What Is Redundancy Pay Based On? A Guide to Your Rights and Employer Obligations in the UK

Facing redundancy is never easy - for both employees and business owners. Whether you’re running a small business with your first team or you’re an employee worried about the future, understanding redundancy pay in the UK is absolutely crucial.

There’s a lot of confusion out there about what redundancy pay is based on, what happens if you’ve worked under 2 years, your rights, and what employers legally need to provide. If you want straightforward answers (without wading through legal jargon!), you’re in the right place.

In this article, we’ll break down: how redundancy pay is calculated in the UK, what counts as “service”, what happens if you’re made redundant with less than 2 years’ service, how notice periods and holiday pay work, and what employers must do to stay compliant. We’ll also tackle key questions about contractual versus statutory redundancy, and where to get help if you need it.

Let’s dive in and get you equipped with the knowledge to handle redundancy with confidence.

What Does Redundancy Mean In The UK?

Redundancy happens when an employer needs to reduce their workforce - usually because a role is no longer needed due to business closure, a downturn in work, new technology, or changes in business direction. It’s not a reflection on the individual employee’s performance.

Employers must follow a fair and transparent redundancy process in the UK, with special rules around pay, notice and employee rights under laws such as the Employment Rights Act 1996.

What Is Redundancy Pay Based On?

So what is redundancy pay based on in the UK? It’s a common question - and one that trips up a lot of business owners and employees alike.

In essence, statutory redundancy pay (the minimum employers must pay by law) is based on:

• Employee’s age at the time of redundancy
• Length of continuous service with the employer (in years)
• Weekly pay (with a statutory maximum, currently £700 per week for redundancies after 6 April 2024)

The calculation is:

• 0.5 week’s pay for each year of service under age 22
• 1 week’s pay for each year of service aged 22 to 40
• 1.5 week’s pay for each year of service aged 41 and over

Redundancy pay is only statutory if you’ve worked for at least 2 years (more on less than 2 years in a moment).

It’s important to note that “weekly pay” for redundancy includes your normal gross weekly wage, but excludes overtime or bonuses, unless your contract says these are part of it.

If your employment contract offers more generous redundancy pay (for example, “2 weeks’ pay for every year of service”), this is called contractual redundancy pay or “enhanced redundancy pay”. In that case, you’re entitled to the higher amount, provided it’s written into your contract or staff handbook.

How Is Length of Service Calculated For Redundancy?

Your length of service counts from the day you started work up to the date your job ends (your “dismissal date”). If you have had continuous employment - with no breaks other than statutory ones like maternity leave or sickness - your whole period with the employer counts.

Partial years are not rounded up, so only full years of service are taken into account for statutory redundancy pay. For example, if you have 5 years and 8 months’ service, only 5 years are counted toward pay.

For more on continuous service and how breaks or part-time work may affect eligibility, check our guide on continuous service dates.

What If You’re Made Redundant Before 2 Years’ Service?

This is where many employers and employees have questions: what if redundancy comes before 2 years?

• No statutory redundancy pay: If you’ve worked for less than 2 years (even by one day), you are not entitled to statutory redundancy pay under UK law.
• Your contract might differ: Some businesses offer contractual redundancy pay even under 2 years’ service. Check your employment contract and staff handbook closely.
• Other rights still apply: Even if no redundancy pay is due, all employees are entitled to proper notice, any outstanding holiday pay, and pay up to their final working day.

For a detailed look at redundancy under 2 years (or “redundancy rights under 2 years”), see our guide: Redundancy Entitlement UK.

Who Pays Redundancy In The UK?

The responsibility for paying redundancy falls squarely on the employer. That means, as a business owner, you’ll need to ensure you budget for any statutory (or higher contractual) payments required.

If a company becomes insolvent, there are government schemes in place (via the Insolvency Service) for ex-employees to claim some or all of their redundancy pay - but ideally businesses plan ahead to avoid this scenario.

If you’re not sure what applies for your company’s structure or facing a sale/closure, see our guide to employee rights when selling your business for more on obligations during restructuring.

Statutory Vs Contractual Redundancy Pay: What’s The Difference?

As mentioned earlier, statutory redundancy pay is the legal minimum set by the UK government. You can always check the latest government rates, but currently, the cap is £700 per week (as of April 2024) and up to 20 years of service.

Contractual redundancy pay is what your own contract, agreement, or staff policy provides. Some employers choose to offer “enhanced redundancy pay” (for example, extra weeks for long-serving staff, or payment even before 2 years), as a way to show goodwill or attract talented staff.

• If your contract doesn’t mention redundancy pay, the statutory minimum applies.
• If your contract offers more, you’re entitled to the greater amount.

Always check the specific wording, and if in doubt, have an employment law expert review your contract (here’s what to look for in a contract).

Holiday Pay During Redundancy Notice Period

Another common question is: What happens to holiday pay during redundancy?

• If you have unused holiday entitlement when being made redundant, your employer must pay you for it as part of your final pay.
• You may be asked to take your remaining holiday during the notice period. If not, it’s paid as a lump sum.
• Your notice period continues as normal, and you’re usually entitled to normal pay during this time.

