When facing redundancy, one of the most pressing questions employees ask is: who pays redundancy compensation? The answer depends on several factors, including your employer’s financial situation, your length of service, and whether your company remains solvent. Understanding redundancy who pays responsibilities can help you navigate this challenging period with confidence and ensure you receive the payments you’re entitled to.
Redundancy occurs when your role is eliminated due to business restructuring, closure, or reduced need for certain positions – not because of performance issues or misconduct. This distinction matters because it triggers specific legal rights, including redundancy pay in many cases. Whether you’re an employee concerned about upcoming redundancies or an employer managing workforce changes, knowing who bears the financial responsibility for these payments is crucial.
This comprehensive guide will walk you through the payment framework, from statutory requirements to government safety nets, helping you understand exactly who pays redundancy compensation in different scenarios.
Who is Responsible for Paying Redundancy
The primary responsibility for paying redundancy lies squarely with employers. When a company makes employees redundant, the employer pays statutory redundancy pay to all eligible workers from their own funds. This obligation exists regardless of whether the redundancy was planned or sudden, and applies to both small businesses and large corporations.
However, the reality of redundancy who pays becomes more complex when employers face financial difficulties. The government’s Redundancy Payments Service (RPS) serves as a crucial safety net, stepping in when employers become insolvent and cannot meet their obligations. This dual-layer system ensures that employees don’t lose their entitlements simply because their former employer runs into financial trouble.
Payment responsibility depends entirely on the employer’s financial status and trading situation at the time of redundancy. A solvent company trading normally must pay all redundancy costs from company funds, while an insolvent business triggers government intervention through the RPS system.
It’s important to note that directors and company shareholders are not personally liable for redundancy payments in limited companies. The liability remains with the company entity itself, which means personal assets of business owners are typically protected from redundancy payment claims.
Statutory Redundancy Pay Requirements
To qualify for statutory redundancy pay, employees must have worked continuously for at least two years with the same employer. This continuous service requirement is strictly enforced, and breaks in employment can reset the qualification period. The weekly pay used for calculations is capped at £719 as of April 2024, which means higher earners won’t receive redundancy pay based on their full salary. Other statutory employment benefits, such as statutory sick pay (SSP), have their own eligibility criteria and payment rules.
The maximum statutory redundancy payment currently stands at £21,570 for someone with 20 years of service. This calculation uses a formula based on your age, length of service, and weekly pay, creating a structured approach to determining entitlements.
Payment rates vary significantly by age group, reflecting government policy to provide enhanced protection for older workers who may face greater challenges finding new employment:
- Under 22 years old: half a week’s pay for each full year of service
- 22 to 40 years old: one week’s pay for each full year of service
- 41 years and older: 1.5 weeks’ pay for each full year of service
For details on how to calculate pro-rata annual leave allowance, especially if an employee joins or leaves partway through the year, see this comprehensive guide.
A significant financial benefit is that up to £30,000 of redundancy pay is tax-free, making these payments more valuable than equivalent salary increases. This tax treatment applies to genuine redundancy payments, though other termination payments like pay in lieu of notice remain subject to normal income tax and National Insurance contributions.
The redundancy pay depends on these statutory calculations, but many employers offer enhanced redundancy pay through contractual agreements or company policies that exceed the minimum requirements.
When Employers Can Pay Redundancy
Solvent companies must pay redundancy from their own funds, typically making payment on the employment termination date or an agreed alternative date set out in writing. The employer offers this payment as part of the final settlement, often combining it with notice pay and payment for accrued but unused holiday entitlement.
Employers must provide a written calculation showing exactly how much redundancy pay was determined, breaking down the age-related multipliers, years of service, and weekly pay used in the calculation. This transparency helps prevent disputes and allows employees to verify the accuracy of their payments.
Many employers provide enhanced or contractual redundancy pay that exceeds statutory minimums. These enhanced schemes may offer more generous multipliers, higher weekly pay caps, or additional benefits like career transition support. When an employer offers enhanced terms, they become contractually bound to honor these commitments.
The timing of payment is crucial for cash flow planning. While the standard expectation is payment with the final paycheck, employers facing temporary cash flow issues can negotiate alternative payment schedules in writing. However, unreasonable delays expose employers to legal claims and potential tribunal action.
Some employers struggling with redundancy costs may explore government support options, particularly if the redundancies are part of a broader business rescue plan. Companies in Company Voluntary Arrangements (CVA) can sometimes access government assistance, though this support is limited and subject to strict eligibility criteria.
When Government Pays Redundancy
The Redundancy Payments Service takes over payment responsibilities when employers are formally insolvent. Insolvency includes various legal procedures: administration, liquidation, bankruptcy, and receivership. Each of these triggers the government safety net, ensuring employees don’t lose their statutory entitlements.
