Furlough and Redundancy Pay

When making employees redundant, the amount of redundancy pay is usually based on a number of factors, one of which is their normal wage but during the coronavirus pandemic, many employees have been placed on furlough, with a reduction in their wage, and then made redundant. Either through ignorance or design, some employers whose employees find themselves in this strait are using the reduced furlough rate as the basis for redundancy payments. As of Friday 31st July, legislation prevents this from happening.

Furlough pay

At the start of the furlough scheme, officially known as the Coronavirus Job Retention Scheme, employers could claim back 80% of an employee’s usual salary - up to a maximum of £2,500 a month. Employers had the option to top up the employee’s salary or agree the reduction in pay with their employees.

Since the start of August, the government will still pay 80% of the employee’s salary, but the employer now has to pay the employee’s national insurance and pension contributions. The percentage paid by the government will fall month on month until the end of the scheme on 31st October.

The new law

Furloughed employees who are subsequently made redundant will now receive redundancy pay based on their normal wage. These changes will also apply to Statutory Notice Pay, which is where employees must be given a notice period before their employment ends, varying from at least one week’s notice up to 12 weeks’ notice, depending on how long they have worked for their employer. During this notice period, employees must be paid.

The government says it also has plans to ensure that basic awards for unfair dismissal cases are based on full pay rather than wages under the Coronavirus Job Retention Scheme.

The legislation also covers other employment rights that rely on average weekly pay, including notice pay, unfair dismissal and short-time working.

Statutory redundancy pay – what to know

An employee who has been made redundant is only entitled to receive a statutory redundancy payment if they have two years’ or more continuous service with his or her employer.

The maximum number of years counted for statutory redundancy purposes is 20. Length of service should be calculated by counting backwards from the effective date of dismissal. This is generally the date on which the notice given to the employee ends. Employers need to be aware that long-term absences caused by sickness, lay-off and pregnancy count towards continuous service.

The redundancy payment due to each employee under the statutory redundancy payment scheme depends on their age and length of service, up to 20 years. This determines the number of weeks’ pay due, which is then subject to a limit on weekly pay. Weekly pay is capped at £538. The maximum amount of statutory redundancy pay is £16,140.

In years gone by, the limit on weekly pay increased on or after 1st February every year, but this has now changed and any further change will take effect from April.

When calculating the number of weeks’ redundancy pay due, employers should note that an employee is entitled to:

• Half a week’s pay for each full year of service where the employee was aged under 22 during the year

• A week’s pay for each full year of service where the employee was aged above 22 but under 41 during the year

• One and a half weeks’ pay for each full year of service where the employee was aged over 41 during the year

When making a redundancy payment, the employer must provide the employee with a written statement showing how the amount was calculated.

A redundancy payment is calculated by cross-referencing the employee’s age and length of service, then multiplying that number by the weekly salary (the weekly salary is currently capped at £525).