For more on calculating holiday entitlement, see: How To Calculate Holiday Entitlement.

Statutory redundancy pay is separate from holiday pay - you can’t be asked to use up holiday pay instead of redundancy pay.

What Is Enhanced Redundancy Pay?

Enhanced redundancy pay is anything above the statutory minimum. Employers sometimes offer enhanced packages for:

• Staff loyalty (e.g. extra weeks for longer service)
• Senior or key employees, to reflect their contribution
• Voluntary redundancy, to encourage staff to leave willingly
• Business-specific policies, agreed as part of a union or collective deal

If your business offers enhanced redundancy, it’s important that the rules are clearly set out in employment contracts or your workplace policies, and that you apply them consistently. Need help establishing a fair redundancy process or drafting an agreement? Check out our full redundancy guide here.

Average Redundancy Pay In The UK

The average redundancy pay varies quite a lot across different industries and business sizes. However, because the law sets a cap, for most statutory redundancy cases, the pay will not exceed:

• Up to 30 weeks’ pay (if you have 20 years’ service and are over 41)
• Up to £21,000 (based on the current £700 weekly cap and full service)
• Most redundancies fall well below this, especially in small businesses

Remember - your own contract could specify more generous terms.

If you’re negotiating a redundancy exit (or offering one as an employer), it’s wise to benchmark locally and review sector norms. If you want more information on how redundancy pay is calculated, see our in-depth explanation.

Redundancy And Less Than 2 Years’ Service: What Else Do I Need To Know?

Here’s a summary of how redundancy works if you have less than 2 years’ service:

• No statutory redundancy pay - but you’re still entitled to notice and holiday pay
• Notice period - at least 1 week’s notice after 1 month, or as laid out in your contract
• Holiday pay - pay for any accrued but unused holiday
• No special redundancy consultation rights, but a fair selection process is still required

Having less than 2 years’ service also limits some other employee rights (such as unfair dismissal claims), but not things like protection from discrimination.

Employers should always check for any bespoke terms in contracts and keep documentation of why redundancies are necessary, in case of a challenge.

Legal Steps Employers Must Take In A Redundancy Process

If you’re making staff redundant, it’s essential you get the process right. This protects you from unfair dismissal claims and ensures your team are treated with respect.

Key legal steps include:

• Consultation - talk to impacted staff, explain the reasons for redundancy, and either offer alternatives or seek feedback (for 20+ roles, collective consultation applies)
• Fair selection - use clear, objective criteria to select roles for redundancy
• Notice - give proper notice (statutory minimum or as stated in contracts)
• Calculating redundancy pay - check both statutory and contractual terms
• Handle holiday pay and other benefits lawfully (see our employer’s checklist for ending contracts)
• Document everything to evidence your legal compliance

It’s wise to take advice before launching any redundancy process, especially if you have team members close to 2 years’ service or with special circumstances (like pregnancy, sick leave or family leave).

Common Redundancy Pitfalls For Employers (And How To Avoid Them)

Making mistakes around redundancy can cost your business time, money and reputation. Common pitfalls include:

• Getting service calculations wrong (forgetting starter dates, or including/excluding notice pay incorrectly)
• Not checking contract terms for enhanced redundancy, bonuses or holiday
• Failing to hold meaningful consultation or to record your selection criteria
• Not giving written notice or providing a “settlement agreement” (required for some exits)
• Dismissing an employee just before their 2-year anniversary to avoid redundancy pay (this can be challenged as unfair if deliberately timed)

To avoid these errors, make sure you review all relevant documentation, use a legally compliant employment contract, and seek professional advice for any “grey areas.”

What If I Think My Redundancy Is Unfair?

If you’re an employee and believe you were unfairly selected for redundancy (or dismissed unfairly to avoid redundancy pay), you may be able to challenge it at an employment tribunal - provided you work in the UK and meet qualifying periods.

If you’re an employer, this is why following the proper process (selection, consultation, notice and pay) is vital.

For guidance, see our article on dismissing an employee properly and consider legal support if a dispute looks likely.

Key Takeaways

• Redundancy pay in the UK is based on age, length of continuous service, and weekly pay, with a statutory minimum for those with 2+ years’ service
• Employees with less than 2 years’ service aren’t entitled to statutory redundancy pay, but may have rights via contract or policy
• Employers, not the government, are responsible for redundancy payments unless insolvent
• Contractual or “enhanced” redundancy pay may provide more than the minimum, but must be written and applied fairly
• Notice pay, outstanding holiday, and a fair process are always required regardless of length of service
• Holiday pay is paid out or taken during the redundancy notice period - it’s separate from redundancy pay
• If you’re unsure about your rights or obligations, it’s wise to speak with an employment law expert to avoid costly missteps

If you want expert guidance on your redundancy obligations, need your staff contracts reviewed, or want help drafting a fair redundancy policy, reach out to Sprintlaw UK on 08081347754 or email us at team@sprintlaw.co.uk for a free, no-obligations chat. Our friendly team is here to help you stay compliant and run your business with confidence.