How do pay cuts affect statutory redundancy pay?
How do pay cuts affect statutory redundancy pay?
Many employers negotiate staff pay cuts to avoid making redundancies. If redundancies later become inevitable, is a statutory redundancy payment (SRP) calculated using the reduced rate of pay or the employee’s original salary?
It is believed that 18% of employers now believe that some redundancies across its workforce will be inevitable. To avoid this, some employers cut their employees pay……
Original or reduced?
Our reader wants to know if any statutory redundancy pay (SRP) should be calculated based on the employee’s original salary or if they can use the negotiated reduced rate of pay?
The answer is that it depends on whether the pay cut was a temporary one or if it was a permanent variation to the employee’s employment contract.
The calculation
Where there was a permanent variation to the employee’s contract, the SRP can be calculated on the reduced rate of pay.
Alternatively, if our subscriber agreed that the employee’s pay would only be reduced on a temporary basis, e.g. for a few months, any SRP that’s due should be calculated using the employee’s original salary.
If the pay reduction was left open-ended (which isn’t advisable), our subscriber’s employees will have a strong argument that their original salary should be used to calculate a SRP .
Employees are only entitled to receive an SRP when they’ve completed two years’ continuous service with their employer - it is not a day one right.
Calculating an SRP
An SRP is calculated using the employee’s
age (there are no lower or upper age limits for redundancy payments)
number of complete years’ service up to a maximum of 20 years; and
weekly pay figure which is subject to a statutory cap - for 2022/23 this is £571.
A written statement
Once this information is to hand, an SRP can be calculated using our redundancy payments ready reckoner (see The next step ). The Employment Rights Act 1996 also requires employers to set out in writing how they’ve calculated a SRP, but there’s no prescribed or official format for this.
So, you can include this information in a redundancy termination notice (see The next step ). Alternatively, you may prefer to give redundant employees a separate SRP calculation when the payment is made to them (see The next step ).
Tip. An SRP is normally paid to an employee on the last day of their employment or shortly thereafter, e.g. on your next payroll run. However, if the SRP is not going to be paid on the employee’s last day of employment, advise them of this in writing and when the payment will be made to them - this will avoid any unnecessary queries.
If the pay cut was made on a temporary basis only, the SRP should be calculated using the employee’s original salary. Where it was a permanent change to the employment contract, the new rate of pay can be used. Either way, the statutory cap on a week’s pay applies and the employee must receive a copy of the SRP calculation in writing.