How to manage your risk of redundancy
“I can’t save every job. I can’t protect every single business.”
The words of chancellor Rishi Sunak last week were of little comfort to millions of UK workers who fear being made redundant as the furlough scheme comes to an end, and the less generous job support scheme takes its place.
Human resources departments are burning the midnight oil, reconciling the cost of the crisis and the effectiveness of new support measures against their future staffing requirements. In these anxious times, we all need to know our financial rights and work out the tactics we should employ to counter the threats ahead.
When it comes to redundancy, I have been on both sides of the negotiating table. As a professional manager, I have previously made hundreds of staff redundant, yet I have also been made redundant myself more than once during the course of my career.
My advice to readers living in fear of receiving a P45 is not to let your emotions colour what will be a critical financial decision.
In the past, I have advised colleagues to check out what is available in the jobs market so they can assess what sacrifices or changes they are willing to make to stay with their employer.
The consultation period is a time to strengthen your relationship with clients or to work out if now is the time to try self-employment. With each recession, a great many new companies are started. Companies that do not have enough work for specialist staff may be willing to offer a freelance contract.
In addition to furloughing staff, many companies have tried to head off the immediate need for job cuts by asking staff to take pay cuts or reduce the hours they work. Nearly one-fifth of senior UK managers have taken pay cuts during the pandemic, according to a recent poll by the Chartered Management Institute on behalf of the Financial Times.
We all need to be aware of how the pandemic has changed our industries or professions and prepare ourselves so that any announcement in our companies is the beginning of a process and not the end of a career. Here is FT Money’s guide to the key questions about redundancy and your financial rights.
I fear my job is at risk. How can I calculate my likely redundancy settlement?
The first place to look is your contract or letter of employment where the redundancy terms should be clearly stated. Depending on when you were hired, these may be better than those currently offered by your company.
Your contract may state that you will get one month of salary for every complete year of service at the date you leave the company. Often more valuable is the amount of pay in lieu of notice that you will receive. It is quite common for senior colleagues to have a year’s salary guaranteed. Some contracts, issued when particular skills are in demand, can pay two years’ annual salary on departure.
You may still be able to negotiate an enhanced package if former colleagues have previously received extra redundancy payments because they are deemed to have established “custom and practice”. This is one reason employers may have tried to hide pay-offs in the past by using secrecy clauses so that colleagues cannot later compare them.
Emilie Cole, employment partner at Irwin Mitchell, said that settlement agreements have to be countersigned by a lawyer or another specified person. “You can try and negotiate a higher settlement than the one on offer. We deal with many cases of employees in the financial sector where we get a better deal because the employee has some sort of “leverage” over the employer — such as evidence they have been discriminated against for unlawful reasons such as sex, race or disability or they have been selected for redundancy for being a whistleblower.”
Non-compete clauses can enhance redundancy pay; they limit who you can work for during a set period after leaving. Companies may also be willing to continue medical insurance or pension payments for a period and to provide your company car, laptop, mobile or other office equipment as part of a deal. A computer may be of little value to an employer but will be prized by people setting up a company for the first time and worried about how long their money will last.
You are entitled to any holiday pay, but employers can get you to pay it back if you have taken more holiday than your entitlement at the time of redundancy. Employers can also ask you to take holiday after you have been given notice of redundancy.
What if my employer is closing?
If the company has no money left to offer redundancy pay, you will need to claim statutory redundancy pay from the Redundancy Payments Service, which is part of the Insolvency Service. This fund will then try to reclaim the cash from the company’s assets.
Statutory redundancy is paid to employees who have worked for their current employer for more than two years. This includes employees whose company was taken over — if they have continuous employment across the two businesses.
The maximum weekly pay taken into account is £538 — earnings above this level do not count. Those under the age of 22 get half a week’s pay for each full year of employment. For those under the age of 41, one week is paid for each complete year, and for those older than this, one and a half week’s pay is paid.
Your weekly pay is the average you earned per week over the 12 weeks before receiving your redundancy notice. However, those paid less than usual because they were furloughed should receive redundancy based on their normal pay.
