How to calculate redundancy pay for furloughed staff

Furloughed employees will now be entitled to redundancy pay based on their normal wages, not their furlough rate. Kate Palmer, Associate Director of Advisory at Peninsula, explains what employers need to consider.

Redundancy Pay Furlough Staff UK

What are the alternatives to redundancy?

With the coronavirus (COVID-19) pandemic causing significant issues for companies across the UK, many employers may be faced with the genuine prospect of making staff redundant.

However, there are some alternatives to redundancies that should first be considered, including:

  • reduced working hours
  • adjusting budgets
  • freezing pay
  • flexible working
  • voluntary redundancy

Up until now, however, if you have no option but to make staff redundancies, calculating notice pay for furloughed employees was a complicated area which depended on various factors. If staff have been furloughed and have therefore seen their wages decrease to 80 per cent, employers likely asked if their notice pay should be based on their usual wages or the new, decreased amount.

How do you calculate redundancy pay?

Staff who are made redundant are entitled to notice pay that is based on their usual working hours and the amount of time they have worked for the company. As a rule, they should receive ‘statutory notice pay’, which is:

  • one week’s worth of pay as a minimum when they have worked for a company for at least one month
  • at least one week’s pay per year of their employment, up to a maximum of 12 weeks, if they have at least two year’s continuous employment

The law states that statutory notice pay in certain circumstances is protected, which means that the employee should be paid in full for their statutory notice period; so, a full week’s pay for each week of notice. This applies even if the employee may not be in work because they are on sickness absence, for example.

However, this rule does not apply where the amount of notice that the employee is contractually entitled to upon dismissal is at least one week more than the statutory notice period. For this reason, the contract of employment should always be double checked to ensure that the correct salary is paid during the notice period.

How does the furlough scheme affect redundancy pay?

Not being provided with work while being ready and willing to work is another such instance of absence that would normally require full pay to be maintained during the statutory notice period. This is an accurate description of furlough.

Therefore, when an employee was on furlough, the contractual notice that they were entitled to was being compared with the length of statutory notice that applies. If the contractual notice was at least one week higher than the statutory, full pay was no longer protected.

This is why new legislation is being brought in to ensure furloughed staff who are made redundant will be entitled to redundancy pay based on their normal wages, not their furlough rate, effective 31 July 2020. Basic awards for unfair dismissal cases must also be based on full pay rather than furlough pay.

How was redundancy pay for those on furlough being calculated?

Up until now, many furloughed employees received the amount of pay contractually agreed for that absence when made redundant:

  • In most cases, the employee had agreed to receive 80 per cent of their pay while they are furloughed so, where pay protection did not apply, they received 80 per cent of their pay during the statutory notice period. If they agreed a higher rate of pay, then this was payable.
  • Where the contractual notice was not at least a week more than the statutory amount, meaning that notice pay was protected, the employee received 100 per cent of their pay regardless of the furlough.  

About the author

Kate Palmer is Associate Director of Advisory at global employment law consultancy at Peninsula.

See also

Five things to consider before making staff redundant

What you need to know about holiday entitlement and pay during lockdown

How will the workplace look after the lockdown?

What does it mean to be furloughed?

Find out more

Redundancy: your rights (GOV.UK)

Claim for loss of notice pay (GOV.UK)

Image: Getty Images

Publication updated: 3 August 2020

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.