Redundancy pay paid to furloughed workers based on normal wages

From Friday 31st July 2020, furloughed workers losing their jobs became eligible for redundancy pay based on their normal wages and not their furlough rate.  The new law ensured that workers now receive their full pay-off, said Business Secretary Alok Sharma, who added “It is important that employees receive the payments they are rightly entitled to.”

The legislation was a rapid response to what the Government had seen as a ‘loophole’ allowing employers to pay severance sums based on the less generous furlough pay – 80% of normal wages, capped at £2,500 per month.

Workers with more than two years of 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 Government confirmed that a minority of firms had taken advantage of the current crisis to calculate the payout at the lower rate.

The furlough scheme requires employers to ask employees for their consent to be furloughed. When doing this, many employers made a commitment that if an employee subsequently had to be made redundant, they would pay redundancy pay based on the employee’s pre-furlough wages or salary. However, not all employers included this commitment when asking consent which, until this legislation was introduced, allowed them to make reduced payments.

The new law will also apply to statutory notice pay and will ensure that notice pay is based on normal wages rather than the lower wages they may have been paid under the Coronavirus Job Retention Scheme.

Similar provisions apply for employees whose pay varies with the amount of work performed, or who have no normal working hours. In these cases, pay is normally averaged over the last 12 weeks. The new rules apply where this period includes at least one week during which the employee was furloughed and ensure that the averaging is based on full rather than reduced pay.

There has been no change the cap on a week’s pay for the purpose of calculating statutory redundancy pay (currently £538), so there is no effect on the overall maximum statutory redundancy payment or unfair dismissal basic award that an employee can receive (currently £16,140).

This means that the overall effect of the legislation is likely to be modest but could still be very significant for newly redundant employees facing a difficult jobs market. Or, indeed, for businesses trying to make savings wherever possible in order to stay afloat.

The calculation of notice and redundancy pay in these circumstances can be complex. If you should require any advice or assistance please don’t hesitate to contact info@briarsgroup.com