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Furloughed employees will be entitled to receive redundancy payments at their normal rate of pay, rather than the reduced furloughed rate. This change on redundancy pay was announced by the government on 30 July and applies with immediate effect from today, 31 July 2020.

What is the change to redundancy payments?

Redundancy payments are calculated based on a “week’s pay” which is a set legal calculation. For employees that have standard working hours and receive an annual salary that doesn’t vary, this calculation is straightforward and is based on their normal annual salary. These employees would already have received redundancy payments calculated on their normal pay, even if they were on furlough.

For employees that don’t have normal working hours and whose pay therefore varies month to month, for example because they work shift patterns, the calculation of a week’s pay is based on an average of their last 12 weeks’ pay. For these employees, if they had been placed on furlough for some or all of the last 12 weeks’ under the normal rules their redundancy payment would be lower as it would take into account reduced pay during furlough. This discrepancy has been raised by many as being unfair.

The change in the rules, which takes effect from 31 July 2020, means that when employers calculate redundancy pay they should disregard any reduction in salary due to furlough. If an employee does not have normal working hours, their “week’s pay” for redundancy payments should now be calculated based on their reference salary for claiming furlough pay (i.e. the amount submitted by the employer to work out the percentage of salary they can then claim for the employee from the government).

Redundancy payments are only available to qualifying employees that have over 2 years’ service with their employer.

The change also affects the calculation of statutory notice pay. We have previously advised that employers should top up furlough pay to ensure that employees receive their normal pay during periods of notice while they are on furlough, which this change confirms is the correct approach.

What do employers need to do?

Employers need to do the following:

  1. Employers that have already calculated redundancy payments for employees that are under redundancy consultation but whose employment has not yet ended should review their redundancy payment calculations and make any adjustments needed.
  2. Employers that are considering commencing redundancy consultation should ensure that they calculate redundancy payments for eligible employees using the new methods.
  3. Employers should continue to ensure that employees that are working their notice whilst on furlough receive their normal pay during their notice period. 

If you would like to discuss any issues covered in this update please contact a member of the Employment team.

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