Do small businesses have to pay redundancy?

All employers, irrespective of size, are liable for statutory redundancy pay (SRP).

What is redundancy?

Legally, a redundancy situation exists only where:

  • You shut down a business or part of a business;

  • You shut down at a given location even if you are moving to a new location; or

  • Your need for employees to do work of a particular kind reduces or ends.

 

Other  redundancy payments

Employees may also be due enhanced redundancy payment, either under their contract or through a collective agreement – such as NHS workers - so do check your terms of employment carefully before taking any action.

Qualification for SRP and amount due

To qualify for SRP the employee must have two years' continuous service. The payment is calculated from the employee's age, length of service as follows:

  • 1.5 weeks' pay for each complete year of service after reaching the age of 41

  • 1 week´s pay for each complete year of service between the ages of 22 and 40 inclusive; and

  • 0.5 week’s pay for each complete year of service under the age of 22.

 

SRP is capped at £525.00 per week and is payable for a maximum of 20 years’ service.  Therefore the maximum SRP receivable is £15,750.00.

There is a simple and reliable calculator on the gov.uk website at https://www.gov.uk/calculate-your-redundancy-pay

Who is entitled to SRP?

The entitlement to SRP applies to all employees, including part-timers, and employees on fixed term contracts, with more than 2 years’ continuous service.  However, SRP is not due to “workers” who are not employees, so it is important to correctly identify the individual’s status. 

Is tax payable on SRP?

The good news (if there is any!) is that, currently, SRP is not treated as taxable income but as compensation so you will not have to pay employer’s NI or pension contributions on these sums.  Your employee will receive SRP with no deductions for tax or NI.

Does the number of redundancies make a difference?

Special rules apply where you are planning 20 or more redundancies, which involve collective consultation, statutory minimum consultation periods and a requirement to make a notification to the government.

Notice pay

Remember that you are also required to provide the employee with their contractual notice, which should be, as a minimum, the statutory entitlement.  If you have no work for them during his period then you may have to make a payment in lieu.

Redundancy is complex and the process involves several steps, any of which can trip up the unwary and result in a possible unfair dismissal and/or unlawful discrimination and awards of compensation in a Tribunal.

Before you make any redundancy payment you should:

  • Ensure there is a genuine redundancy

  • Replacing an employee with someone who does essentially the same job may not count as a genuine redundancy.  Does the situation count as a genuine redundancy as defined above?

  • Design an appropriate process for communication, consultation and selection

  • Allow reasonable timescales for these steps to be fairly and meaningfully completed.  Ensure that no inadvertent discrimination arises.

  • Identify those people affected by the potential redundancy

  • It is essential to correctly identify those who are “at risk” to ensure a fair selection.

  • Take all reasonable steps to avoid a redundancy

  • Redundancy should be considered as the last straw option no other reasonable solution exists.

 

  • Conduct a meaningful consultation

 

  • You must communicate your plans and the reasons redundancy is being contemplated and allow employees to offer alternatives whereby compulsory redundancy can be avoided.

 

  • Identify alternative employment - not only jobs of similar status/benefits/terms of employment, but also other roles that the displaced employee might wish to consider

  • Take appropriate expert advice!

Redundancy should not be lightly undertaken.  Taking professional advice is strongly recommended.

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