Statutory redundancy pay: calculation

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Elizabeth Stevens of Steeles (Law) LLP continues a series of articles on statutory redundancy pay with a look at how statutory redundancy pay is calculated. For an employee to be entitled to statutory redundancy pay, he or she must have at least two years' qualifying service and be dismissed for redundancy in accordance with the statutory definition (see Statutory redundancy pay: qualifying rules in this series for more details). If entitlement is established, the employer needs to calculate how much statutory redundancy pay to pay the employee.

Formula for calculating statutory redundancy pay

The rules for calculating statutory redundancy pay are set out in s.162 of the Employment Rights Act 1996. The amount of redundancy pay is dependent on the employee's age and length of service at the relevant date. The relevant date for these purposes is the date on which notice expires if the contract is terminated with notice, or the date of expiry of a fixed-term contract. However, if the employer does not give the employee his or her entitlement to statutory notice, the relevant date is postponed to the date on which statutory notice would have expired, had it been given.

Working backwards from the relevant date, the employee's complete years of continuous employment must be calculated. Then a multiplier is applied, which is dependent on the age of the employee. The multiplier is:

  • one and a half weeks' pay for each year of employment in which the employee was aged 41 or over;
  • one week's pay for each year of employment in which the employee was aged between 22 and 40; and
  • half a week's pay for each year of employment in which the employee was aged 21 or under.

The maximum number of years' service that can be taken into account is 20. Since 1 October 2006, there has been no upper age limit on the entitlement to statutory redundancy pay. Prior to this date, employees who were 65 or over were not entitled to statutory redundancy pay and tapering provisions applied to those made redundant when they were 64.

There is an interactive redundancy pay calculator in the XpertHR quick reference section, which can be used to calculate employees' entitlement to redundancy pay.

A "week's pay"

A "week's pay" for the purpose of statutory redundancy pay is calculated in accordance with the provisions in part 14, chapter 2 of the Employment Rights Act 1996. Where an employee has normal working hours and his or her remuneration does not vary with the amount of work done, a week's pay is the amount payable under the contract in force when the payment is calculated, provided that the employee works for all the normal working hours. Where pay varies according to the hours worked or amount of work done, or the employee has no normal working hours, a week's pay is established by carrying out an averaging process over the previous 12 weeks (see Calculation of a week's pay in the XpertHR quick reference section for more details).

The amount of a week's pay is subject to s.227 of the Employment Rights Act 1996, which provides an upper weekly limit for the purpose of calculating statutory redundancy pay and various compensation awards, including the basic award for unfair dismissal (which is calculated in the same way as statutory redundancy pay). Under provisions in s.34 of the Employment Relations Act 1999, if the retail prices index (RPI) for September of a year is higher or lower than the RPI for the previous September, the Secretary of State is required to change the limits that apply to compensation awards and statutory payments, including a week's pay, by the same percentage as the change in the RPI. The Employment Rights (Increase of Limits) Order 2011 (SI 2011/3006) came into force on 1 February 2012 and increased compensation awards and statutory payments to reflect the 5.6% increase in the RPI from September 2010 to September 2011.

Therefore, where the relevant date falls on or after 1 February 2012, the maximum amount of a week's pay that can be used to calculate statutory redundancy pay is £430 (increased from £400), which means that the maximum amount of statutory redundancy pay is £12,900 (increased from £12,000) for an employee with 20 or more years' service all accrued at the age of 41 or over.

Examples

Example 1: John started working for his employer on 1 March 1994. His date of birth was 5 January 1953 and he is 59. His employer has given him notice to terminate his employment on the ground of redundancy. This will take effect on 31 May 2012, which is the relevant date for the purpose of calculating his statutory redundancy pay. He earns in excess of £430 per week.

At the relevant date he will have 18 years' continuous service. He will have been aged 41 or over for his whole period of service.

Therefore, his statutory redundancy pay should be calculated as one and a half weeks' pay multiplied by 18, which equals 27 weeks' pay. This amounts to £11,610.

Example 2: Sarah started working for her employer on 1 June 2002. Her date of birth was 28 October 1982 and she is 29. Her employment is being terminated without notice on the ground of redundancy on 1 March 2012 and she is being paid in lieu of her notice entitlement. The relevant date for the purpose of calculating her statutory redundancy pay is 3 May 2012 (the expiry of what would have been her nine-week entitlement to statutory notice). She earns in excess of £430 per week.

At the relevant date she has nine years' continuous service. For two of those years she was aged under 22. For seven years she has been aged 22 or over.

Therefore, her entitlement to statutory redundancy pay should be calculated as eight weeks' pay (half a week's pay multiplied by two, plus one week's pay multiplied by seven). This amounts to £3,440.

Claiming statutory redundancy pay

An ex-employee who has been made redundant, but who has not been paid his or her correct entitlement to statutory redundancy pay, has six months from the relevant date to bring a claim. Within this period, he or she must either make a claim for the payment in writing to the employer or make a claim to an employment tribunal (s.164 of the Employment Rights Act 1996). The tribunal can exercise its discretion to allow him or her to claim the payment during a further period of six months, if it is just and equitable to do so.

Written statements

When making payments, employers must provide redundant employees with a written statement of their statutory redundancy pay entitlement, showing how they calculated the payment. Failure to do so is a criminal offence and will result in the employer being liable to pay a fine of up to £200 (s.165 of the Employment Rights Act 1996). If the employer fails to respond to an employee's subsequent request for a written statement, it can be fined up to £1,000.

Further, if an employer makes a payment to a redundant employee without providing a written statement of how it was calculated, the payment might not be regarded as a redundancy payment and the employer could be ordered by an employment tribunal to make a further payment, unless it can show that the payment was calculated by reference to the statutory formula for redundancy pay. Therefore, it is important that employers make it clear if they intend a lump-sum termination payment to include statutory redundancy pay.

Next week's topic of the week article will be a case study around statutory redundancy pay and will be published on 20 February.

Elizabeth Stevens is a professional support lawyer in the employment team at Steeles (Law) LLP (estevens@steeleslaw.co.uk).

Further information on Steeles (Law) LLP can be accessed at www.steeleslaw.co.uk.