Making your staff redundant
If you are making your employees redundant due to the company’s insolvency, you have certain legal duties and obligations. Treating employees fairly and correctly in this difficult time is a major priority and concern for almost all directors we work with. However, it is also often an incredibly stressful and pressurized period in which all resources are inevitably stretched. This guide will clearly outline the factors you need to consider, the company’s obligations during this time, and what will happen if the company unable to meet its obligations.
How many employees does your company currently have?
If the company employs less than 20 members of staff, use the following guide to help you plan and execute the redundancy process fairly and efficiently. If the company employs more than 20 members of staff, you can find further information at the bottom of this page.
All employees are entitled to a notice period if their employment is ending. In some cases, the notice period will be defined in an employee’s individual contract of employment. Where this is not the case, use the tabs below to determine the statutory minimum notice periods, or minimum legal notice periods the company has to give its employees:
- Less than 2 full years' service given to the company
- 2 full years' service
- More than 2 full years' service
If they have given more than 2 years, but less than 3 years, the statutory notice period requirement will remain at 2 weeks.
For example, an employee who has given 5.5 full years’ service, is entitled to 5 weeks paid notice.
After 15 years full service, they will be entitled to 12 weeks paid notice.
Payment in lieu of notice
Employees can be paid in lieu of notice. If this is not defined in the employee’s original contract of employment, the statutory minimum periods above will apply.
Time off for job-hunting
If employees are working their notice period, and they’ve been employed by the company for two full years or more, they are entitled to reasonable time off to look for new employment during their notice period. During such times, you are not necessarily required to pay full wages, unless you choose to. Under statutory guidelines, you are only liable to pay 40% of a week’s pay if the employee takes time off for job-hunting.
For example, for an employee normally working 5 days a week, who takes 4 days over the notice period to jobhunt and attend interviews, you will pay 2 days out of the 5. As for how much time off constitutes reasonable time off, one way to look at it would be to ensure that an employee has up to 40% of a week’s pay in terms of equivalent time off to look for a new job.
Unpaid Wages and Holiday Pay
All employees should receive any outstanding wages and holiday pay they are owed.
All employees that have been employed by the company for 2 years or more are also entitled to redundancy pay if their employment is ending. How much they are entitled to may be defined in their original contract of employment, alternatively, the statutory minimum entitlements are as follows:
- For each full year worked aged 41 or over
- Each full year 22 or over, but under 41
- Each full year aged under 22
How to calculate statutory redundancy entitlements
You will need to determine the employee’s weekly pay rate. For employees whose weekly hours vary, their weekly pay rate is determined using an average of the previous 12 weeks pay. For those on a defined gross annual salary, their weekly pay will be calculated from the gross annual figure. Multiply weekly pay rate by the number of weeks’ redundancy and notice entitlements.
If the company cannot meet its financial obligations towards employees being made redundant
If the company cannot meet its obligations towards employees as above, it is most likely insolvent and will need to be placed into a formal insolvency procedure. Once the company has entered formal insolvency, employees will be able to make a claim to the National Insurance Fund for their outstanding employment entitlements (up to the statutory limits as below), via the Redundancy Payments Service.
Where owed, all employees will be able to claim for:
- Redundancy pay – subject to the statutory minimum entitlements above. A maximum weekly pay limit of £525 in tax year to 5th April 2020 will be considered, and a maximum of 30 weeks paid
- Notice Pay – subject to the statutory minimum above. If they have worked their notice period but the company is unable to pay them, if they weren’t given any notice, or if they were paid until the end of employment but didn’t work their full notice period, they are entitled to claim for statutory notice pay. Up to a maximum weekly pay of £525 for 19/20 tax year, and a maximum pay of 12 weeks
- Unpaid Wages – up to a maximum of 8 weeks, and maximum weekly pay of £525 for 19/20 tax year
- Outstanding holiday days – up to a maximum of 6 weeks, and maximum weekly pay of £525 for 19/20 tax year
Deductions at source
- Redundancy payments are not subject to any tax or NI deductions at source.
- Holiday pay and unpaid wages are subject to national insurance deductions at source and tax deductions at 20% rate at source.
- Notice pay will also be subject to tax deductions at source at 20% rate, plus national Insurance deductions, and deductions will also be made for jobseekers allowance, regardless of whether it has been claimed or not.
If the company employs more than 20 people and intends to make 20 or more people redundant within a 90-day period, you must follow collective consultation rules. You can find more information regarding collective consultation on the government’s website here. There is no limit on how long collective consultations should last, however, employees cannot be dismissed without a minimum of 30 days consultation if the company plans to make between 20 and 99 redundancies, or 45 days if more than 100 redundancies.
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