With effect from 31 July, the Government introduced new legislation to ensure that furloughed employees receive full redundancy payments and statutory notice payments.
- Eligible furloughed employees will be entitled to receive statutory redundancy pay based on their normal wages, rather than a reduced furlough rate, and;
- Furloughed employees will also be entitled to receive statutory notice pay and other entitlements, based on their normal wages, rather than a reduced furlough rate
Under new laws, furloughed employees who are then made redundant will receive redundancy pay based on their normal wage. The Government announcement stated that, throughout the pandemic, they have urged businesses to pay those employees being made redundant based on their normal wage, rather than their furlough pay, which is often less.
They state that, whilst the majority of businesses have based the redundancy, and notice payments made on the employees’ normal wage, a small minority have not.
The new legislation also covers other employment rights that rely on average weekly pay, including notice pay, unfair dismissal, and short-time working.
The effect of the new legislation: Redundancy payments
Employees with more than 2 years’ continuous service who are made redundant are usually entitled to a statutory redundancy payment that is based on length of service, age and pay, up to a statutory maximum.
The new legislation ensures that employees who are furloughed receive statutory redundancy pay based on their normal wages, rather than a reduced furlough rate.
The calculation for statutory redundancy pay for employees relies on inputting average weekly pay, alongside other factors such as length of continuous service and the employee’s age.
Average weekly pay is usually worked out by adding together the pay received over the 12 weeks up to when the employer notifies the employee that they are being made redundant, and dividing by 12, to get the average.
The new legislation ensures that, for the statutory redundancy payment calculation, employers must treat any weeks an employer spent on furlough over the 12-week reference period. as if they were working, and on full (100%) pay.
The legislation does not impact any enhanced redundancy pay that may be stipulated in the terms and conditions of an employee’s individual employment contract.
The effect of the new legislation: Statutory notice payments
The legislative changes also apply to statutory notice pay. This relates to any payments made to the employees working their notice period, or any payment made to the employee in lieu of working that notice. This can vary from at least one week’s notice up to 12 weeks’ notice, depending on how long they have worked for their employer.
The legislation ensures that notice pay is based on normal wages rather than reduced wages under the Coronavirus Job Retention Scheme (CJRS). Where an employee on furlough is working their notice, provided that the employee had previously been furloughed for at least 3 weeks prior to the 30 June, the employer can still make a claim under the CJRS scheme up to the relevant threshold, but they must top up the employee’s payment to the level of their normal pay entitlement. Any tax and Class 1 NIC due on the top up pay must also be calculated as normal.
Other changes coming into force as a result of the legislation will ensure basic awards for unfair dismissal cases are based on full pay rather than wages paid under the CJRS.
The new legislation, whilst fair, adds another complication to an issue that is already complex and easy to get wrong. We recommend that any business that is considering making either a number of staff redundant, or is negotiating a significant termination payment with an individual, takes specific Employment Tax advice prior to committing to making any offers of payment. Taking early advice can ensure that any payments made are both tax compliant and as tax efficient as possible for both the employer and employee.