When an employer is insolvent, employees have six months from their employment end date to claim through the RPS. This deadline is strictly enforced, so prompt action is essential. Claims require a CN number provided by the insolvency practitioner handling the company’s affairs, creating a formal link between the insolvency process and employee claims.
The redundancy payment service operates through an online portal where employees can submit their claims and track progress. The service typically processes payments within six weeks of receiving complete claim information, though complex cases may take longer.
Importantly, the RPS only covers statutory redundancy pay, not enhanced contractual payments. If your employment contract promised redundancy pay above the statutory minimum, you’ll need to claim the enhanced portion as an unsecured creditor in the insolvency proceedings. This distinction often means employees receive less than they might have expected from enhanced schemes.
Financial Support for Struggling Businesses
Companies in Company Voluntary Arrangements (CVA) can apply for government loans to help fund redundancy costs, though this support is limited to businesses with realistic prospects of survival. Businesses in administration may also access RPS assistance for redundancy costs as part of a rescue plan.
Employers must prove their inability to pay redundancy costs and demonstrate that the redundancies will improve business survival prospects. This support is not available for companies already in formal liquidation, where the focus shifts entirely to the RPS system for employee protection.
The government recognizes that redundancy costs can push struggling businesses into insolvency, so these support mechanisms aim to preserve jobs where possible while ensuring fair treatment for employees who do lose their positions.
Employee Rights When Employers Cannot Pay
When an employer fails to pay redundancy, employees should first contact their former employer directly to request the unpaid redundancy pay. This initial step often resolves simple administrative delays or misunderstandings about payment timing.
If the employer doesn’t respond or refuses to pay, the Acas early conciliation service provides free mediation to help resolve the dispute. Acas conciliation is often faster and less stressful than formal legal proceedings, and many disputes are resolved at this stage.
Employment tribunal claims must be made within three months of employment ending, creating a tight deadline for legal action. Before proceeding with a tribunal claim, employees should check if their employer is insolvent using the GOV.UK company register, as insolvency changes the appropriate route for claiming payments.
If the employer is confirmed insolvent, employees should claim through the RPS rather than pursuing tribunal action against a company that cannot pay. The RPS system is specifically designed for these situations and offers a more reliable route to payment than attempting to enforce tribunal awards against insolvent businesses.
Employees who worked for companies that have ceased trading should also check whether the business has entered any formal insolvency procedure. Sometimes companies simply stop trading without formal insolvency, which can complicate the claims process and may require legal advice to determine the best approach.
Additional Payments Through Government Schemes
Beyond redundancy pay, the RPS can help recover other employment-related debts when employers become insolvent. Unpaid holiday pay can be claimed alongside redundancy pay, up to the statutory limits that apply to payments from the National Insurance Fund.
Outstanding notice pay may also be recoverable through the RPS, though this is subject to statutory caps on weekly pay and maximum periods. The notice period entitlement depends on your length of service, typically one week per year of service up to a maximum of 12 weeks.
State benefits received during your notice period may reduce the final redundancy payment amount, as the government seeks to avoid double payments for the same period. This coordination between different government systems can be complex, and the RPS will explain any adjustments made to your claim.
Payments from the National Insurance Fund typically take up to six weeks to process once the RPS receives complete claim information. The service prioritizes claims based on hardship, so employees facing particular financial difficulty may receive faster processing.
Some employees may also be entitled to claim unpaid wages for work completed before their employment ended. These claims are subject to the same insolvency procedures and time limits as redundancy pay claims.
What Happens If Payment is Disputed
The RPS explains reasons for non-payment or reduced amounts when claims don’t meet the statutory criteria. Common reasons include insufficient service length, disputes over employment dates, or lack of supporting documentation from the insolvent employer’s records.
Employer records may not support employee claims in some cases, particularly where companies kept poor records or where employment arrangements were informal. The RPS relies heavily on official company records, so any discrepancies between employee expectations and company documentation can lead to reduced payments.
Employment tribunals can resolve disputes over entitlement to redundancy pay, but employees should seek professional legal advice before starting tribunal proceedings. The tribunal system is complex, and poorly presented cases often fail even when employees have valid claims.
Different deadlines apply for redundancy pay claims versus unfair dismissal claims, creating potential confusion about which route to pursue. Redundancy pay claims generally have longer time limits, but the specific deadlines depend on whether the employer is solvent or insolvent.
The key to avoiding disputes is maintaining good employment records and understanding your entitlements before redundancy occurs. Employees who keep records of their start date, continuous service, and any enhanced redundancy terms in their contracts are better positioned to claim their full entitlements.
Understanding redundancy who pays responsibilities helps both employers and employees navigate these challenging situations with clarity. Whether payments come from company funds or government safety nets, knowing your rights and the available support systems ensures you can access the compensation you’re entitled to receive. If you’re facing redundancy or managing redundancy processes, consider seeking professional advice to ensure all obligations and entitlements are properly addressed.
