Redundancy Costs – What You Need To Know

The concept of making an employee redundant can be daunting for Company Directors. Not only is it a difficult situation to manage from a personal perspective, but there are also financial considerations to consider. This blog answers the all-important question – what costs will you incur when making staff redundancies? We’ll share everything you need to know about how much employees are entitled to receive during termination. Read on for valuable insight into managing redundancies responsibly and legally.

1. What are the statutory redundancy pay rates?

In the United Kingdom, employees who have been made redundant and fit the criteria are entitled to receive statutory redundancy pay from their employer. These statutory pay rates have increased as of April 2023, so it is important you are up to date on these figures. The amount of statutory redundancy pay an individual is entitled to receive depends on their length of service and their age. As highlighted on the Government website, generally a member of staff who has been working at your company for two or more years would be entitled to as follows;

–        Half a week’s pay for each year worked under 22 years old

–        One week’s pay for each year worked over 22 years old but under 41 years old

–        One and half week’s pay for each year worked 41 years or older

You calculate the employee’s average weekly pay from the last 12 weeks before they received the redundancy notice. The maximum amount of statutory redundancy pay is capped at £643 per week and £19,290 overall. The length of service is capped at 20 years. You can calculate statutory redundancy payments for employees using Clearview’s free redundancy calculator.

2. Who in your company is entitled to redundancy payment?

If your company is downsizing, restructuring, or closing resulting in redundancy you will have to make redundancy payments.  Generally, an employee who has been working continuously at your company for over two years is eligible for redundancy pay. However, some contracts exclude workers, such as those on fixed-term contracts. It is important as a company director that you understand the different contract types your staff members may have. This will ensure you understand their rights to redundancy and take the right legal procedures.

3. Statutory redundancy vs contractual redundancy

Statutory redundancy pay is the legal minimum that as an employer you are required to provide to a member of staff that meets the qualifying conditions. Non-statutory redundancy pay, on the other hand, is discretionary but it is often seen as best practice to provide a higher amount. This additional compensation can be a nice bonus, to show staff you appreciate the hard work they have put into your company. There may also be contractual redundancy involved, where non-statutory redundancy pay is part of an employee’s contract in which cased you would be legally obliged to provide the amount stipulated.

4. Compulsory vs non-compulsory redundancy

Non-compulsory redundancies, also known as voluntary redundancies, occur when employees are asked if they would like to volunteer to leave the company. It is crucial to have a fair and transparent selection process in place as not everyone who applies will automatically be chosen for the redundancy. An alternative to this is offering incentives for early retirement, which must be offered across the workforce. However, as a company director you would need to make it clear that this decision is up to the employee. Make sure you provide the same information to each and every employee during this consultation period and avoid confidential one to one meetings with employees where possible, as this could create grounds for unfair treatment and HR disputes.

5. Getting it right and Support with Costs

To be able to complete staff redundancy you need to demonstrate to employees that you have explored various steps to avoid it, considered alternative options, and documented proof of this. For example, as an employer you should try to find affected staff members alternative employment within the organisation. Employees are generally able to try out an alternative role for 4 weeks without giving up their right to redundancy pay. Meaning that if you are restructuring your business, there is opportunity for your employees to try a new role and see if they fit in your new business model. This will not only demonstrate your commitment to your employees, but you will be able to retain valuable talent and skills, saving your company money by allowing employees you have already invested in to explore a potential new career path. Once all other options have been explored, it is vital that the reason for redundancy is accurate and clearly communicated to all parties involved, as misunderstandings could lead to unnecessary confusion.  Redundancy costs as a time of financial strife can cripple a business. The business you are running may not be in the financial position to cover the costs of redundancy pay but would otherwise be able to carry on trading. In these circumstances, you can apply to the Redundancy Payment Service which is part of the Insolvency Service.  Redundancy payments will be made directly to your employees and the business pays this loan back over time.

6. The consultation and notice periods you need to adhere to

Organisations are obliged to follow specific guidelines to ensure staff redundancies are conducted fairly and transparently. Two critical factors to keep in mind are consultation and notice periods. The consultation period is when the organisation has a discussion with the employee to inform them of the redundancy, discuss the reasons behind it and explore alternatives, this must start either 30 or 45 days before any dismissals come into effect depending on the number of redundancies in your company. The notice period is the time between notification of redundancy and the employee’s last day of work and can vary according to employee’s length of service, but it should not be less than the statutory period. This can be between a week and twelve weeks’ notice. By adhering to these legal requirements, your company can ensure an equitable process that respects rights of both the employee and the organisation.

7. Calculating redundancy – getting it right. Point to the free Clearview redundancy calculator

 Calculating redundancy can be a daunting and complex process but it’s important to ensure that you plan it right, as mistakes can lead to serious financial and legal consequences. That’s why we recommend using our free Redundancy Cost Calculator, which can help you accurately calculate the  redundancy costs to the business. This online tool takes into account  factors of employment duration, age, and salary for multiple employees, providing you with a comprehensive report that’s easy to understand. By using Clearview’s Redundancy Cost Calculator, you can make informed decisions about redundancy and avoid any unnecessary complications.

 Conclusion – after the redundancies how much can you expect to save – was it worth it?

Now that you have all the information to accurately assess the consequences of your redundancies, it is time to look ahead and make a plan. Forecasting your future cashflow will allow you to see if the reduction in staff is potentially worth the savings. Clearview’s free forecasting tool can be useful in this process, enabling you to better understand your finances. Alongside this, Clearview’s redundancy calculator will help you accurately estimate what kind of saving you would expect after staffing reductions – click the link and find out more today! Further reading is available in our blog around managing redundancy costs. Armed with this knowledge, you can be better equipped to “regroup and rebuild”. Taking these steps now allows you to remain confident that your business will enjoy greater financial stability in the future.

Note – the Clearview redundancy calculator is an indication of the potential costs of statutory redundancy pay and should only be used as a guide. It does not consider any holiday or back pay that might be due to the employee or additional contracted redundancy pay.

Businesses considering redundancy as an option should always seek the advice of a HR or legal professional before taking any action.

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