Government announcement: employees must receive statutory redundancy payments based on normal pay, not furlough pay

Posted: July 30, 2020

Subject to limited exceptions, any employee with more than two years’ continuous service is entitled to a statutory redundancy payment in the event that they are dismissed by reason of redundancy.  

This statutory redundancy payment is worked out based on an employee’s age and length of service. An employee is entitled to:

  • half a week’s pay for each complete year of service in which the employee was under the age of 22;
  • a week’s pay for each complete year of service that they were aged between 22 and 40; and
  • one and a half week’s pay for each complete year of service that they were over 41.

As part of the furlough scheme, many employees have agreed to reduce their pay to what the Government will cover. For most employees this has meant taking a 20% pay cut (although some higher paid workers will have received a larger reduction). The effect is that a “week’s pay” for many furloughed employees is lower than it was for them in pre-Covid 19 times.

Some employers have been calculating a week’s pay for the purpose of a statutory redundancy payment based on the reduced furlough salary. As many employees have agreed to changes to their contracts, this was arguably lawful. The Government has now changed this and, from tomorrow (Friday 31 July 2020), a week’s pay for the purpose of calculating a statutory redundancy payment must be based on what a week’s pay was before an employee went on furlough.

This change will not affect highly paid employees as a week’s pay for the purpose of calculating a statutory redundancy payment is currently capped at £538 (the equivalent of earning £27,976 per annum). In addition, from what we understand, this change will only affect statutory redundancy payments and not more generous contractual schemes.

This legislation will also ensure that notice pay is based on an employee’s normal wages rather than their wages under the furlough scheme.

The Government announcement can be found here:

https://www.gov.uk/government/news/new-law-to-ensure-furloughed-employees-receive-full-redundancy-payments

Andrew Lloyd, Associate and Victoria Willson, Partner, Simkins LLP