How do I work out redundancy pay?

Calculating statutory redundancy payments

Many employers will be familiar with the method of calculating an employee’s statutory redundancy payment and, in most cases, it will be a straightforward calculation based on an employee’s basic weekly wage, age and length of service.   However, where an employee receives overtime or commission or some other additional pay on top of their basic wage, the calculation can be more complicated.   Here is a brief guide to what counts and what does not count when calculating an employee’s statutory redundancy payment. 

Redundancy Pay 101

As a reminder, the basic method of calculating the amount of an employee’s statutory redundancy entitlement is as follows:

• 0.5 week’s pay for each year of employment up to age 22
• 1 week’s pay for each year of employment between the ages of 22 and 40
• 1.5 week’s pay for each year of employment aged 41 or over

The following rules also apply:

• A week’s pay is capped at £548 (currently – it changes every April); and
• Length of service is capped at 20 years. 

How to calculate a week’s pay

A week’s pay for statutory redundancy pay purposes is based on the employee’s gross pay, capped at the statutory maximum, before tax and NI is deducted.  If the employee’s gross weekly pay exceeds the statutory maximum, then it is plain sailing because you do not have to calculate the exact figure.   However, when the employee earns less than the statutory maximum, you need to work out the precise figure­ – which is when it can get tricky.     

What counts/does not count towards a week’s pay

The main thing to note – which may come as a surprise – is that what counts towards a week’s pay for the purposes of calculating a statutory redundancy payment is different depending on the hours of work and type of work the employee does. 

Employees will generally fall within one of the following three categories

1. Employees with normal working hours whose pay does not vary with the amount of work done.

For these employees, the calculation of a week’s pay for the purposes of a statutory redundancy payment will be “the amount payable if they work their normal working hours in week”.  In other words, this means the employee’s basic salary without any bonuses or commission payments.   

There are some exceptions to this.   For example, an attendance bonus will count in the calculation of a “week’s” pay because it is part of the employee’s entitlement for working their normal hours.    Overtime will count but only when it is guaranteed compulsory overtime.  Commission, such as sales commission, however, will not count.  So, an employee on a low basic salary whose main earnings are derived from commission will potentially lose out considerably when it comes to a statutory redundancy payment.   

2. Employees with normal working hours but whose pay varies according to the amount of work done or the time of work.

The employees who fall into this category are typically those who do piece work – so they get paid according to volume of output – or employees whose pay varies according to what shift pattern they are on.   For these employees, their week’s pay is based on their average pay during those normal working hours over the previous 12 working weeks – including “any commission or similar payment which varies in amount”.  

3. Employees with no normal working hours. 

For these employees, the calculation is straightforward – a week’s pay is calculated as an average of all the sums earned in the previous 12 weeks in respect of which remuneration was payable.  So, for these employees, any overtime payments, any bonuses, and any commission must all be included.

It is important to mention that these rules about what counts/ does not count towards a week’s pay only apply to statutory redundancy payments.  They do not apply to working out statutory holiday pay or notice pay because these – unhelpfully – go by a different set of rules!

Other payments/benefits

1. Benefits in Kind

Benefits such as private health care, permanent health insurance, etc are not regarded as “pay” and therefore you do not need to include the value of these benefits in the calculation of a week’s pay.

2. Tips, service charges and gratuities

If tips are paid by customers directly to employees, they will not form part of the employee’s remuneration and so will not count towards a week’s pay for the purposes of calculating statutory redundancy entitlement.   The same is likely to apply where a tronc system is used to pool and distribute tips – because the tips are not paid by the employer, the argument is they cannot be “remuneration”.    On the other hand, tips left on cheque and credit card payments passed to the employer could be regarded as “remuneration” for the purposes of calculating a week’s pay – because the employer pays out the tips.  However, there is no definitive ruling on this. 

3. Pension Contributions

Employer pension contributions count as “remuneration” for the purposes of calculating a week’s pay, so you need to include these in your calculations.  This can increase the potential value of a week’s pay quite considerably if the scheme is one where an employer makes a high contribution (e.g. a final salary scheme) although such schemes are rare these days.

Redundancy payments and furlough

One final point to mention is that employees who are furloughed or on flexible furlough are entitled to statutory redundancy pay calculated according to their normal wages (i.e. not on their reduced furlough rate).