Working out the cost of necessary job cuts
Published 14 May 2018
For any employee informed they will be made redundant one of the first questions they are likely to ask is ‘what will I get paid?’
How that figure is calculated is likely to be secondary when facing an uncertain future and loss of a regular and expected income.
The impact can be devastating for employees and for long-serving members of staff it can be life changing.
It is a position an increasing number of workers are finding themselves in. Large scale redundancies as a result of cost-cutting measures in ever changing commercial markets now seem to be a regular news feature.
BT recently announced plans to axe 13,000 jobs in the next three years. The telecommunications giant said the move and additional measures would help to reduce costs by £1.5bn (1).
The news comes after the Royal Bank of Scotland announced it is to close 162 branches, which will mean the loss of 792 jobs (2)
Toys R Us and Maplin also went into administration earlier this year, putting more than 5,500 jobs in doubt. Workers at Shop Direct face an uncertain future after the online retailer announced restructuring plans that will put nearly two thousand jobs at risk when it closes sites in Greater Manchester in 2020 (3).
There are two different redundancy payments that workers can be paid.
- Statutory redundancy pay – should be paid when an employee has worked for an organisation for two years or more.
- Contractual redundancy pay - extra money an employment contract says will be paid in addition to the statutory amount.
Smaller businesses are more likely to offer workers the statutory redundancy payment whereas bigger organisations may offer enhanced redundancy schemes.
Any payment made as a result of redundancy should be based on the worker’s gross pay, before tax is deducted. The statutory payment the employee gets is also paid tax free.
The government provides details of how statutory redundancy payments are calculated and the amount that should be paid (4)
For each full year an individual has worked for an employer they get:
- Age 18 to 22 - half a week's pay
- Age 22 to 40 - 1 week's pay
- Age 41 and older - 1.5 weeks' pay
For those who turn 22 or 41 during the course of their employment, the higher rates will only be paid for the full years that the employee is over 22 or 41.
There are limits to redundancy payments that will affect the high earners in particular and long-serving employees.
When being made redundant the maximum weekly amount you can get as part of the statutory payment is £508 - even if you earn more per week. You can also only get redundancy pay for a maximum of 20 years’ work (for example, if you’ve worked at your job for 25 years, you will only get redundancy pay for 20 years).
Many employers, not all, will offer enhanced redundancy payments. Such a payment is contractual in nature and is based on either a contractual or implied right to receive an enhanced redundancy payment.
The reasons for an employer offering enhanced payments can vary. They can include wanting to help and reward loyal employees; it can help to get rid of employees quickly and avoid having a demoralised members of staff working out their notice; and if the redundancy is questionable the offer can be subject to a legally binding settlement agreement that protects the employer from being sued for unfair dismissal.
The way in which redundancy payments are enhanced differ and can include:
- Removing the statutory cap of £508 on a weeks’ pay.
- Offering two or more weeks’ pay for each full year worked.
- Providing a payment in lieu of notice.
- Offering support to help the affected employee find another job.
In the last financial year (2016 – 2017) British businesses paid out an estimated £3.8bn to more than 250,000 employees who were made redundant (5).
1. BT cuts 13,000 jobs to slash costs. BBC News [Internet]. 2018 May 10 [cited 2018 May 14]; Available from: http://www.bbc.co.uk/news/business-44065422
2. RBS to close 162 branches and cut hundreds of jobs across the UK [Internet]. The Independent. 2018 [cited 2018 May 5]. Available from: http://www.independent.co.uk/news/business/news/rbs-job-cuts-uk-branch-close-network-england-wales-a8330846.html
3. 2,000 jobs at risk as Shop Direct closes three sites [Internet]. Sky News. [cited 2018 May 5]. Available from: https://news.sky.com/story/2000-jobs-at-risk-as-shop-direct-closes-three-sites-11326282
4. Redundancy: your rights: Redundancy pay [Internet]. GOV.UK. [cited 2018 May 14]. Available from: https://www.gov.uk/redundant-your-rights/redundancy-pay
5. Christie S. Businesses forked out £3.8bn in redundancy payments last year. The Telegraph [Internet]. 2018 Mar 19 [cited 2018 May 14]; Available from: https://www.telegraph.co.uk/business/2018/03/19/businesses-forked-38bn-redundancy-payments-last-year/