New law on redundancy and notice pay for furloughed employees

The Employment Rights Act 1996 (Coronavirus, Calculation of a Week’s Pay) Regulations 2020 were announced on the morning on 30 July, passed the same day and come into force the following day, 31 July 2020.

The furlough scheme requires employers to ask employees for their consent to be furloughed. When doing this, many employers made a commitment that if an employee subsequently had to be made redundant, they would pay notice or redundancy pay based on the employee’s pre-furlough wages or salary. However, not all employers were so generous. The government has become concerned by what it sees as a “loophole” allowing employers in some cases to pay severance sums based on less generous furlough pay (80% of normal pay, capped at £2,500 per month).

The government has now moved to address this. For employees with normal working hours, if the calculation date for statutory redundancy pay or statutory notice pay falls on or before 31 October 2020 (when the furlough scheme comes to an end), the amount which is payable “is to be calculated disregarding any reduction in the amount payable as a result of [the employee] being furloughed”. This also applies to contractual notice, if this is not at least one week more than statutory minimum notice. 

Similar provisions apply for employees whose pay varies with the time of or amount of work, or who have no normal working hours. In these cases, pay is normally averaged over the last 12 weeks. The new rules apply where this period includes at least one week during which the employee was furloughed and ensure that the averaging is based on full rather than reduced pay.

The new regulations also protect employees’ pre-furlough position in respect of certain other claims where the calculation of a week’s pay is relevant, such as unfair dismissal basic awards, and claims relating to a failure to provide a statement of employment particulars. 

There has been no change the cap on a week’s pay for the purpose of calculating statutory redundancy pay (currently £538), so there is no effect on the overall maximum statutory redundancy payment or unfair dismissal basic award that an employee can receive (currently £16,140). The new rules also do not preclude employers paying a lower rate of pay for contractual notice periods which exceed the statutory minimum by at least one week. The overall effect is therefore likely to be modest but could still mean a lot to newly redundant employees facing a desperately difficult jobs market. Or, for that matter to employers for whom every penny counts when seeking to stay afloat.

As the regulations come into force on 31 July 2020, any redundancy or notice payments already made before that date will not be covered by the new rules, meaning that employees who have already been made redundant may have missed out. The calculation of notice and redundancy pay in these circumstances can be complex. For more detail see our article Restructuring the workplace post Covid-19 - FAQs for employers.