Law change means furloughed employees must get full redundancy pay

With the furlough scheme set to be withdrawn on 31 October, and the UK economic recovery continuing to be more gradual than many would hope, some observers are still fearful of mass layoffs in the autumn.

The government has therefore acted swiftly to close a loophole which meant companies could fire furloughed employees, then base their redundancy pay on their (often lower) furlough salary, rather than their usual salary.

This piece will explain the law change, and how it affects small businesses owners.

What was the furlough redundancy pay loophole?

The rules around statutory (i.e. the legal minimum) redundancy pay are a little complex, and fully explained in our redundancy guide.

In simple terms, the amount you have to pay fired employees is always based on a percentage of their weekly pay.

You only have to make a statutory redundancy payment when an employee has worked for your business for at least two years.

The amount you need to pay depends on the age of the employee being made redundant, and how long they have worked for you.

This weekly pay is based on how much an employee was paid per week on average in the 12 weeks prior to the day they were given their redundancy notice.

However, under the furlough scheme, only 80% of an employee’s normal salary is covered by the government (with employers able to top up the rest if they wish).

This has meant that many employees have only been receiving 80% of their normal pay while on furlough.

Previously then, employees who were furloughed and then fired could receive lower redundancy pay, because they received a lower weekly wage whilst on furlough.

This would obviously further disadvantage those employees at a time of great personal stress.

While the government stressed that most employers have done right by their fired employees and based redundancy pay on their normal (pre-furlough) weekly pay, some have not.

This has led the government to make sure that the law makes clear that redundancy pay must be based on an employee’s normal weekly pay.

How has the redundancy pay law changed?

As explained above, the change to the law only affects the amount of statutory redundancy pay given to employees who are furloughed and then made redundant.

Now, from 31 July 2020:

It’s a key point for small businesses to take note of and, while basing redundancy pay on normal pay was always the right thing to do, this change means it’s now required by law.

Similarly, the government has said that this change will also apply to statutory notice pay – the pay an employee receives while working their notice period (i.e. the amount of time they have to work before being made redundant).

If employers pay employees a lump sum rather than having them work their notice period, then again, this amount must be based on a 12-week average of the employee’s normal pay.

Finally, basic awards in cases of unfair dismissal will also now have to be based on an employee’s weekly pay.

Summing up the changes, the Business Secretary Alok Sharma stated that the new law “will ensure furloughed workers are not short-changed if they are ever made redundant.”

Key points for your small business

• The government has closed a loophole related to redundancy pay for employees who are furloughed and then fired
• Now, redundancy pay must be based on a 12-week average of the employee’s normal pay
• This change also applies to statutory notice pay and basic awards in cases of unfair dismissal

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