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Why do employers offer enhanced redundancy payments?

Posted on September 04, 2017

Why do employers offer enhanced redundancy payments?

Many, though by no means all employers, will offer enhanced severance payment if they have to make an employee redundant.

Employees with over two years’ service have the right to a statutory payment on termination of employment. This accrues at the rate of one weeks’ pay to a maximum of £571 (or £544 for redundancies before 6 April 2022) x full years worked (to a maximum of 20). There is a multiplier of 1.5 for years worked over the age of 41.

For example, an employee aged 51, working 5 years and earning £800 pw will receive a Statutory Redundancy Payment of £4,282.50 (£571 x 5 years x 1.5).

Here are some reasons why employers may choose to give an enhanced redundancy payment:

  • The statutory redundancy payment may not last very long. Employers may want help out their loyal ex-employee until s/he gets another job;
  • They may want to reward loyalty and length of service. In theory, this could amount to indirect age discrimination under the Equality Act (older employees tend to have worked longer for the same employer). However if the employer mirrors the statutory provisions (for example by paying a full weeks pay per year worked), they are likely to be able to successfully defend any claim under the Act;
  • The redundancy may be legally suspect. By making an offer subject to a legally binding settlement agreement, the employer can a) cut short the redundancy selection process and b) make sure the employee can’t sue them for unfair dismissal;
  • Additionally, the settlement agreement will generally include terms obliging the employee to maintain confidentiality, and not to make derogatory comments about their old employer, or getting them to sign up to post termination restrictions stopping the poaching of clients. This helps protect the reputation of the organisation by stuffing their mouth’s with gold;
  • Non-contractual payments on redundancy can generally be paid tax free (up to a cap, currently £30,000). Employers who pay discretionary bonuses, will normally say that there is no right to a bonus of the person leaves part way through the bonus year. Though no employer will admit it, a tax free compensatory payment on redundancy may well come pretty close to the taxable bonus they would otherwise have paid’
  • They may want to get the employee out of the door fairly quickly, and may prefer not to have a demoralised member of staff working out his/her notice for two or three months. For this reason many employers give a payment in lieu of notice (PILON) instead of making the employee work it.  PILON’s must always be taxed, so there is no tax advantage to receiving a payment in lieu of notice.
  • There but for the grace of God go I; many managers understand that their own positions may not be quite as secure as they would like. If they treat their own staff decently when making them redundant, they set a precedent which may also benefit them in the future.

Redundancy payments are often enhanced by:

  • Not requiring the employee to have worked a minimum of 2 years;
  • Removing the statutory cap of £571 on a weeks pay;
  • Sometimes offering two or more weeks pay for each full year worked;
  • Giving a payment in lieu of notice;
  • Offering outplacement support to help the employee find another job;
  • Allowing medical cover or car allowances to be extended for a period.

If you’re put at risk of redundancy, how do you persuade your boss to pay you an enhanced redundancy payment? Sometimes the company’s first offer will be better than you might receive even if you were unfairly dismissed, and you wont really need to negotiate at all. If you have to negotiate, there are three basic ways of going about it:

  1. Appeal to your manager’s better nature and encourage them to feel sympathy for the plight you find yourself in. Remind them that it could be them in a years time. If only a couple of you are being made redundant, this might work. If fifty of you are being let go, its unlikely to;
  2. Make life as awkward as possible in the redundancy consultation exercise, by asking searching questions, challenging the redundancy selection criteria and generally being difficult. Your employer may take the view it’s better go make you a reasonable offer, than to go through the rigmarole of dealing with your six page appeal letter;
  3. Argue that your redundancy is unfair, or that other claims arise. This is the approach that many solicitors will use. Employers often prejudge the outcome of the redundancy process and skew the redundancy selection criteria to get to the result they want. A careful analysis of the redundancy process may elicit grounds to challenge its fairness

Reculver Solicitors are employment lawyers and advise on redundancy, unfair dismissal and other employment matters and are based in London WC1. Reculver has developed a Redundancy and unfair dismissal Calculator tool which the statutory redundancy payment; the statutory notice period, payment in lieu of notice and a possible unfair dismissal award if out of work for six months.

Posted in: redundancy


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