The maximum number of years that can be taken into account under the statutory scheme is 20 years, which means the maximum payout is £16,140 (£16,800 in Northern Ireland).
How much notice of redundancy does my company have to give me?
Senior employees tend to get the undivided attention of HR professionals as they negotiate their exit from a company. This is likely to take place over a matter of hours with generous compensation for the speed of the process. In such cases, the company will want agreement with the departing executive. May the best lawyer win.
For everyone else, the employer should give between one and 12 weeks’ notice of redundancy, depending on how long a person has been at the company. However, your employer may pay you instead of giving the proper notice, or simply pay you with no need for you to go into work.
Companies planning to make fewer than 20 people redundant can consult individually and there is no minimum time for the process. When the number set to lose their jobs is between 20 and 99, the first dismissal cannot take place for 30 days. Job losses of 100 or more require 45 days of consultation until the first departure.
Acas, the conciliation service, recommends that as part of this process, employers should try to move employees who would otherwise be made redundant into other jobs, otherwise the redundancy could be judged an “unfair dismissal”. In situations like these, your internal networking skills can pay dividends.
Can companies make all of those who have been on furlough redundant?
No. Employees have to be selected for redundancy in a fair way. This might involve deciding which skills and departments will be needed for the future of the business. This is usually done by consulting employees or their representatives to agree selection criteria — even if the numbers of jobs at risk are lower than those outlined above.
The criteria used might include standard of work, disciplinary record, skills, qualifications, experience and attendance record. If you are in a unique role, there is no need for a selection pool, nor is there a requirement if the whole business is being closed.
Employees cannot be selected on the grounds of age, disability, marriage or civil partnership status, pregnancy, maternity or paternity leave, race, religion, sexual orientation, membership of a trade union, being a part-time or a fixed-term employee or being a whistleblower within the company or to regulators.
While line managers may have firm views about who should stay, there should be an appeal system. In one scheme I was involved in, a journalist was selected for redundancy by her boss. She had just taken on a mortgage and argued persuasively that she had not been selected fairly. It was good to see her make a brilliant use of her second chance over the next few years and to be promoted several times.
What could happen to my bonus if I’m made redundant?
Employees may be able to safeguard their bonuses but this will depend on the wording of their contract. Some are guaranteed; others depend on the company’s share price, revenues or measurable personal performance targets, or a mixture.
However, that does not necessarily give an employee the right to the amount they think they are owed. Most bonus schemes are “discretionary”; the requirements for awarding them are flexible.
Jayne-Anne Gadhia, when chief executive of Virgin Money, told the FT’s Women at the Top conference that even when employment continues, bonuses had to be fought over. She had not realised when she was offered less than she expected in her first year in banking that she had to argue for more. She did not make the mistake again — and nor should colleagues who are being made redundant.
Cases that have reached the courts have ruled that an employer must exercise its discretion “in good faith” and “on reasonable grounds”. Some employers fight to the door of the tribunal. One employer refused to pay me my due and it was only when we were waiting to go into the hearing that its barrister asked mine what it would take to settle. Had I blinked first, I would have got nothing.
How much tax will I pay?
Anyone made redundant can receive up to £30,000 of their severance pay tax free. Payments above this are taxed at your marginal rate, but only 20 per cent is taken initially. Higher rate taxpayers have to save the remaining 20 or 25 per cent and then pay the tax the following January after filling in a self-assessment tax return.
All payments in lieu of notice, which are guaranteed in your terms and conditions, will be both taxable and subject to Class 1 national insurance contributions. The amount will be treated as earnings and will not be subject to the £30,000 income tax exemption. All other termination payments are included within the scope of the £30,000 redundancy pay.
Paying into a pension plan can be a tax-efficient move on redundancy. Robert Walter, tax director at Blick Rothenberg, says that even if an individual has already paid in up to their annual allowance (a maximum of £40,000) they could investigate using the “carry forward” provisions to top up contributions from previous tax years.
