How to Handle Redundancy Payments Correctly

Redundancy payments are a significant legal and financial obligation for employers in England and Wales when dismissing employees on grounds of redundancy. Getting redundancy payments right is essential to comply with statutory requirements, uphold employees' rights, and minimise the risk of claims to employment tribunals. This guide explains the legal framework, how to calculate statutory redundancy pay, what employers must do in practice, and common areas of risk.

Introduction

Redundancy arises when an employer needs to reduce their workforce because a job no longer exists, the business is closing, or the requirement for work is declining. Employers must handle redundancy processes fairly and pay statutory redundancy payments where applicable. Statutory redundancy pay is a legal entitlement for eligible employees and must be calculated and paid correctly to avoid tribunal claims for unlawful deductions from wages, breach of contract or discrimination.

Who Is Entitled to Statutory Redundancy Pay?

To qualify for statutory redundancy pay, an employee must meet the following legal conditions:

• They are classified as an employee (not a contractor or casual worker).
• They have at least 2 years' continuous service with the employer at the date of dismissal.
• They are dismissed specifically because of redundancy (business closure or job ceasing to exist).

Employees who do not meet these conditions may not be entitled to statutory redundancy pay, but could still have other rights such as enhanced contractual redundancy pay if their employment contract provides for it.

How Many Weeks' Pay Should Employers Calculate?

Statutory redundancy pay is based on age, length of continuous service and weekly pay. The calculation rules are as follows:

• 0.5 week's pay for each full year of service when aged under 22.
• 1 week's pay for each full year of service when aged 22 to 40.
• 1.5 weeks' pay for each full year of service when aged 41 and over.

Service is capped at 20 years, so no payments are due for years beyond 20.

Weekly Pay and Caps

An employee's weekly pay for redundancy purposes is the average weekly earnings over the 12 weeks prior to the redundancy notice. This includes regular pay such as contractual bonuses or commission where the employment contract provides for them.

For redundancies on or after 6 April 2025, the weekly pay is legally capped at £719, and the maximum total statutory redundancy pay is £21,570.

Step‑by‑Step Redundancy Pay Calculation

1. Confirm Period of Continuous Service

Employers should confirm the precise start and end dates of an employee's continuous service. Only complete years count for statutory redundancy calculations. Continuous service includes most periods of leave, including annual leave and statutory family leave.

2. Work Out Weekly Pay

Calculate the average weekly pay over the 12 weeks before redundancy notice. If pay varies, average out the gross pay including contractual overtime and bonuses where the contract requires such payment.

3. Apply Age Band Multipliers

Multiply the appropriate weekly pay rate by the statutory factor for each year of service in the different age bands (under 22, 22–40, 41 and over). This gives the statutory redundancy pay entitlement in weeks' pay.

4. Check Weekly Cap and Total Pay Limit

Ensure the weekly rate does not exceed the statutory cap and that the total pay does not exceed the overall maximum entitlement.

Paying Redundancy Pay

Employers must communicate clearly with the employee about:

• How redundancy pay has been calculated (in writing); and
• When and how the payment will be made.

Redundancy payments should ordinarily be paid on or before the employee's final pay date, unless otherwise agreed in writing.

Tax and National Insurance

Statutory redundancy pay up to £30,000 is tax‑free. Other components of redundancy settlements, such as pay in lieu of notice (PILON) or holiday pay, may be taxable. Employers should apply appropriate tax and National Insurance deductions where required.

Record‑Keeping and Written Explanation

Employers are legally obliged to provide a written explanation of how redundancy pay was calculated. Failure to do so can expose the employer to claims. This written statement should set out:

• The number of years counted for redundancy;
• How weekly pay was calculated;
• The statutory formula applied; and
• The total amount paid.

Maintaining clear records of these steps supports compliance and protects against disputes.

Handling Other Redundancy‑Related Payments

Redundancy payments are just one element of the final amounts owed to an employee leaving under redundancy. Employers may also need to address:

• Holiday pay for accrued but untaken leave;
• Pay in lieu of notice (PILON) if the employee is not required to work their notice period;
• Arrears of pay for unpaid wages; and
• Protective awards where appropriate consultation obligations have been breached.

These elements should be assessed separately, with clear payroll accounting and written notices to the employee.

Time Limits and Legal Remedies

Employment Tribunal Claims

Employees have strict time limits when challenging redundancy pay:

• 6 months minus one day from the end of employment to claim statutory redundancy pay through an employment tribunal.

Tribunal claims may also arise for unfair dismissal or discrimination if redundancy processes are mishandled.

Government Redundancy Payment Service

If an employer is insolvent and cannot pay redundancy, employees may apply to the Redundancy Payments Service (RPS) to recover statutory redundancy pay and other owed amounts. Documentation and evidence of employment and redundancy are required.

Common Practical Issues and Risks

Enhanced or Contractual Redundancy Pay

Some employers offer enhanced redundancy payments above the statutory minimum through contractual terms or policies. These should be clearly documented, and employees should understand how they interact with statutory entitlements. Contractual redundancy pay forms part of the employment contract and must be honoured according to its terms.

Refusal of Suitable Alternative Work

If an employer offers suitable alternative work and the employee unreasonably refuses, redundancy pay may be reduced or lost. Employers should document offers of alternative roles and reasons for refusal where relevant.

Key Takeaways

Handling redundancy payments correctly involves meeting statutory entitlements, communicating the calculation in writing, and integrating the payment into payroll with appropriate deductions. Statutory redundancy pay depends on length of service, age and weekly pay, with caps on weekly and total amounts. Employers should ensure that all elements, including holiday pay and PILON, are accounted for and that records support compliance with legal duties. Proper administration reduces the risk of disputes, tribunal claims and compensation orders.