Redundancy Costs Following Furlough

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Freedom Day due on 21 June has been postponed for four weeks. Rishi Sunak has rejected pleas from businesses to extend the furlough scheme and says it will begin to phase out from 1 July. 

The Furlough Scheme 

The scheme was Initially designed as short-term protection for jobs and livelihoods and was extended to run until 30 September 2021

Be aware that if you employ people that you’ve furloughed, the support will be tapered from 1 July. You’ll need to contribute 10 per cent towards hours staff don’t work in July, increasing to 20 per cent in August and September

The decision to extend the furlough scheme to the end of September was very welcome at the time. Small businesses account for 48 per cent of all UK jobs. An essential lifeline for millions around the country.  

The Fallout From Furlough  

With the Chancellor’s announcement that although the opening up of the country is to be deferred and the scheme to come to an end this could leave many businesses in a very difficult situation if they are unable to open as planned. 

The outcome will now be possible redundancies that employers have managed to put off by using the furlough scheme. 

This is going to prove a major challenge for some small businesses. Many just managing to survive this crisis. 

Employees on furlough with a long service record facing redundancy are the most experienced and were the most expensive to make redundant last year.  The looming costs could well push businesses under.   

Redundancy Notice Periods 

Many assume that notice periods are a month, provided by the employer. Not so. For example; an employee with ten years’ service is entitled to statutory notice of ten weeks’ pay (notice is capped at 12 weeks). Redundancy pay is factored by age and has likely additional cost implications. 

From 1 December 2020, notice periods can no longer be claimed using the CRJS scheme. This means that an employee’s furlough period must end the day before their notice period starts. Employers will therefore be liable for 100% of the cost of the employee’s notice period. Employers are also not allowed to use furlough payments to cover redundancy payments. 

How much is redundancy going to cost? 

With financial pressures, reducing headcount may seem the most straightforward next step. But redundancy has direct costs.  

> Redundancy pay 

You must pay at least the legal statutory minimum amount of redundancy pay to your employees who have worked for you for at least two full years. 

You should check your employment contracts as they might say you need to pay more than the statutory amount. 

How many weeks statutory redundancy pay someone is entitled to depend on both of the following: 

  • the employee’s age 
  • how long they’ve worked for you (up to the last 20 years) 

Statutory redundancy pay is capped at the last 20 years that the employee has worked for you. 

Working backwards from the day their notice starts, you must add all of the following that apply: 

  • half a weeks’ pay for each full year they were aged under 22; 
  • one week’s pay for each full year they were aged 22 or older, but aged under 41; 
  • one and a half weeks’ pay for each full year they were aged 41 years or older. 

> Lieu of notice pay 

The other main direct cost to consider is notice pay, including the possibility of paying lieu of notice. 

Those employees who have been with the business for a long time will have longer statutory notice periods. As much as 12 weeks for those with 12 years’ service or more. Remember that if the statutory notice entitlement is longer than the contractual notice period, the statutory notice period takes precedent. 

If you cannot afford redundancy pay 

If making redundancy payments puts your business at risk, you can ask the Redundancy Payments Service (RPS) for financial help. 

If you’re insolvent you can get RPS to make your redundancy payments and recover the debt from your assets. 

Is there another option? 

Reducing headcount may seem like the most logical first step for businesses under pressure. However, reducing the workforce could be more costly than expected. By rethinking some of the costs or looking at the company’s property portfolio, businesses may be able to avoid difficult redundancies. 

If you need assistance with deciding on the best move, please get in touch and see how we can help. 

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Disclaimer: Information provided by Kidwells Accountancy on our website is for informational purposes only. It is provided in good faith but we make no guarantee of any kind regarding the accuracy, reliability, or completeness of any information on our site. We always recommend businesses seek independent legal and financial advice before working with us or acting on any information on our website.

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