Calculating redundancy payments for employees who have been furloughed

Redundancy payments should be based on pre-furlough pay but what happens where employees have no normal hours?

Despite the various efforts made by the Government to support employers through the pandemic, many will be faced with the unfortunate need to make staff redundant. Redundancies are not straightforward, but they will be complicated further where the employee is entitled to a statutory redundancy payment, has variable hours, and has been furloughed in the weeks leading up to their redundancy.

Employers need to also be aware that from 1 December 2020 they cannot use Coronavirus Job Retention Scheme (CJRS) funding to support notice pay for staff (whatever the reason for termination of employment). This change in the rules could have a significant impact on employers’ finances where they have not budgeted for this in their plans.

Calculating redundancy pay for employees with no normal hours

Provided an employee is entitled to a statutory redundancy payment (SRP), an employer needs to know three key things to calculate how much SRP is due: 1) the employee’s age at the date of termination of employment; 2) the employee’s length of service at the date of termination; and 3) the value of the employee’s weekly pay (which is subject to a statutory cap).

Calculating weekly pay for these purposes can be complicated by atypical working patterns. If an employee has no normal working hours, then weekly pay is calculated using a ‘reference period’. The reference period is the last 12 weeks prior to the date of redundancy in which the employee was entitled to remuneration. This includes paid non-working weeks (e.g. for paid leave such as holiday) but does not include weeks where no remuneration was due. If any weeks are excluded, then the employer must go back further in time to find the last 12 paid weeks. The weekly pay is the average of the total remuneration in those weeks, divided by 12.

How is this applied to furlough leave?

Firstly, it is important to note that furloughed hours are counted as hours in which the employee is entitled to remuneration for the purposes of the 12-week reference period. A key question is what value those hours are given.

When applying to the CJRS for funding, employers must calculate ‘reference pay’ to work out the value of furloughed hours. It is this reference pay, calculated in accordance with CJRS rules, which is applied to furloughed hours for the purposes of working out weekly pay for the SRP. However, it is important to note that the CJRS cap on pay (i.e. the £2,500 monthly cap) does not apply for the purposes of calculating weekly pay. 

Remuneration for any worked hours during the reference period is also included in the calculation of weekly pay.

Example

Tom is employed by OJ Ltd. Tom has minimum contracted hours, but the actual amount of work varies considerably depending on business needs. Work has diminished as the effect of the pandemic and lockdown has continued, and Tom agreed to go on to the flexible furlough scheme.

Unfortunately, OJ is now no longer viable and they must make all staff redundant. OJ need to calculate Tom’s weekly pay for SRP purposes.

Tom was flexibly furloughed during the 12-week period prior to his redundancy. In those 12 weeks he worked a total of 63 hours and was furloughed for 189 hours. Tom’s hourly pay is £10.90 and his hourly reference pay for the purposes of his furloughed hours was calculated by OJ to be £10.73, in accordance with CJRS guidance.

For the purposes of the statutory redundancy payment, OJ calculates Tom’s weekly pay to be:

• 63 hours worked x £10.90 = £686.70
• 189 furloughed hours x £10.73 = £2,027.97
• £2,027.97 + £686.70 = £2,714.67
• £2,714.67 ÷ 12 = £226.22 per week*

*Note that in this example the weekly pay is calculated to be under the statutory cap on a week’s pay (currently £538), but the cap would need to be applied if this were exceeded.

Selecting the correct reference period

Employers should note that the end of the reference period is determined to be the last 12 ‘full’ weeks (where remuneration was paid) prior to termination. If the termination takes place midweek, the end of the reference period is the end of the last full week before termination takes place.

Serving notice or being paid in lieu?

It is important for employers to understand that the pay reference period for SRP purposes depends on how they go about terminating staff employment contracts.

If someone is dismissed with immediate effect and paid in lieu of notice, then the end of the reference period is the date on which the unworked notice period (i.e. the greater of their contractual or statutory notice) due from the employer should have ended.

If the employee works their notice, the end of the reference period is the last date on which statutory notice should have been given by the employer. This is subject to the full week rule noted above. However, in this case, because the employer must look back to the last 12 weeks in which the employee was paid, these rules may not make a difference to the calculation.

Comment

Rules for calculating the right redundancy payment were brought in to ensure that employees are not penalised by being on furlough leave.

Unfortunately, those rules add to the complexity of calculating the redundancy entitlement and employers need to ensure that they are not under-valuing their redundancy pay calculations. An employee who is underpaid may seek to recover the value of the underpayment and, although the value of underpayment may not be significant itself, the administrational time involved in correcting any errors can add up to significant sums which employers will want to avoid incurring.

If you would like to discuss any aspect of this article further, please contact Michael Crowther or any other member of the Employment team on 0113 244 6100. You can also keep up to date by following Wrigleys Employment team on X. The information in this article is necessarily of a general nature. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors.