Types of Redundancy Pay
Redundancy is defined in Section 139(1) ERA 1996 as when there is an imminent or current closure of a business or workplace, and reductionin the need for employees. The main right that you have is the right to a payment for loss of employment. Section 135 ERA 1996 gives you the right to a redundancy payment if you are made redundant, laid off or kept on short time.
There are two types of redundancy pay;
- Statutory redundancy pay
- Contractual redundancy pay
Statutory Redundancy Pay
Statutory redundancy pay is the minimum that your employer must pay you under the law. Under S155 of the Employment Rights Act 1996, you must have a minimum of 2 years continuous service as an employee to qualify for a statutory redundancy payment. You are not entitled to statutory redundancy pay if you resign from your job. If you volunteer for redundancy you are entitled to payment. This is also the case if you leave before the redundancy date by agreement.
Employee’s on a fixed-term contract that has been agreed, renewed or extended since 1 October 2002 are entitled to a statutory redundancy payment as are directors who have a contract of employment. The Employment Equality (Age) Regulations 2006 removed the upper age limit of 65 but this does not affect the age-banded method of calculating statutory redundancy payments.
Section 162 of the Employment Rights Act 1996 sets out how statutory redundancy pay should be calculated. Section 119 of the Employment Rights Act 1996, says that it should be calculated by taking your age, years of service and average weekly pay into account to arrive at a figure (the statutory formula) as follows;
- For your years of employment aged under 21 – Half a week’s pay for each year
- For your years of employment aged 22 to 40 – One week’s pay for each year
- For your years of employment aged over 41 – A week and a half’s pay for each year
Your continuous service is calculated by counting backwards from the date when your employment would end. Weekly pay is limited to a maximum of £464 a week (for redundancies on or after 6 April 2014) and the maximum number of years’ continuous service used in the calculation is 20. If you have less than 2 years’ service, the Employment Tribunal has the power to extend your period of continuous service so that you can qualify for redundancy pay.
Exclusions From Statutory Redundancy Payment
Sections 155-161 ERA 1996 lists the groups of employees who do not qualify for redundancy payments as follows;
- Employees employed for less than two years.
- Employee Shareholders
- Merchant seamen, former registered dock workers engaged in dock work (covered by other arrangements) or share fishermen.
- Crown servants, members of the armed forces or police services
- Apprentices who are not employees at the end of their training
- A domestic servant who is a member of the employer’s immediate family.
Contractual Redundancy Pay
You may have terms in your employment contract, or your employer’s redundancy policy that provide enhanced redundancy pay, and an agreed redundancy procedure. The law provides a minimum entitlement and so contractual terms are generally more generous.
Under S165 ERA 1996, your employer must give you a written statement setting out how your statutory redundancy payment has been calculated. An employer who without reasonable excuse fails to comply is guilty of an offence and liable on summary conviction to a fine.
Tax on Redundancy Payments
Statutory and contractual redundancy payments are tax free up to £30,000. Any payment that is not compensation for loss of employment is taxable.
You are entitled to payment for your accrued annual leave that you have not taken, but the payment would be taxable because it is not compensation for losing your job.
Employment Tribunal Claim
Under S164 ERA 1996 you have 3 months less one day to bring a claim in the employment tribunal if your employer does not pay your contractual redundancy pay, and 6 months less one day if your employer does not pay your statutory redundancy pay.
If your contractual redundancy pay is more than £25,000 the Employment tribunal will not be able to deal with your case, and you would have to go to the County Court.
Last Updated: [01/09/2021]