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Can employers base redundancy payments on furlough wages?

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Redundancies are always a stressful time for all parties involved; employees are worried about their future and employers will want to look after those employees as best they can, as well as ensure they follow a fair and proper procedure to avoid tribunal claims. The Coronavirus Job Retention Scheme (CJRS) and the newly introduced concept of furlough leave have only added to the complexity of the redundancy process. Our Employment Law team here reviews how redundancy payments in particular have been affected by furlough leave and provides clarity for employers on the pay those payments should be based on. 

What are redundancy payments?

Employees who have worked for you for at least two years at the date their employment terminates are entitled to statutory redundancy payments. A statutory redundancy payment is calculated by taking into account an employee’s age and length of service, generally being entitled to the following:

  • half a week’s pay for each full year they were under 22
  • one week’s pay for each full year they were 22 or older, but under 41
  • one and half week’s pay for each full year they were 41 or older.

A week’s pay is usually the amount of pay an individual would normally receive for a week’s work.  There are different calculations that should be used to calculate a week’s pay depending on whether or not the employee has normal working hours or not or whether they work on a zero hour’s contract or they have an element of their pay based on commission.

Some employees will have recently been earning less than their normal earnings as a result of being placed on furlough leave.  For these employees, many employers will be wondering how to calculate a statutory redundancy payment; should this be based on the amount of earnings that the employee was paid whilst on furlough leave, or on their normal wages?

How to calculate redundancy payments for employees who were on furlough leave

The Government has recently provided guidance on how to calculate statutory redundancy payments for employees who have been furloughed.  On 31 July 2020 new legislation was passed stating that all employees are entitled to redundancy payments based on their full, normal wages.  Therefore, if you wish to make a furloughed employee redundant, you must use that employee’s normal wages when calculating redundancy pay.  The new law applies to basic statutory redundancy pay and does not affect any enhanced redundancy pay that may be stipulated in an employee’s contract. 

The law clarified that statutory notice pay must also be based on full wages.  Other changes that have been brought in as a result of the new legislation ensure that awards for unfair dismissal will be calculated using an employee’s full contractual wages, not their earnings while on furlough leave.  These changes are part of the Government’s efforts to ensure that employees receive the payments they are entitled to.

What if I made employees redundant before 31 July?

The law came into effect on 31 July 2020 and before this, the Government had only encouraged businesses to base redundancy payments on full pay, so it was not mandatory.  If an employee was given their notice and their employment ended before 31 July, then the old rules apply and their statutory redundancy payment may have been based on their furlough wages.

It may be more complicated if the employee was given their notice before 31 July, but their employment ends after this date.  In this case, it may depend on when the calculation date is; if the calculation date falls before 31 October 2020 but after 31 July 2020, then the employee should benefit from the new rules.   Where the calculation date falls depends on the statutory notice period that applies in a particular case and whether notice was given to the employee.

If you are considering redundancies and have questions regarding redundancy pay, you should bear in mind the risk of employees bringing a claim to the Employment Tribunal if they believe they were not paid the correct amount.  Employees have a right to see how their redundancy pay was calculated and if an employee disagrees with the amount of payment, they have three months from the date their employment ends to file a claim with the Employment Tribunal.  Some employees may feel that in light of the new law, their redundancy payments should have been based on their full wages and issue a tribunal claim for unlawful deduction of wages or breach of contract.

Redundancy is a difficult process for you as an employer and your affected employees.  However, this new legislation does provide some much needed guidance on how the process works within the CJRS.  If you are considering making redundancies in your business, or you have already done so and you are concerned about the redundancy payment calculations, we can offer you video or telephone appointments to discuss your situation.  To book your appointment, call us today on 023 8071 7717 or email employment@warnergoodman.co.uk.  Alternatively, you may find the following articles useful:

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.