Will furloughed wages drag down redundancy payments?

The coronavirus pandemic and lockdown has had an effect on the UK economy similar to taking a finished jigsaw puzzle and knocking it off the table.

The previous certainties, conventions and forecasts are all up in the air and without initiatives such as the Coronavirus Job Retention Scheme (CJRS), business rates holidays and other tax deferrals, the situation could have been even worse.


Even with these measures in place, they aren’t permanent and eventually businesses are going to have to reconcile trying to reopen in a changed physical, economic and emotional environment for customers and staff.


They’ve also brought an unintended loophole that could potentially see some redundancy payments reduced.


Placing an employee on the CJRS requires a variation to the contract of employment in which the employee agrees to a reduced salary rate. An issue may then arise if the employee is made redundant whilst on the scheme. What is the correct rate of pay at which redundancy pay claims should be calculated? Should this be based on the employees’ regular wages or on their reduced pay if they’ve been furloughed?


Under the CJRS scheme, employees receive 80% of their wages up to a limit of £2,500 a month. When an employee is made redundant then they’re entitled to a paid notice period or, depending on the contract of employment, pay in lieu of notice (PILON) as well as redundancy payments. They should also receive any outstanding arrears of pay and payment for any outstanding holiday days. All of which of course, are calculated based on salary.


So would there be anything to prevent an employer using the current, lower, furlough rate of pay to calculate any due severance rather than the standard amount they would have usually received?


For example, an employee earning £30,420 a year would lose £507 for a one-month notice period or £1,521 for a three-month period using the furlough salary rate.


And what about standard redundancy payments? Currently, the UK statutory maximum rate that is paid by the Redundancy Payments Service is £538 per week, but for a furloughed employee this would be £468 (80% of the average UK weekly wage of £585.)


An employee working for the same employer for ten years between the ages of 22 and 32 would lose £700 under this scenario.


Employment lawyers are in agreement that it’s a legal grey area. Under the strict interpretation of the law, employers calculate redundancy pay based salary or where salary varies, an average of the previous 12 weeks wages. If this includes furloughed pay during this timescale then it would naturally be reduced.


A spokesperson for the government said: “We would urge employers not to use the job retention scheme to make someone redundant on less favourable terms then they would otherwise have received”.


For those employees, including the directors of limited companies who are also legitimate employees of the company, the Redundancy Payments Service has issued (partial) guidance on the rates that redundancy payments will be calculated in situations of insolvency:


  • Redundancy Pay – will be calculated at normal salary rate prior to the CJRS variation to contract. Where salary payments vary, the 12 weeks prior to the furlough period will be used
  • Holiday Pay – should also be calculated at the pre furlough CJRS rate and where appropriate may be topped up to normal salary rate if holidays have been taken during the furlough periods and paid at the lower rate
  • Arrears of Pay – any arrears owing during the furlough period will be calculated at the furlough rate; arrears owing pre-furlough will be calculated at the normal rate
  • Notice Pay – we await further guidance to date


Jenny Graham of Redundancy Assist said: “On balance this seems a fair and common sense approach. There’s been no official clarification regarding notice payments yet, and whilst we hope that payments for loss of notice will be made according to normal salary rates, we’ll wait for further updates from the RPS”.


Redundancy can be a complicated and emotional subject without a global pandemic occurring.


If you are the director of a company and thinking how best to close your company and do the right thing by your employees then you should get in touch with us today.


We can advise you on everything you need to know including what your own redundancy rights are