Tuesday 27 April 2010

Redundancy Rights

There is no doubt that whoever wins the next election, cutbacks in government spending are inevitable which will mean redundancies amongst public sector workers and probably quangos as well.

It seems likely too that the private sector will continue to suffer with Angel GurrĂ­a, secretary general of the Organisation for Economic Co-operation and Development, warning that, ‘the short-term labour market outlook is not rosy,’ with, ‘a serious risk of a jobless recovery. Firms have ample margin to respond to the increase of demand by raising working hours before they start hiring new workers in large numbers again.’

With unemployment running at around 2.5 million, times are tough with the number of applicants chasing work reaching a 20-month high, according to new research. Recruitment website said the number of job applications had soared by almost a third, with 12 applicants for every job, the highest for 20 months. So if you face the possibility of redundancy, it is important to know your entitlement.

Many employees will have a contract of employment which sets out redundancy payments. But if all you qualify for is Statutory Redundancy Pay you are likely to find yourself in financial difficulties because the payments are low – even if you have been a high earner. To qualify for any payment at all you must have worked for your employer for at least two years.

Maximum payment depends on length of service, your age and your pay – but only up to a maximum of £330 a week. This is well below the average wage of around £24,000 a year or £460 a week. Higher earners will find that they are in immediate difficulties if they rely on statutory payments and even those who have taken out income protection insurance against being made redundant will generally find that the maximum payout is £1,500 a month, occasionally £2,000.

Under the statutory scheme employees are entitled to half a week's pay for each complete year of service below the age of 22, one week's pay for each year between 22 and 40 and one and a half week's pay for each year above the age of 41. So for somebody aged 64 with 20 years’ service with the same employer (the maximum eligible) on the maximum eligible earnings of £330 a week, the maximum redundancy payment is £9,900. This is tax free which softens the blow a little – but not much.

Civil servants and many public sector workers are not covered by statutory redundancy provisions but the Civil Service Compensation Scheme provides equivalent benefits. In March of this year 200,000 civil servants held a two-day strike over plans to cap redundancy pay. The Public and Commercial Services Union claimed that some workers could lose a third of their entitlement over cuts under the civil service compensation scheme. Those affected work in areas such as the courts, ports, job and tax centres. If you are a public sector worker contact PCSU ( to get the latest information on your redundancy rights.

Under the new system - which came into effect in April - anyone earning £30,000 or less will be entitled to a maximum of three years' pay or £60,000, whichever is lower. Redundancy is currently calculated on length of service, with a month's pay for every year worked. Those earning £30,000 or more will be paid a maximum of two years' pay. Unions claimed that an employee with 20 years' service earning £24,000 a year could lose £20,000 as a result of new caps.

Many employees have a contract of employment which sets out entitlement to redundancy pay or notice. To receive any payment, you must have been made redundant - you cannot resign. If you are paid monthly your contract would typically stipulate a minimum of one month’s notice.

Whatever your contract says, your employer must give you at least the statutory minimum period of notice, which depends on how long you have been employed - one week if you've been continuously employed for between one month and two years and one week for each complete year (up to a maximum of 12) if you have been continuously employed for two or more years. For example, if you've had six and a half years service, you will be entitled to six weeks notice.

If you are entitled to a payoff in excess of the statutory maximum of £9,900, the first £30,000 may be tax free. Whether or not payments are taxable depends on whether the money is ‘payment in lieu of notice’ (PILON), or compensation or ex-gratia payments. PILONs are taxable because they are earnings. They include any salary, fee, holiday pay, bonus and anything that constitutes an emolument of the employment. Even where there is no written contract, the employer’s past actions will count. In other words, if the employer has been in the habit of making a payment regardless of the contract, it will be treated as taxable pay.

Where the redundancy payments are ‘compensation for loss of office’ and not written into the contract, the first £30,000 of payments is exempt from tax and National Insurance Contributions. Any excess will be subject to tax and NICs. HM Revenue & Customs will only treat these payments as non-taxable if they are not specified in the contract of employment and are not ‘routinely’ provided. Non-contractual payments and benefits or compensation paid to employees in return for their agreement to vary rights (or not sue their employer!) are a grey area and may be taxable.

Acas (the Advisory, Conciliation and Arbitration Service - offers free, confidential and impartial advice on all employment rights issues. Acas helpline 08457 47 47 47. For more information on Statutory Redundancy Pay go to or or

More Free Redundancy Advice



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