Redundancy Compensation and Settlements
Entitlement to Redundancy Payments
To be entitled to redundancy payments an employee must normally have two years’ continuous employment. An employee is not eligible for statutory redundancy payments if he or she has unreasonably refused suitable alternative employment.
Level of Redundancy Payments
Minimum statutory redundancy payments are calculated according to a formula based on length of service, age and weekly pay.
Employers may wish to improve on the basic statutory entitlement by way of a term in the employment contract or by way of an ex-gratia award. The redundant employee may also be entitled to contractual notice and other entitlements under the employment contract (e.g. untaken holiday, fringe benefits).
If an employer wants to pay in lieu of notice (as opposed to the employee working out his or her notice), this right should be specifically noted in the employment contract. In the absence of a PILON clause, it used to be possible to make payments in lieu of notice tax-free. However, as of 6 April 2018, all payments made in lieu of notice, whether contractual or not, will be subject to tax and Class 1 national insurance contributions.
Redundancy payments are tax free up to £30,000 and over this amount the former employee’s marginal rate is imposed. If the payment is not genuinely for redundancy, or not ex-gratia, it may be taxable in full.
Employees should be given a statement as to any settlement and calculation of the award and to get his or her written acknowledgement that the sums paid are in full and final satisfaction of all contractual claims.
If there is an element of dispute, employers may also wish to make payments on an ex-gratia basis, ideally supported by the use of a settlement agreement. In the absence of a settlement agreement, it is important that an offer of payment is drafted in such a way so that it is not taken as an admission of liability at a later stage (e.g. during subsequent unfair dismissal or wrongful dismissal proceedings).
Where redundancy is pending, time off to seek work or re-training must be given to affected employees.