As businesses are starting to feel the financial effects of the current pandemic, job losses are rising and there is a possibility that some employees may have to be made redundant. This guide explains what redundancy is and outlines how it works, including redundancy notice periods, statutory redundancy pay and tax on redundancy pay.
What does redundancy mean?
Redundancy refers to the process whereby a business reduces its workforce due to lack of work or because a job is no longer needed. This could be because the organisation needs to cut costs by reducing staff numbers, a job no longer exists, or a business is closing.
It’s important to note that redundancy is not the same as being fired. Redundancy can either be:
- Voluntary- Staff can volunteer themselves to be made redundant
- Involuntary – Employers choose which staff to make redundant
How does redundancy work?
There are several steps involved in making redundancies:
- Have a clear reason as to why you are making redundancies so you can effectively communicate this to your staff. This should be about the job role that will be no longer available rather than the employee otherwise the move could be deemed as unfair.
- Let employees know that their position is at risk of redundancy. This can be done in a group meeting and allows employees the opportunity to comment on the proposed changes before they come in to affect. You should start preparing for a consultation as soon as possible.
- Produce criteria to determine which employees will be made redundant. This should be easy to understand and a draft version should be taken to individual consultation meetings so that employees can comment on the criteria.
- Hold individual consultations meetings for the employees at risk of redundancy. This is an opportunity to seek voluntary redundancies and to inform employees of their redundancy entitlements
- After gathering feedback from your employees you should make any changed you deem are necessary then check the criteria again
- This is where a second consultation meeting should take place. This meeting should be followed up in writing, inviting them to a final consultation meeting.
- Final consultations should take place. At this meeting, you can make a final decision to issue employees with a notice of redundancy. This should also be followed up writing.
What is a redundancy consultation?
A redundancy consultation is a meeting that allows you to discuss any changes you intend to make with employees and their representatives. This opportunity should also enable you to get employees feedback and input, which should then be seriously considered during the decision-making process.
The consultation can take place over the phone or, if agreed, face to face. You must follow ‘collective consultation’ rules if you intend to make 20 or more redundancies within a 90-day period. These rules include:
- Notifying the redundancy payment service before the consultation starts.
- Consulting with a trade union representative or elected employee representative or with staff directly if there is not one.
- Providing information to representatives or staff with enough time for staff to confer it.
- Responding to any requests for more information.
- Giving any staff termination notices showing the agreed leaving date.
- Issuing notices once the consultation is complete.
Voluntary redundancy can be a good opportunity to offer staff a fair package and have them feel like they have left on good terms. We always advise our clients that this is the best option where possible as employers will spend less time having to make compulsory redundancies. For more high-profile organisations, voluntary redundancies also remove the potential for any PR backlash or negative company reviews on sites like Glassdoor.
Redundancy notice periods
The statutory notice periods for redundancy are as follows:
- At least one weeks’ notice if employed between 1 month and a year
- One months’ notice for each year if employed between 2 and 12 years
- 12 weeks’ notice if employed for 12 years or more
Statutory redundancy pay
The amount of redundancy pay an employee is entitled to depends on their age and how long they have been working for the company:
- After the employee’s 41st birthday, employers must pay 1.5 weeks pay for each year of work.
- After their 22nd birthday, employers must pay 1 weeks pay for each year of work.
- Before their 22nd birthday, employers must pay half a week’s pay for each year of work.
- Weekly pay should also include any regular overtime along with any bonuses or commission.
Redundancy pay is capped at 20 years. You can use the gov.uk calculator to help calculate statutory redundancy pay.
Tax on redundancy pay
Redundancy pay will only be taxed if it exceeds £30,000 as it qualifies for special tax treatment due to it being compensation for job loss. However, holiday pay will be taxed the same as any other pay.
If you need advice about redundancy tax implications and employee redundancies rights, please get in touch and we will be happy to help.