New legislation passed guarantees statutory redundancy and minimum notice pay will be based on normal weekly pay for some

Since the introduction of the job retention scheme (“JRS”) there has been debate surrounding the correct rate of pay to give for employees who are given notice of redundancy while on furlough. This ambiguity has led some employers to pay statutory minimum notice and redundancy at the furlough rate rather than an employee’s usual weekly rate in an attempt to save money. 

To address this uncertainty new legislation was passed (hastily) on 30 July 2020. Like most government changes we have at this time, the rules are complicated but essentially, the new legislation changes the way a statutory “week’s pay” is to be calculated in respect of statutory redundancy and statutory minimum notice periods for those on furlough leave. From 31 July, the new legislation effectively means, employers have to disregard any time spent on furlough leave/pay for the purposes of calculating a statutory “week’s pay”.

The cap on a week’s pay does; however, continue - £538 per week.

Employers need to be aware of the changes and make budgetary plans quickly.

Statutory Redundancy Pay

For most employees, the change in legislation will not impact upon their statutory redundancy payments as most will already be subject to the week’s pay statutory cap of £538 applied to their statutory redundancy pay. However, for other employee’s whose pay has been impacted and reduced by furlough leave, using pre-furlough rates of pay could make a real difference.

The pre-furlough week’s pay calculations do not impact upon any employer-backed redundancy payment scheme, unless of course it chooses to or it states it will follow the statutory rules relating to the calculation of a week’s pay. However, there could be tension between employees if some feel they are getting more than others.

Statutory Notice Pay

Similarly, where an employee has fixed hours or pay per week, and is entitled to receive statutory minimum notice (or no more than 1 week more than statutory minimum notice), employers should use their pre-furlough weekly rate of pay when working out statutory minimum notice and apply the cap (£538) accordingly.

If an employee instead, has variable pay as their hours are flexible, employers should continue to work out an average over the last 12 weeks (ignoring weeks where they did not earn anything) and again, use normal weekly average pay and not furlough pay where these employees are entitled to statutory minimum notice (or no more than 1 week more than statutory minimum notice). Then the weekly, statutory cap can be applied.

Always check the contract of employment!

What if contractual notice is longer than statutory minimum notice? What if, for example, someone has been employed for 3 years but is entitled to 3 months’ notice so above statutory minimum notice of 1 week for every year up to maximum of 12 weeks for 12 years’ service?

Where an employee’s contractual notice entitlement is more than 1 week longer than the statutory entitlement, it would appear the new rules do not apply and employers can choose to pay furlough pay or pre-furlough pay depending on what has been agreed in the furlough letter.

These changes only apply to those employees who are on furlough leave and from 31 July. Where does this leave employees who have agreed to a pay reduction? These new rules will not apply. Much will depend on the terms of the pay reduction and whether it is temporary or permanent. Again, this could cause tension within the workforce if those on furlough are being paid more than those who have been working and taken a pay cut to save the business.

Whilst the government is urging all employers to avoid redundancies where possible, Business Secretary Alok Sharma stated that those facing redundancy under the new rules will not be “short changed”.

JRS Changes

When it was first established employers were able to recover 80% of an employee’s usual salary up to a maximum of £2,500 a month under the JRS. Employers had the option to top the salary up or to agree the reduction in pay with their employees.

As of 1 August 2020, the government is still paying 80% of the employee’s salary, but the employer is now required to pay the employee’s national insurance and pension contributions.

From 1 September 2020, the government’s contribution towards furlough salary will drop to 70% subject to a cap of £2,187.50 and the employer will need to contribute the other 10% of the furloughed employees’ wages, plus their national insurance and pension contributions.

Further changes will take place on 1 October 2020, when the government’s contribution will fall again to 60% subject to a cap of £1,875 and the employer will have to contribute 20% plus national insurance and pension contributions for an employee still on furlough.

Employer contribution to furloughed wages is steadily set to rise, with the JRS due to be closed from 31 October 2020, meaning that employers will once again become responsible for paying the wages of their employees without government assistance.

It is hoped that with lock down restrictions being eased and the UK currently seeing its lowest rates of recorded Coronavirus cases that businesses will see a steady increase in business and the need for redundancies will decrease. Employers are reminded that the Chancellor announced that a £1,000 bonus will be paid for each employee that is brought back from furlough and remains in employment until the end of January 2021.

If you would like to discuss a possible redundancy situation with us, or any other matter please contact us by email [email protected].