Redundancy and notice pay for furloughed employees

From 31 July 2020 employers must pay redundancy at the employee’s normal weekly rate (capped at £538 per week) and statutory notice at the employee’s normal rate (uncapped) rather than their furloughed rate.

This has been prompted by many employers calculating redundancy based on the furloughed rate, which has taken the employee’s weekly rate below £538 and also paying notice at the furlough rate for those whose contractual notice exceeded statutory minimum notice by at least a week, which has therefore saved employers money.

New regulations, The Employment Rights Act 1996 (Coronavirus, Calculation of a Week’s Pay) Regulations 2020, broadly seek to ensure that, for those furloughed employees whose employment is terminated, the calculation of their statutory entitlements relating to termination is based on their normal pay rather than on their furloughed pay. The entitlements concerned are redundancy pay, statutory notice pay, compensation for unfair dismissal, failure to provide a written statement of reasons for dismissal, failure to comply with an order for reinstatement or re-engagement and remuneration for time off to look for employment or arrange training.

The regulations do not affect any entitlements of employees who have not been furloughed – they only relate to those who’ve been furloughed (including flexibly furloughed) and those who’ve recently returned from furlough.

Employees with more than two years’ continuous service are entitled to statutory redundancy pay based on length of service, age and pay, up to the statutory maximum. Calculating statutory redundancy pay is not always straightforward. Employers need to calculate a week’s pay under the 1996 Act at the ‘calculation date’. The calculation method for a week’s pay varies depending on whether the employee has normal working hours or no normal working hours. Broadly speaking, if pay and hours fluctuate a 12-week period is used to calculate average pay.

Under the 1996 Act, the calculation date for notice pay is the day immediately preceding the first day of the period of notice required. The 2020 regulations state that, for employees with normal working hours, if the calculation date for statutory redundancy pay or statutory notice pay falls on or before 31 October 2020 (when the furlough scheme comes to an end), the amount which is payable ‘is to be calculated disregarding any reduction in the amount payable as a result of [the employee] being furloughed’. This also applies to contractual notice, if this is not at least one week more than statutory minimum notice.

There is an exception where the employer and employee have agreed a variation in working hours intended to last beyond the employee’s furlough arrangements. In this instance, the calculation date is that provided for in the 1996 Act.

There’s 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). The new rules also do not preclude employers paying a lower rate of pay for contractual notice periods which exceed the statutory minimum by at least one week.