for them to establish the required length of service. If they do meet the required length of service (2 continuous years) then they’ll be entitled to redundancy pay. In these instances, you’re best seeking professional advice.
Please note that while this blog intends to offer an insight for small businesses, it does not constitute legal advice.