Legal rights of employees

When an employer wishes to make redundancies, employees have a number of legal rights:

• redundancy payment (see below)

• time off to look for work or to arrange training

• notice

• consultation (see Article 183)

• the right not to be unfairly selected for redundancy

• a four-week trial period in a new job with the same employer (more if agreed in writing).

Redundancy payment

There is a statutory right to a payment for those with at least two years’ continuous employment from the age of 18. This also applies to people working on fixed-term contracts that have been agreed, renewed or extended since 1 October 2002. Working back from the date of termination of employment, the employee could claim the following:

• half a week’s gross pay for each year they were under 21

• one week’s gross pay, for each year they were between the ages of 22 and 40

• one and a half week’s gross pay, for each year they were aged 41 or above.

Employees must receive the calculation of their payments in writing. At the time of writing (July 2015), there is a maximum figure of £475 per week for a week’s pay used when calculating statutory redundancy payments. The maximum number of years that can be taken into account is 20. The weekly figure is subject to regular review by the government. Naturally, an employer can pay over and above the statutory minimum. Redundancy payments of up to £30,000 are not subject to tax or National Insurance contributions (NICs).

Settlements may also include the provision of benefits in non-cash form, such as continued use of a car after termination. In this case, it will be given a cash value and added to your redundancy pay for tax purposes. This may take it over the £30,000 limit.

If the redundancy package comes to more than £30,000 employees must contact their local tax office; it is also advisable to seek independent advice. Anything that could be construed as payment for services under the employment contract will also normally be subject to tax and NICs, this includes outstanding salary or bonuses, payment in lieu of notice (unless the employer only had to give unpaid notice and the payment is compensation for that) and restrictive covenants not to work for a competitor for a certain period.

There may be tax and NICs to pay on damages for breach of contract if, as in a claim for unpaid wages, the damages were merely an alternative to obtaining something in the contract. The same applies to any part of a ‘settlement agreement’ to settle all claims against the employer that cover a right in the employee’s contract, e.g. of remuneration (see article 203).

‘Compensation for loss of office’ is usually taken as a misnomer and is more likely to be some form of ‘golden parachute’. As a result, if this was set out in the remuneration package, or contract, or employee handbooks, tax and NICs will be due.

Employer and employee must consider the often complex tax implications when negotiating a termination package. At the very least, the employee should be informed of how much of his or her compensation for leaving a job HMRC will take.

Payment in lieu of notice

Payment in lieu of notice (PILON) is common in redundancy cases where consultation has been taking place; as a result it is not a dismissal without notice or warning, which is highly likely to be unfair. In many circumstances, once the employer and employee have agreed that a redundancy dismissal is to be made both parties may agree that there is little point in working out the notice period and PILON can come into effect. PILON can also be a dignified way of carrying out a capability dismissal as it allows the employee to leave immediately, rather than struggling on.

If an employer has restrictive contractual clauses in place (e.g. to prevent an employee joining rival immediately, see article 88) it is important that a PILON clause is also included in the contract to ensure the restrictive clauses are enforceable. An example might be where an employee joins a rival but an employer does not want them to be on gardening leave as it might prevent the immediate recruitment of a successor due to headcounts. A PILON clause would remove the employee from the payroll but enable the employer to prevent them joining the rival straight away. To achieve this aim, it is vital that any PILON dismissal letter clearly states when the contract ends. Usually the PILON payment should be made at the same time as the dismissal, the exception is if the employee still has company property, e.g. a laptop at home that contains confidential information, in which case it might be appropriate to delay the PILON payment until the items have been returned – but only if there is a clause in the employment contract that expressly allows the delay. In the case of other payments or benefits, e.g. bonuses or use of a company car, that would have accrued during the notice period, the usual position is that the PILON payment should include these. The exception is when the employment contract states they are not payable during the notice period.