If it is difficult to land another job quickly, the loss of income in the following tax year could also affect how much you can pay in tax free to your pension. “If someone’s taxable income is only £30,000 for tax year, the maximum they can contribute [into their pension] is £30,000 for the year,” he says.
Those with share options may be able to reduce their capital gains tax bill by gifting shares to their spouse or civil partner and limiting the profit to the £12,300 allowance.
My employer intends to make voluntary redundancies. Should I come forward?
Redundancy is not a right. Often, the keenest are employees who are confident they can find other work or would welcome a pay-off to start their own business — yet these are frequently the people an employer will want to keep.
Ms Cole says: “Employers will often ask for volunteers as a way of reducing the number of compulsory redundancies they need to make. To make volunteering attractive, they may offer to enhance the redundancy package available. But the employer doesn’t have to accept everyone who wants to volunteer for redundancy and, if you are valuable to the business, they are likely to turn down your application.”
Employers may approach individuals with a redundancy offer, or make known the terms and wait for volunteers.
One redundancy programme I was involved in was achieved without a single compulsory redundancy in more than 100 job losses. At the outset there were some people whose jobs were not needed and others who were told that they were vital. The ones in the vital jobs who wanted to leave trained up the others so that they could fill their roles. There was enough time to do so as there was a 45-day consultation period and everyone wanted it to work.
Unfortunately, even if you are accepted for VR, you cannot demand that you leave immediately so you may miss the opportunity of any new job you have lined up.
Companies often need time to restructure their businesses as going concerns. Higher-paid colleagues with short service may be tipped for redundancy, especially if the company has set itself a savings target, rather than a number of jobs to be shed (redundancy packages for those with short service will cost less than long-serving higher earners).
While unemployment benefits are not payable for six months to anyone who leaves a job voluntarily, this does not apply to voluntary redundancy. Most other benefits are means tested. You will not qualify if you have more than £16,000 in savings — including any redundancy lump sum.
I’m a partner in a professional firm — do the redundancy rules differ?
Traditionally, partners are self-employed and taxed as sole traders even though their partnerships usually handle their tax returns and payments. Partners have to invest in the firm to become eligible for a share of its profits. They build up equity points every year.
During the financial crisis some cut around 15 per cent of their partners. This may leave the remaining partners to compensate the departing partners for the money they have built up. The nearer they are to retirement, the more they may get.
The firms have to abide by the provisions of partnership agreements. These often say that a partner can only be removed following a vote of the partners. However, several Employment Tribunal appeals have debated whether members of a LLP could be considered employees, and therefore able to claim unfair dismissal.
“Equity partners own the business. They are the employer. You can’t be both an employer and an employee, so equity partners don’t have employee rights such as redundancy rights,” says Daniel Barnett, barrister at Outer Temple Chambers and presenter of the LBC Legal Hour.
“Salaried partners tend to earn a fixed amount and have to do what they’re told. The word ‘partner’ is used a honorific title. They are usually employees, and so have employee rights including the right to a redundancy payment.”
“If a firm collapses, the equity partners get a share of the assets — but often the debts will exceed the assets and they’ll get nothing — indeed, they’re personally liable for the debts. Employees, by contrast, get a redundancy payment and notice pay which is underwritten by the government.”
It is important that partners in professional firms check their agreements to establish their status and potentially seek legal advice.
I am loath to leave my company. Can I make them an alternative offer?
During the redundancy negotiations, employees can ask to move to a different department or to work part-time or on a freelance basis. This can help an employer who is trying to reduce the headcount in a particular part of the business. Employees could also offer to take a pay cut, either temporary or permanent, or to reduce their hours.
I found this works for both parties. Employers may know they cannot afford to keep you on your old contract but want you to help them during the transition, and the employee has a safety net. When you are later looking for a new role you can make the point that your old employer wanted to keep you so much that they produced a unique deal for you.
If you’re offered a new role with your existing company under a different contract, you are entitled to a four-week trial in your new role. During this period your entitlement to a redundancy payment is protected.
If you have a specific question about redundancy, or an experience that you would like to share with other readers, please comment below. You can also email us in confidence at firstname.lastname@example.org