Small Businesses and Redundancy

Small businesses and redundancy


Your Guide:


Redundancy is the process by which an employer ‘lets someone go’ from their company because there is no longer a business need for the work they are doing. When you run a small business, things are always changing - and whilst one role might be essential at one stage of your company’s lifecycle, that might not always be the case. Priorities might change; you might decide to change the way you work, you might be going through a tough time financially, or your business could even become insolvent.


In any of these situations, there could become a time when a role is no longer necessary and redundancy is the only option. However, redundancy is a complicated process, and it’s important to handle it in a way that’s fair, considerate and above all, legal. We explain everything you need to know about the redundancy process for small businesses in this helpful guide.


How to avoid redundancy


Before you get as far as making someone redundant, there are a number of measures you could consider to see if redundancy could be avoided.


For example, could you save money by cutting costs? From cheaper office space to cutting staffing costs and improving cash flow by renewing overdrafts or factoring/invoice discounting, there are ways that you could save money without having to go as far as making full redundancies. If your business is running out of cash, make sure you read this guide for ways to cut costs, improve cash flow and turn things around. However, if none of these are possible, redundancy might well be your only option.


The basic rules of redundancy


When looking to make staff redundant, employers should always refer to company policies, the company handbook and/or employment contracts to ensure their own redundancy process is followed. Be sure to check employment contracts for any clauses about redundancy payments and length of notice to make sure you are clear on the terms agreed to at the beginning of employment. For example, senior members of staff may be entitled to three months’ notice or a higher pay off. There is no set statutory procedure or redundancy process for a small business, which is why it’s so important to check your company handbook and employment contracts.


Statutory redundancy pay


If nothing is otherwise stated in your handbook or contracts, statutory redundancy pay is the legal minimum that you will need to pay. 

Statutory redundancy pay is the certain minimum level of pay which employers are obliged to abide by. To be eligible for statutory redundancy pay, an employee needs to have been employed for at least two years. 

In this situation, they will be entitled to:

  • Statutory pay according to their age and length of service

  • Time off to look for work or make arrangements for training

  • Any accrued, untaken holiday pay

The first £30,000 of redundancy pay is tax-free, regardless of whether it is a statutory payment or a more generous payment, and National Insurance isn’t paid on redundancy pay either. However, holiday pay, pay in lieu of notice and any other amounts will be taxed as usual. 

Depending on how long your employees have worked for you, they might be able to claim up to eight weeks of unpaid wages, up to six weeks holiday pay for days not taken, compensation in lieu of receiving statutory notice, plus redundancy pay and unpaid pension contributions. 

Find out how much your staff could claim by visiting:

Your rights if your employer is insolvent: What you can get - GOV.UK (www.gov.uk)


Notice pay versus statutory pay


When it comes to redundancy pay, there are two main things to discuss: notice pay and statutory redundancy pay. Notice pay is simply the employee’s standard pay which you are obliged to pay for the duration of their notice. However, you can also let this person leave the business before their notice is up by paying their notice pay in advance, which is known as payment in lieu of notice.


The typical redundancy process


If you don’t have your own company policies, it’s best to follow the typical process to make sure everything is conducted fairly and properly. 

To dismiss someone fairly for redundancy, an employer must establish that the role is genuinely redundant, follow a fair consultation procedure and consider whether there is a suitable alternative employment. 

You can’t use a redundancy process simply as a way of moving someone out of the business - and as such, your decisions about who is made redundant needs to be as transparent as possible.

The three key elements typically needed to show a fair process are:

  1. Those at risk of redundancy must be fairly selected using objective selection criteria

  2. Employees must be warned of the redundancy and the reasons for it

  3. Employees should be invited to partake in a consultation process

The consultation process

Everyone at risk of redundancy will typically have three consultation meetings taking place over a period of seven to 10 days. The first meeting is generally used to place the individual at risk of redundancy, explain the reasons for this and to advise them of the consultation process. 

At the second meeting, the employee should be allowed to provide any suggested alternatives to redundancy for consideration and consider suitable alternative roles that might be available. 

