The rules on severance pay in detail
Employees are only entitled to severance pay if their position is ‘redundant’ (due to a business closure, a closure of their place of work, or a reduced requirement for employees performing work of the particular kind they were employed to perform), and only then if they have two or more years’ continuous service. A redundant employee is entitled to a statutory redundancy payment which is calculated according to age and length of service. The payment is calculated as follows:
- One and a half week’s pay for each year of employment which consists wholly of weeks in which the employee was not below the age of 41;
- One week’s pay for each such year of employment which consists wholly of weeks in which the employee was not below the age of 22; and
- Half a week’s pay for each such year of employment not falling within either of the preceding bullet points.
The maximum number of service years to be taken into account is 20 and the maximum amount of a week’s pay is GBP 508 as of 6 April 2018. Applying the above calculation, the maximum redundancy payment is currently GBP 15,240 as of 6 April 2018.
In practice, many employers choose to make ‘enhanced’ redundancy payments. If such payments are calculated using the statutory redundancy payment formula with permitted uplifts they will not be discriminatory on grounds of age. Other schemes that include age or length of service criteria as factors in calculating a redundancy payment may need to be objectively justified.
Notice provisions in employees’ contracts must also be observed.
Author: Lewis Silkin
Date: December 2018