On 31 July 2020, new law came into force which changed the way redundancy pay is to be calculated for furloughed employees.
A number of statutory rights provided under the Employment Rights Act 1996 ('ERA') are calculated using the concept of an 'average weekly pay'. Examples of these rights include statutory redundancy pay, basic awards for unfair dismissal and statutory notice entitlements.
Under the ERA, an employee will be entitled to statutory redundancy pay if they have been working for their employer for at least 2 years. The amount of statutory redundancy pay is then calculated by taking into account a number of factors, including an employee's average weekly pay, length of continuous service and age.
The COVID-19 pandemic and the introduction of the Coronavirus Job Retention Scheme (CJRS) cast doubt on what is meant by the concept of an 'average weekly pay'. What would it mean for an employee on furlough who has been asked to accept reduced pay during their period of furlough?
Employment Rights Act 1996 (Coronavirus, Calculation of a Week's Pay) Regulations 2020
The Government have brought in the Employment Rights Act 1996 (Coronavirus, Calculation of a Week's Pay) Regulations 2020 (the 'Regulations') to give clarity in this area.
The Regulations came into force on 31 July 2020 and they seek to ensure that if a furloughed employee is made redundant, their statutory redundancy pay will be calculated based on their original wage, rather than their reduced furloughed wage, which often employers will have negotiated down to 80% of their normal wage.
Before these new regulations were introduced, the Government had been urging businesses to calculate statutory redundancy pay based on an employee's normal wage. However, the Government have stated that there were a minority of businesses that were ignoring this guidance and were instead using the reduced furloughed pay in their calculations. The Government have therefore introduced the Regulations to try ensure that furloughed workers are not short-changed if they are made redundant.
How are Statutory Redundancy Payments calculated under the Regulations?
Statutory redundancy pay will need to be calculated in accordance with the Regulations if either of the following two situations apply:
- An employee receives a notice to terminate on or after the date they became furloughed; or
- An employee is dismissed without notice and the date of termination was on or after the date on which the employee became furloughed.
Under the ERA, average weekly pay is usually calculated by adding an employee's pay for the past 12 weeks up to the date the employer notified the employee that they are being made redundant, and then dividing this total by 12 to get an average weekly pay figure. However, if the Regulations apply, employers will need to calculate statutory redundancy pay in accordance with the adjusted formula set out in the Regulations. The correct formula to use depends on the method in which an employee is paid, e.g. a fixed wage, a variable wage, shift work etc. However, a general principle across each formula is that, when calculating an 'average week's pay', employers must treat any weeks an employee spent on furlough as if they were working on their pre-furlough wage.
The Regulations apply to the basic statutory redundancy pay and do not affect any contractually- enhanced redundancy payments under the terms of the employment contract.
The maximum amount of an 'average week's pay' under the ERA for statutory redundancy purposes remains the same and is currently set at £538.
Other Statutory Entitlements
The Regulations are not limited to statutory redundancy pay, as the new law also impacts other employment rights which are calculated based on an 'average weekly pay'.
One example of this is Statutory Notice Pay, as under the Regulations, an employees' notice pay must be based on their normal wage, rather than any reduced furlough wage.
Another example is unfair dismissal awards, as the new Regulations ensure that basic awards for unfair dismissal claims are calculated based on a furloughed employee's full wage, rather than any reduced furlough wage.
This new Regulation seeks to reassure furloughed employees, who went on furlough at a reduced wage to save their employers money, that they will not be disadvantaged should they later be made redundant. The new law also provides much needed clarity on how a furloughed employee's statutory entitlement to redundancy pay under the ERA should be calculated
Originally published 19 August, 2020
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