Enhanced redundancy pay: when do you have a right to receive it?

Chris Hadrill , a specialist employment solicitor at Redmans, answers the question: “In what situations might I have a right to receive an enhanced redundancy payment?”

What is an enhanced redundancy payment?

An enhanced redundancy payment is a payment that you may receive from your employment if your employer makes you redundant.

A right to receive an enhanced redundancy payment is contractual in nature – whether you will be entitled to an enhanced redundancy payment will therefore depend on whether:

  1. You have an express contractual right to receive an enhanced redundancy payment; or
  2. You have an implied contractual right to receive an enhanced redundancy payment

Further reading :  read our guide on contracts of employment

When might you have an express contractual right to receive an enhanced redundancy payment?

Some employees have an express contractual entitlement to enhanced redundancy pay. This is generally in the following situations:

  1. If you have a right to such written into your contract of employment;
  2. If you have a right to such incorporated into your employer’s policies (check the redundancy policy, staff handbook, and any other policy that may apply); and/or
  3. If your employer has entered into a collective agreement containing enhanced redundancy terms (whether on a business-wide or industry-wide basis)

This may be because their employer has entered a business or industry-wide collective agreement containing enhanced redundancy payment terms, which has been incorporated by reference into their employment contracts. Others may have been supplied with contractual documentation (either at the start of or during their employment

When might you have an implied contractual right to receive an enhanced redundancy payment?

You may also have a right to an enhanced redundancy payment implied into your contract of employment: this will generally apply if your employer has consistently followed an established practice of making enhanced redundancy payments – by paying such payments in the past an employer may create an expectation that it will do so in the future.

In order to show that a right to an enhanced redundancy payment is a term of your contract of employment by virtue of your employer’s custom and practice you must generally show that the terms are:

  • Reasonable, notorious and certain;
  • Fair (not arbitrary or capricious); and
  • Generally established (well known) and clear cut

There are some further conditions that you’ll need to meet in order to show an implied right to an enhanced redundancy payment and we’ll cover these in a more in-depth fashion in a future article

Some other things to think about

Some employer will require their employees to sign a settlement agreement in order to gain an entitlement to an enhanced redundancy payment: this means that the employee will have to generally sign away their rights to bring any claims against their (former) employer in order to receive the settlement agreement payment.

You should also expect to receive statutory redundancy pay if you’re being made redundant, as well as the other contractual sums that you are entitled to (notice pay, holiday pay, commission, bonus, as applicable).

Is enhanced redundancy pay tax free?

This depends: if the enhanced redundancy pay is contractual in nature then it’s unlikely that the contractual redundancy pay could be paid tax-free; if the enhanced redundancy pay is being paid as an ex gratia payment (i.e. as compensation for termination of your employment, rather than a contractual payment) then it can be paid tax free (up to a maximum of £30,000).

What does a standard enhanced redundancy payment look like?

What a standard enhanced redundancy payment will look like will depend from employer to employer but, in our experience, you can generally expect to receive the following payments (normally via a settlement agreement):

  1. Payment in lieu of notice (or that you’re placed on garden leave for your notice period)
  2. Payment of accrued but untaken annual leave
  3. Payment of any other contractual sums owed to you (bonus, commission etc.)
  4. Your statutory redundancy pay
  5. The enhanced redundancy payment (we would normally expect this to be, on average, between 2-3 months’ gross salary)

What is a good enhanced redundancy payment?

A good enhanced redundancy payment will generally incorporate your notice pay, holiday pay, and other contractual sums, as well as between 3-6 months’ gross salary as compensation for termination of your employment.

How you can check whether you have a right to an enhanced redundancy payment – some hints and tips

If you’re being made redundant then you should check the following (among other things) in order to determine whether you have a contractual right to an enhanced redundancy payment:

  1. Check your contract of employment and employer’s policies to see whether you have an express right to receive an enhanced redundancy payment
  2. Check whether you have a right to an enhanced redundancy payment in any collective agreement that your employer has agreed to
  3. Check, as best as you can, the custom and practice of your employer in whether it has paid out enhanced redundancy payments in the past and, if so, how consistently it has done so, whether it has used particular calculations to calculate enhanced redundancies, and so on
  4. Check what statutory redundancy pay you’re entitled to

Chris Hadrill, a specialist employment solicitor at Redmans, commented: “Whether you have a right to an enhanced redundancy payment can be a tricky and technical legal question – it’s recommended that you do your research properly and, further, get some expert legal advice on your situation.”