Correctly calculating statutory redundancy pay is a legal requirement for all employers in the UK. Understanding the calculation is crucial for maintaining compliance with UK employment law and ensuring a fair and smooth process for departing employees. This guide provides a clear breakdown for employers.
Key Takeaways
- Redundancy pay is based on an employee's age, weekly pay (up to a statutory limit), and length of service.
- Employees are only eligible after completing at least two full years of continuous service.
- The calculation is capped at a maximum of 20 years of service.
Disclaimer: This article provides general guidance and is not a substitute for professional legal advice. Employers should consult a legal expert or ACAS for advice specific to their situation.
What is Statutory Redundancy Pay?
Statutory redundancy pay is a lump-sum payment that employers in the UK are legally required to make to an employee who is being made redundant. It serves as compensation for the loss of employment. The amount is determined by a formula set by the government.
Who is Eligible for Redundancy Pay?
To be eligible for statutory redundancy pay, an employee must:
- Be an employee working under a contract of employment.
- Have at least two years of continuous service with the employer.
- Have been dismissed due to a genuine redundancy situation.
How to Calculate Redundancy Pay: The Formula
The calculation is based on three factors: the employee's age, their length of service (capped at 20 years), and their weekly pay (capped at a statutory limit which is updated annually).
Redundancy Calculation Rules
- For each full year of service when the employee was aged 41 or older: 1.5 weeks' pay.
- For each full year of service between ages 22 and 40: 1 week's pay.
- For each full year of service under the age of 22: 0.5 week's pay.
Example Redundancy Calculations
Let's assume the statutory weekly pay cap is £600 for these examples.
Scenario 1: An employee aged 35 with 5 years of service, earning £500/week.
- 5 years of service, all between ages 22-40.
- Calculation: 5 years × 1 week's pay/year = 5 weeks' pay.
- Total Pay: 5 weeks × £500 = £2,500
Scenario 2: An employee aged 50 with 10 years of service, earning £700/week.
- Weekly pay is capped at £600 for calculation.
- 9 years of service over age 41: 9 × 1.5 = 13.5 weeks' pay.
- 1 year of service at age 40: 1 × 1 = 1 week's pay.
- Total weeks' pay: 13.5 + 1 = 14.5 weeks.
- Total Pay: 14.5 weeks × £600 = £8,700
For official calculations, you can use the UK government's redundancy pay calculator.
When is Redundancy Pay Not Required?
Statutory redundancy pay may not be required if the employee is dismissed for gross misconduct, or if they unreasonably refuse an offer of suitable alternative employment.
Conclusion
Correctly calculating and paying statutory redundancy pay is a fundamental responsibility for employers in the UK. By understanding the rules and using the correct inputs, you can ensure a compliant and fair process. Integrating your payroll with a system like Zolmi's payroll software can help manage employee data and salary information accurately, making these calculations easier.