The Department for Business, Energy & Industrial Strategy published a statement on 30 July announcing that furloughed employees will receive statutory redundancy pay based on their normal wages, rather than a reduced furlough rate. This measure was introduced as part of the government’s general efforts to protect people’s incomes through the Coronavirus Job Retention Scheme and prepare for the impending rise in redundancies as the scheme winds to a close. The new rules were introduced by The Employment Rights Act 1996 (Coronavirus, Calculation of a Week's Pay) Regulations 2020 (SI 2020/814) (the Regulations), which came into force on 31 July 2020. This LawFlash considers what this welcome clarification will mean for employers who are considering making furloughed employees redundant.
This LawFlash supplements our detailed prior analysis that sets out the key considerations for UK employers as the furlough scheme draws to a close.
Employees with more than two years’ continuous service who are made redundant are usually entitled to a statutory redundancy payment, based on their length of service, age, and pay, up to a statutory maximum. However, the government has noted that a minority of businesses have taken advantage of the furlough scheme in order to pay reduced redundancy rates based on reduced furlough wages.
In a continued attempt to support workers during the pandemic, businesses will now have to pay employees their full redundancy entitlements under the new legislation that came into force on 31 July. This means that furloughed employees who are made redundant will now receive statutory redundancy pay based on their normal wages, even if they were receiving 80% of their wages since March.
The Regulations will continue to apply until the relevant statutory entitlements are no longer affected by an employee being or having been furloughed. Employers who effected redundancies and made payments before 31 July will not be retrospectively covered by the Regulations but may inadvertently face scrutiny by employees in the coming weeks if they used reduced rates to calculate these entitlements.
The amount of statutory redundancy pay depends on an employee’s average weekly pay, length of continuous service and age. An employee’s average weekly pay is usually worked out by calculating the average pay received over the 12 weeks immediately before they receive notification of their dismissal by way of redundancy. Workers with normal working hours (and whose pay does not vary with the amount of work done) are typically entitled to rely on their basic salary for the purposes of the redundancy calculation.
The Regulations prescribe that the calculation of a week’s pay in relation to furloughed employees is to be calculated with reference to an employee’s full pay. Employees on fluctuating hours are typically entitled to a payment based on the average of their last 12 weeks’ pay, which is likely to be at the reduced 80% figure if they were furloughed. The new law provides necessary clarity for such employees who may have been negatively impacted due to the nature of their working pattern.
The new law applies to basic statutory redundancy pay entitlements where the calculation falls on or before 31 October 2020; any additional or enhanced redundancy pay stipulated in individual employment contracts will continue to apply in accordance with ordinary employment laws.
The new legislation also requires employers to calculate other statutory payments with reference to a furloughed employee's normal pay, thereby amending the definition of “weekly pay” to a furloughed employee’s normal pay. These include:
These measures will ensure that furloughed employees retain their pre-furlough rights and are not prejudiced for having taken advantage of the government scheme.
The furlough scheme is scheduled to end on 31 October 2020. While some employers may delay planned redundancies in order to benefit from the Job Retention Bonus, it is likely that severely affected businesses will proceed with making redundancies in the near future, if they haven’t done so already. The National Institute of Economic and Social Research think tank recently estimated that unemployment could rise to 10% of the British workforce by the end of 2020.
Unlike the statutory schemes designed to assist employers during the pandemic, the cost of redundancy payments is a protection for employees, the cost of which must be borne solely by employers. The present climate and impending rise in unemployment means that for some, every penny counts. The difference between a full and reduced redundancy payment could go a long way to assist those struggling financially.
It is widely recognised that a large number of businesses have been impacted by the pandemic and will have no option but to reduce their workforce. While redundancies may be unavoidable, they must be fair and reasonable in the circumstances. The new laws might simply affirm what some employers are already doing, but will go a long way to prevent those taking advantage of the scheme to effect cost savings. Notably, basic awards for unfair dismissal cases must be calculated on full pay, which should also serve to deter employers from dismissing under illegal grounds.
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If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
London
Matthew Howse
Louise Skinner