If by the third and final meeting there is no suitable alternative role and the decision is that the employee’s role is redundant, this should be confirmed in writing.


Giving notice of redundancy


If there are no special exceptions, the amount of notice you will need to give depends on how long they have been with the company. 

If they have been with the company one month to two years you should give at least a week, if it’s two years to 12 years you should give a week’s notice for every year, they’ve worked for you, and those who have been with the company for 12 years or more are obliged to have 12 weeks’ notice.


What if my business is insolvent?


If your business is entering insolvency of some form, the insolvency practitioner will deal with staff and process their claims. In these circumstances, it is unlikely the insolvency practitioner will enter any form of negotiation or consultation with the staff. 

Your employees might be able to claim statutory redundancy pay via the National Insurance Fund which is operated by the Insolvency Service’s Redundancy Payments Office; however, it’s not guaranteed that they will get everything owed to them and they won’t be able to claim for any contractual redundancy pay. 

It’s also important to note that there can be a big difference between contractual entitlement and statutory entitlement and that the RPO will not pay contractual amounts.


How to claim redundancy


If your company has become insolvent, then, your employees can claim for redundancy via the government Insolvency Service. In order to make a claim, they will need a CN case reference number from the insolvency practitioner to get started as well as their National Insurance number, email address, bank or building society details.


For the Insolvency Service to process the claim, they will also need to provide information such as:


  • The date they became redundant;

  • Employment details, including dates and how much they were paid;

  • Details of any money they are owed;

  • Details of any money they owe you;

  • How many holiday days they have taken and how many they are entitled to;

  • Copies of any letters or communication.

The maximum claims that can be paid are 20 weeks’ redundancy, 12 weeks’ notice pay, six weeks’ unpaid holiday, eight weeks’ unpaid wages, and the RPO will also pay any outstanding pension contributions too. 

However, it’s important to note that the RPO does not pay all these payments at one time. Instead, they will pay redundancy separate from the wages and holiday pay, whilst notice pay is paid at the end of the notice period and not before. 

So, if an employee is entitled to the maximum of 12 weeks, they wait until the end of that period and then make that payment. Additionally, if the employee has got a job within the notice period, they will also reduce the notice period accordingly.


Is there a time limit on making a claim?


The timescale for making a claim is within 12 months of the company being wound up or entering a CVA or administration, and it’s important to note that the RPO can reject claims that are made more than six months after the date of liquidation.


Pregnancy and maternity advice


Expectant mothers or those on maternity leave still have the same redundancy rights, which includes redundancy pay, paid notice and any additional money owed. 

During the insolvency process, pregnant employees will be able to get statutory maternity pay from HMRC if they meet the following qualifying conditions:

  • They must have been employed by the same employer for at least 26 weeks by the end of the 15th week before the expected week of childbirth

  • They must still be employed in the same job in the 15th week before the expected week of childbirth, even if they only work for one day, part of a day that week or they are off sick or on holiday

  • They actually receive at least £120 (before tax) per week (April 2020 – April 2021) in earnings, on average in the eight weeks (if paid weekly) or two months (if paid monthly) up to the last pay day before the end of the 15th week before the baby is due

What about employees who are paid below minimum wage?


If an employee is paid below minimum wage, the claim should be brought up to the minimum wage. Many directors will pay themselves a small wage each month with the balance of funds paid from their Directors current account which is cleared at the end of the year with a distribution of dividends, so they are often paid wages below the minimum wage. Therefore, even if they have been paid in full, the difference to make wages up to minimum wage can be claimed back for up to eight weeks.


What happens next?


If your employees are not paid their full entitlement from the redundancy payments office this doesn’t necessarily mean they are precluded from any further distribution. If the liquidation or administration realises sufficient assets to pay a dividend, employees would then be entitled to make a further claim. In these situations, all holiday pay and wages up to £800 are preferential and all other payments due are unsecured and are paid with the main body of creditors. Directly in the process employees can also claim for things such as expenses.

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