Sometimes, certain roles within your company become redundant. Maybe technology has slowly eliminated the need for a specific job. Or maybe you realize that you basically have two employees who do the same thing—and there’s not enough work for both. No matter the reason, nothing is fun about letting an employee go due to redundancy.
So can a redundancy payment help soften the blow? A redundancy payment is a lump sum given to an employee after a company makes their position redundant.
There’s no specific redundancy payment law for US businesses to follow. But many businesses offer severance packages in much the same spirit as a redundancy payment.
We’ll explore why this type of compensation is important—even if it’s not the law here in the US.
What Exactly Is Redundancy Pay?
Redundancy pay is one-time compensation that helps alleviate the impact a sudden job loss has on the affected employee. The US may not have any labor laws that require redundancy pay, but the UK does.
The Parliament of the United Kingdom established the Redundancy Payments Act in 1965. It’s one of the three foundational principles of UK labor law.
The other two are the Contracts of Employment Act 1963, which requires employers to give a statutory minimum notice before making someone redundant, and the Industrial Relations Act 1971, which gives employees the right to a fair dismissal.
Together, the UK’s foundational labor laws give employees the right to:
- Be dismissed for fair reasons only, such as economic redundancy, poor conduct, or unmet qualifications
- Receive notice of termination one week to 12 weeks before the effective termination date, depending on seniority
- Take home statutory redundancy pay if you’ve worked for the employer for two or more years
Statutory redundancy pay is based on three things: an employee’s wages, age, and the time they spent at the company.
All calculations are based on the average an employee earned per week over the 12 weeks before the day the employer gave the redundancy notice.
This is capped at a specific amount based on the UK’s average weekly wage, which changes from year to year. In 2023, the cap is £643 (£669 in Northern Ireland) per week.
Here’s what employees receive:
- Half a week’s pay for each full year they were under 22 years old
- One week’s pay for each full year they were 22-40 years old
- One and a half week’s pay for each full year they were 41+ years old
Only 20 years of service can be counted. This protects employers from having to pay an astronomical redundancy sum to someone with 30 or 40 years of employment at the company. The weekly pay cap helps with this, too.
Calculating Redundancy Pay in the UK
You can head to the UK government’s statutory redundancy calculator to get a clear picture of an employee’s potential redundancy pay.
I went ahead and did it for fun.
My hypothetical employee was 44 years old at the time of redundancy. They earned a weekly salary of £640 per week before taxes and had worked for the employer for 15 years.
With these calculations, my mock employee would take home £10,560 in redundancy pay. This is equivalent to about $12,845.
If they were 30 years old and had five years of experience working for an average of £450 per week before taxes, they’d get just £2,250 (about $2,735).
Of course, employers can pay more than the statutory minimum if they want. Many do this when they want people to make themselves redundant voluntarily.
And in the UK, up to £30,000 of redundancy pay is tax-free for the employee.
Why is Redundancy Pay Important?
The heart of the UK’s Redundancy Payments Act (RPA) 1965 is to protect employees from sudden termination. The final redundancy payment can give employees some time to find a new job without stressing too much about finances.
This might not seem very beneficial to employers, but it is.
Hear us out.
The UK introduced the RPA 1965 to help employers understand the social cost of unemployment. High unemployment rates batter a community’s collective mental health, financial health, and overall morale.
This, in turn, makes it harder for employers to find people with the social and financial support system they need to do meaningful work.
Here’s an example of this.
Mary, a mother of two school-aged children, works full-time at a marketing company in the US. Her partner, Jesse, works at an ad agency across town.
One day, Mary loses her job unexpectedly. She’s totally blindsided, and her company doesn’t offer a severance package or redundancy pay.
Having faced a medical crisis two years earlier, Mary and Jessie don’t have more than a couple thousand dollars in savings. Combined with Jesse’s salary, it’s no match for the family’s expenses—much less the ever-rising rate of inflation.
With student loans, credit card debt, and a mortgage to pay, the loss of Mary’s job is a huge blow to Mary, Jesse, and their kids.
Mary applies for dozens of jobs, but she doesn’t hear back from any of them right away. The home life starts to suffer as Mary and Jesse stress about their lack of income. Jesse starts having a difficult time focusing on his own work.
A week after the job loss, he turns in a big project late and receives a demerit. Now he’s worried about his job security, too.
Meanwhile, the two children are struggling with the abrupt disappearance of the little luxuries they used to enjoy—things like after-school ice cream dates or decent birthday party gifts for their friends.
Their parents’ stress rubs off on them the most, though, and they start to get cranky at school. One child even lashes out at the teacher, sending her into a spiral that then affects her performance at her job for the rest of the day.
Jesse and Mary get called to the school, which means Jesse has to miss work. He’s already walking the tightrope at his job and this makes everything worse.
The longer Mary goes without a job, the deeper the effects of the financial strain on Mary, Jesse, their children, Jesse’s employer, Jesse’s employer’s clients, and the wider community.
Now imagine there are 12,000 people in Mary’s situation in a city of 300,000 people—an employment rate of 4.0%.
No one benefits from this widespread stress. Unemployment is a lot more bearable if there’s redundancy or severance pay to help people with their finances as they search for their next job.
That’s why the Redundancy Payments Act 1965 was established. And it’s why you should work on implementing something similar at your company, even if you’re not required to.
Severance Pay vs. Redundancy Pay
If you’re a US-based employer, you might be wondering, “What’s the difference between redundancy and severance?” How can you know which one to offer your employees?
Think of it this way: redundancy pay is a type of severance pay. And in the UK, redundancy pay is the term that carries legal weight and applies only when an employee is made redundant.
In the US, on the other hand, severance pay is the more common term. It can mean a payout or set of benefits that employees receive when they are laid off or made redundant. Some employees even receive severance when they retire.
Since it covers more than just redundancies, severance pay in the US is more permissive than the UK’s redundancy pay law. Redundancy is just one of the many reasons employers might grant severance pay.
Without Redundancy Pay, Severance is a Good Idea
It only takes a quick look at our hypothetical story of Mary and Jesse’s financial downfall to see that severance pay is ethical. But that’s hardly the only reason companies do it.
Severance pay can also:
- Help protect companies against costly lawsuits. While the US gives employers free rein to fire their employees at-will in many situations, there are important exceptions. A severance package can help keep you out of hot water if an employee sues you for wrongful termination.
- Preserve a company’s reputation. Angry employees who are legally fired at-will tend to spread the news about how poorly their former employer treated them. This can result in bad press for a company.
- Protect company secrets and other proprietary information. Companies can offer a severance package in exchange for a non-disclosure agreement (NDA). Some companies also push non-compete clauses, but these aren’t really worth signing for employees if they limit their ability to find a new job in the same industry. NDAs are enough.
To create your own severance package, look at the framework provided by the UK’s redundancy law. It has both employee and employer protections built in.
In the United States, you should also think about how healthcare, PTO, and other benefits play into a severance package. Consider including:
- Severance pay in accordance with an employee’s length of service and average weekly pay
- Continued healthcare, dental, vision, and life insurance benefits at the same rate for at least two months
- Payouts for unused PTO (which are legally required in an increasing number of states)
- Job placement assistance or career counseling
Helping your soon-to-be former employees feel supported as they transition out of their role is a gift to your team and your company. Check out our guide to the best payroll services for the software you’ll need to pull it all off.
