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Redundancy pay: New law announced to ensure employees receive redundancy pay based on normal wages

30 July 2020
The new legislation ensures furloughed employees receive redundancy pay based on their normal wages, not their reduced furlough rate.  

The Government has announced through a press release a new law to ensure furloughed employees receive statutory redundancy pay based on their normal wages, rather than a reduced furlough rate. The new legislation will come into force on 31 July 2020 and will also apply to statutory notice pay. 

Employees with more than two years' continuous service are entitled to statutory redundancy pay based on length of service, age and pay, up to the statutory maximum.  Calculating statutory redundancy pay is not always straightforward.  Employers need to calculate a week's pay under the Employment Rights Act 1996 at the "calculation date".  The calculation method for a week's pay varies depending on whether the employee has normal working hours or no normal working hours.  Broadly speaking if pay and hours fluctuate a 12 week period is used to calculate average pay.  The legislation includes many nuances and payments such as commission, bonuses and overtime require careful consideration.  

There has been much confusion over how the calculation should work when an employee is furloughed and the employee is on reduced pay.  This new legislation makes it clear that the employee should receive a redundancy payment based on their normal wages, not the furlough rate.  Business Secretary Alok Sharma stated "We urge employers to do everything they can to avoid making redundancies, but where this is unavoidable it is important that employees receive the payments they are rightly entitled to".  

Employers are also required to pay statutory notice pay on the basis of normal wages.  The Government has announced that basic awards for unfair dismissal should also be based on full pay and not the reduced furlough rate.  

The press release makes it clear that the change in law only applies to statutory redundancy pay and will not impact enhanced contractual redundancy payments.  

Comment 

The Coronavirus Job Retention Scheme is currently supporting 9 million jobs.  Despite the unprecedented Government support many employers are having to take the difficult to decision to make employees redundant.  Where this decision has been taken employers should factor in this new legislation into their redundancy calculations.   

If you have any questions, please get in touch with your usual DWF contact or one of the contacts below.



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