Can we pay more than the statutory maximum redundancy pay?

There are both age discrimination and tax issues to consider.

Statutory redundancy payments

Changes were made in October 2006 to the rules for calculating statutory redundancy pay (SRP) in order to remove, at least to some extent, the potential for discriminating on the grounds of age.  The resulting rules for paying SRP are:

1. the employee must be dismissed due to redundancy (as defined)
2. the employee must have two years’ continuous employment at the “relevant date” (normally the date on which the employment ends)
3. payment must be made in respect of a period of up to 20 years’ continuous employment, ending on the relevant date
4. for each complete year of continuous employment, the number of weeks’ SRP is
   • 1½ weeks for each full year that the employee was not under age 41, plus
   • 1 week for each full year that the employee was not under age 22, plus
   • ½ week for each full year that the employee was under age 22.
5. the amount of a “week’s pay” is calculated using the statutory “week’s pay” rules, but limited to a statutory ceiling, £400 per week (from February 2011).

It will be noted that the employee’s age is still a factor in determining the number of weeks that are used for the SRP calculation.

Example: Two employees are redundant.  The relevant date in both cases is 31 May 2011.  Employee A is 66 years old and has 18 years’ service.  Employee B is 34 years old and has 18 years’ service.  Their “week’s pay” is more than £400 per week, so the statutory ceiling applies in both cases.

Employee A is entitled to £10,800 SRP (i.e. 18 years × 1½ weeks × £400).

Employee B is entitled to £6,000 SRP (i.e. (6 years × ½ week) + (12 years × 1 week) × £400)

Although the difference is attributable to the age of each employee, this is permitted by the Schedule 9(10) of the Equality Act 2010 and is not therefore treated as age discrimination.

SRP is not taxable or subject to Class 1 NICs.  It is, however, added to any other qualifying termination payments when determining whether they exceed the £30,000 exemption for tax purposes.

Enhanced redundancy payments

Schedule 9(13) of the Equality Act 2010 provides an exception for enhanced redundancy payments to “qualifying employees” if certain conditions are met.  This is the only specific reference in statute to “enhanced redundancy payments”, although they are also treated as being exempt from income tax to the extent that, when combined with all other qualifying termination payments, they do not exceed the £30,000 limit.  As with SRP, there are no NICs liabilities, irrespective of the amount involved.

Employees are “qualifying employees” if they

• are entitled to SRP, or
• would have been entitled to SRP if they had two years’ continuous employment, or
• volunteered for redundancy, irrespective of their length of service.

The statutory exception from age discrimination applies where:

• a payment made to one qualifying employee is less than the payment made to another qualifying employee and the same rules have been used to calculate both payments, or
• a payment is made to an employee who is entitled to SRP or who would have been entitled to SRP if it were not for having volunteered for redundancy.

Because of the way that an “enhanced redundancy payment” is defined in the Regulations, either of these situations could result in younger employees receiving a smaller payment than older employees, or no payment at all, in otherwise identical circumstances.

For a payment to be an “enhanced redundancy payment”, it must initially be calculated in exactly the same way as SRP.  It may then be adjusted by

1. not limiting the amount of the payment by the statutory ceiling, or limiting it to a figure higher than the statutory ceiling, and/or
2. multiplying the number of weeks (according to the three age bands) by a factor of more than one, and
3. whether or not an (a) and/or (b) adjustment is made, multiplying by a factor of more than one.

Example: Two employees have volunteered for redundancy.  The relevant date in both cases is 31 May 2011, the date on which the termination takes effect.  Employee A is 65 years old and has 10 years’ service.  Employee B is 27 years old and has 10 years’ service.  A “week’s pay” is £250 for Employee A and £600 for Employee B.

Neither employee is entitled to SRP as they are not being dismissed for redundancy.  The employer provides instead an enhanced redundancy payment.  It is calculated in the same way as SRP but (1) there is no ceiling to the “week’s pay” and (2) the resulting payment is doubled.

Employee A receives £7,500 (i.e. 10 years × 1½ weeks × £250 × 2).

Employee B receives £9,000 (i.e. (5 years × ½ week) + (5 years × 1 week) × £600 × 2)

The calculation of the enhanced redundancy payments has followed the SRP rules for both employees.  The employer has only varied the calculation by (1) not applying the statutory ceiling and (2) multiplying the payment by a factor of 2, both adjustments being permitted by the Act.  The difference in the payments is covered by the statutory exception so is not treated as age discrimination.

If the employer chooses to adjust the payments as described above, the same adjustments must be made to each of the three age bands.  For example, the same increased weekly limit must be applied to all three bands, or the same factor must be applied to each of the three bands.  An employer may make different adjustments to the bands but, as required by the Equality Act 2010, would, if challenged, have to show that the different adjustment is a “proportionate means of achieving a legitimate aim”, i.e. justify it objectively.

If the conditions for the exception are met, employers with enhanced redundancy packages that are modelled on the SRP rules are protected from claims of age discrimination.  However if the enhanced payment is calculated in a significantly different way, the exception does not apply and the employer would have to amend the rules or endeavour to justify the differences objectively.