REDUNDANCY PAY - 21.03.2011

Calculating voluntary redundancy pay

Statutory Redundancy Pay

Providing an employee has been dismissed due to redundancy and has been employed for two years or more, they’re entitled to Statutory Redundancy Pay (SRP). But the amount paid is dependent on their age as well as length of service (up to 20 years can count) and gross weekly wage. The latter is subject to a statutory earnings cap which is reviewed each year and currently stands at £400 per week from February 1 2011. SRP is payable as a tax-free lump sum. It is, however, added to any other termination payments when calculating the £30,000 tax-free exemption.

SRP calculation. Firstly, you need to determine the number of complete years of employment, working backwards from the termination date, up to a maximum of 20 years. Then, you need to allow the appropriate amount for each of those years:

• one-and-a-half weeks’ pay for each year of employment when aged 41 or over
• one week’s pay for each year of employment when aged between 22 and 40 inclusive
• half-a-week’s pay when aged 21 or under.

Example. Two employees, A and B, are being made redundant. They both earn more than £400 a week and have 18 years’ service but A is 66 and B is 34. This means that A is entitled to £10,800 SRP (18 years x 1.5 weeks x £400) but B is entitled to £6,000 SRP ((six years x 0.5 week) + (twelve years x one week) x £400). Although the difference is only due to the age of each employee, this is permitted by the Equality Act 2010 and is not, therefore, age discrimination.

Enhanced redundancy payments

If employees volunteer for redundancy, your company may decide to pay them enhanced redundancy pay (ERP). However, the Equality Act also provides an age exception for ERP where employees volunteer for redundancy. This age exception applies as long as the same rules have been used to calculate the ERP payments to different employees.

ERP calculation. You calculate the ERP in exactly the same way as SRP. But you can then adjust it by: (a) not limiting the amount of the payment by the earnings cap and/or (b) multiplying the number of weeks (according to the three age bands) by a factor of more than one, and whether or not an (a) and/or (b) adjustment is made, multiplying by a factor of more than one.

Example. This time, the two employees, A (66) and B (34), have volunteered for redundancy. A earns £400 per week and B earns £600. As B earns more, you are keen to limit his redundancy payment. Neither employee is entitled to SRP as they are not being dismissed for redundancy. Instead the employer provides ERP which is calculated in the same way as SRP but: (1) there is no ceiling to the “week’s pay”; and (2) the resulting payment is doubled. A receives £21,600 (18 years x 1.5 weeks x £400 x 2). B receives £18,000 ((six years x 0.5 week) + (twelve years x one week) x £600 x 2). Without the age exemption, you would have needed to pay B £32,400. The calculation of ERP has followed the SRP rules for both employees. The employer has only varied the calculation by: (1) not applying the earnings cap; and (2) multiplying the payment by a factor of two, both adjustments being permitted by the Act.

Tip. If you choose to adjust the payments as described above, make sure you make the same adjustments to each of the three age bands.