Who Pays Redundancy Money If Your Business Can’t Afford It?
In this article we’ll explain who pays redundancy money when a business is a) solvent, b) trading but struggling financially and c) closing down while insolvent.
Many employees have specific rights if an employer makes them redundant, depending on factors such as their length of service at the company.
These can include rights to redundancy pay, a notice period, consultation, a different role in the company and time off to find a new job.
Recently the outgoing government increased the amount of protection against redundancy for employees taking certain types of parental leave.
As of 6 April 2024, the UK Parliament confirmed that if an employer makes their role redundant, the employee is entitled to first refusal on other vacancies for at least 18 months.
We’ll start by clarifying employees’ rights when an employer makes staff redundant, but the company could still afford to keep them.
How does redundancy pay work usually?
Leaving aside businesses that are struggling financially for the time being, a company might be making redundancies for many reasons. These include changing its services or using new technology to save costs, for example.
Employers cannot unfairly select staff to dismiss and should try avoiding redundancies wherever possible.
The employer should be able to prove that an employee’s current role will no longer exist at the organisation, but also try finding an alternative job within the company.
Employees can take a four week trial period to see if the work is suitable – if not, they are still eligible for redundancy pay, when meeting the below criteria.
If an employer makes staff redundant, it’s the company’s responsibility to make a statutory redundancy payment when the employee:
- Has worked there for at least two years
- Has a contract of employment
- Has not opted for early retirement
Employers can also voluntarily choose to give staff statutory pay if they have not worked there for two years yet.
If entitled to statutory redundancy, the amount of pay varies depending on the employee’s length of time at the company and their age. They are due:
- Half a week’s pay for every complete year of employment up to the age of 22
- 1 week of pay for every full year from 22 to 41
- 1.5 weeks’ pay for every full year from the age of 41
There are caps on both the amount of weekly pay – £700 – and the maximum statutory redundancy pay – £21,000 – required, but employers can choose to provide extra.
Staff who do not receive any – or the right amount – of redundancy pay have three months after the end of their employment to make a claim to an employment tribunal.
Who pays redundancy if a struggling company is still trading?
If a company is facing financial difficulties but is continuing to trade, it may be eligible for government support to help afford these redundancy costs.
This could apply to a business in a Company Voluntary Arrangement (CVA) and it can be what happens to staff during company administration too. Sometimes reducing the workforce could contribute towards saving a struggling business and protect other remaining jobs.
A government-backed loan scheme is available for companies in certain circumstances to cover the cost of redundancy payments when they can’t afford to do so themselves. The business can repay this loan over time.
This financial assistance for employers unable to make statutory redundancy payments is from the Redundancy Payments Service (RPS), part of the Insolvency Service.
To apply for a loan, the company needs to demonstrate that it is unable to pay redundancy costs and that job cuts will improve the business’s survival prospects.
Who pays redundancy when a business closes and is insolvent?
However, this loan is not available to businesses that have stopped trading and are going through formal company liquidation proceedings.
Instead, in this scenario, eligible employees have six months to make a claim to receive redundancy pay from the government via the National Insurance Fund.
Here is our full guide to making a redundancy claim as an employee. While employees can also apply to reclaim unpaid holiday and notice pay, they may not receive the full amount of redundancy pay due to them.
For more details on who pays redundancy when a business closes, read our guide on what happens to employees when a company goes into liquidation.
Final thoughts
We hope this article has helped explain who pays redundancy money in a range of different circumstances. These include when a business is either solvent, trading but struggling financially, or closing down while insolvent.
Lastly, in terms of director redundancy pay, there are options to reclaim owed money too – depending on eligibility criteria.
For other informative articles take a look at our blog. Recently we answered an important, relevant question – is there a penalty for not issuing payslips (UK)?
If your company is struggling financially and at risk of being unable to pay redundancy money, seek support without delay.
After more than 20 years of resolving businesses’ financial difficulties, the Hudson Weir team has some of the most experienced insolvency practitioners London has to offer.
To discuss your company’s specific situation or for any queries about our services, please do not hesitate to contact us.
