Confused on how to calculate redundancy pay?

It certainly is not the easiest thing to understand and whilst you can go to the .gov website and input your information and get your redundancy entitlement figure, you may still be none the wiser on how your redundancy payment is actually calculated.

The lawmakers like to make it difficult for us!

So here is an explanation if you are interested to understand how your redundancy entitlement is calculated:

Statutory redundancy payments are only payable to eligible employees who have been employed for more than two years and have no breaks of service. If you have not worked for a full two years you will not be eligible.

1. Are you thinking, “but I was temporary or on a fixed end contract before I was made permanent” or even “I was an agency worker…”? Well worth bringing up this point, especially if your start date was immediately after your end date and there was no clear ‘break in service’.
2. Check your contractual notice period. If you are first told that you are at risk of redundancy a couple of weeks before you would hit your two year service anniversary and your contractual notice period is a month, then you should qualify for a redundancy payment. Make sure your employer is not trying to pull forward your termination date to reduce your redundancy entitlement.

Statutory redundancy payments are capped at a certain rate or on a week’s basic pay. This capped rate is £538 in 2020. The total maximum statutory payment can be up to £16,140 in the year 2020/2021. This normally changes in April.

What does this mean?

If your annual salary is £32,000 per annum, your weekly pay would be £612.38, but because of the ‘cap’ your redundancy payment will be based on the present limit of £538 for every year worked. This is the case, unless your company has a redundancy policy or scheme which enhances this amount. In the ‘old days’ you might have often found that a company’s enhanced redundancy policy was a month’s pay instead of a week’s…. you can see how lucrative this could have been. Conversely, the cap does not work in reverse; if you earn less than £538 a week, for example £22,000 a year which equates to £423.07 a week, your statutory redundancy calculation is then based on this lower amount; £423.07 multiplied by the number of years’ service you have with any multiplier applied.

So how does the multiplier work? Well it is based on your age and the number of years you have worked for your employer. Let’s say for simplicity you are 30 years old. The multiple is then one (1). If you are 21 or under the multiple is half (5) and if you are 41 or over it’s one and a half times (1.5), if you are aged 22 to 40 the multiplier is one (1). why? Good question, apparently the government believes that maintaining this approach is justified under law because labour market evidence shows that older workers are more likely to be made redundant and have a harder time getting a new job than younger workers. Not logical? Not fair? Yip that’s the legal world we live in. On the Equality and Human Rights Commission’s website it acknowledges that ‘on the face of it,(redundancy multiples) is indirect age discrimination’. Something to ponder on.

 

Returning to the multiplier, in practice it works like this;

Let’s say you are 45 years old and have worked for your employer for eight years and earn £45,000; thus your entitlement is capped at £538 per week;

1. For 5 of those years worked, you were above the age of 41 so the multiplier is 1.5. £538 multiplied by 5 equals= £4,035

1. For 3 of those years worked, you were below the age of 41 so the multiplier is 1. £535 multiplied by 3 equals= £1,614

Hence, your total statutory redundancy entitlement would be £5,649. (£4,035+£1,614) This amount is a tax free payment.

As mentioned above there is a cap on the total statutory redundancy payment available currently £16,140. This means that the higher multiplier of 1.5 can only apply for a maximum of 20 years’ service. Or in simple terms if you have worked for your employer since you were 42 years of age for 25 years you are still only eligible to be compensated for up to a maximum of £16,140 or the maximum of 20 of those years’ service at your normal weekly pay multiplied by 1.5.

In addition, to your redundancy payment you are also entitled to your statutory notice, which is a week for every year of full employment capped at 12 weeks at your normal weekly pay. You may or may not be required to work your notice period, this is normally your employer’s choice.

So in the example above where the salary is £45,000, the notice payment due would be eight (for eight years of service) multiplied by a week’s pay £865.38 = £6,923.08. This figure is subject to tax and NI like a normal PAYE payment.

As you have learned redundancy payment calculation is not simple because of this, be cautious and don’t always take the calculation you are given at face value. Due to the number of variables outlined above you can see there is a wide margin for error.

If you aren’t sure the figure you are being quoted is correct speak to our HR experts who will be able to answer your question on redundancy today.

If you are looking for support with finding work after redundancy check out our article on Sham Redundancy- it’s more common than you think.

Note you have 6 months to make a claim for redundancy pay to an Employment Tribunal.

Further if you think you might have been made redundant unlawfully because of something else look at our guides below and consider if you might want to submit a tribunal claim.