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Mean or average - responses to the Eversheds redundancy pay survey

  • United Kingdom
  • Employment law

14-11-2016

Despite the inevitable uncertainty that lies ahead for the UK over the coming years, as it forges new trading and political relationships in a post-Brexit environment, latest statistics once more appear to show considerable robustness on the part on the UK economy and consequential impact on the labour market. Employment is generally up and redundancy levels low. A recent survey conducted by Eversheds furthermore reveals that many employees are better-protected financially, with a majority of respondent employers offering redundancy packages in excess of statutory minimums for those individuals who do face the hardship of redundancy.

Whilst the law endeavours to offer some benchmarks in terms of redundancy payments, it is down to individual employers to determine whether it is possible or desirable to offer enhancements and whether to do so as a commitment or matter of discretion.

In a bid to identify any industry or sector norms in this regard, last month we sought our clients' feedback on how they approach redundancy payments. The 315 responses we received represent views from a very broad range of employers, of all sizes and from both the private and public sectors. Overall, the feedback received demonstrates there is no “one size fits all” approach amongst employers, regardless of size or sector.

However, key findings include:

  • 2/3 all respondents offer enhanced redundancy terms, over and above statutory minimum requirements
  • of those, chemical/pharmaceutical companies and public sector organisations are most likely to offer enhanced terms, whilst business services organisations are least likely to do so
  • size and sector are influencing but not determinative factors
  • 1/5 of respondents who offer enhanced redundancy pay do so based upon a full month’s salary x years of service and a further 1/5 apply the statutory redundancy calculation but based upon the individual’s actual weekly pay
  • 60% of respondents consider their enhanced redundancy payments to be discretionary in nature and many of those have opted to revert to statutory minimum payments from time to time

Does your organisation offer enhanced redundancy terms over and above statutory minimum requirements?

In light of the very broad spread of types and size of organisations which responded to the survey and which included small businesses all the way up to those with 10,000+ employees, one might have assumed that the results would be weighted in favour of larger organisations in terms of those offering enhanced redundancy terms. However, closer analysis of the above percentage split reveals this is not necessarily the case. Although our survey results found that businesses employing fewer than 100 staff were least likely to have enhanced redundancy schemes (with just under half claiming to do so) there was not huge divergence amongst the remaining respondents according to size of the organisation (see below).

Does business size make a difference to whether enhanced redundancy terms are offered?

If size is not necessarily a determining factor for employers when it comes to offering enhanced redundancy packages to staff, we then looked at whether the survey results revealed any greater prevalence of enhancement according to sector or industry (see below).

Does business sector make a difference to whether enhanced redundancy terms are offered?

When it comes to the influence of sector or business-type in the context of offering redundancy compensation over and above the statutory minimum, our survey results in this regard were a little clearer, with chemical/pharmaceutical organisations and those in the transport or financial services sector being most likely to do so. Respondents from business services organisations and those in the manufacturing sector were considerably more likely to adhere to the statutory scheme for redundancy pay.

What are the principal reasons given for not offering enhanced redundancy terms?

Affordability is the primary reason given for not offering enhanced redundancy terms (50% of those who responded that they do not enhance redundancy pay cited affordability as the primary reason) but fear of setting a binding precedent for the future was also a deterring factor (for 25%).

The issue of affordability was raised across all sectors and sizes of organisation, although this particular element was inevitably more prevalent amongst those sectors less likely to offer enhancements, such as business services. Size of business did not appear to be an indicator here. Fear of setting a precedent was a concern expressed particularly amongst respondents from the manufacturing sector but, again, regardless of size.

No clear pattern of industry “norms” was offered by the responses. However, it is interesting to note that a number of respondents claim they do not offer any enhancement as the industry norm is not to do so or they deem statutory scheme to be adequate, whereas other respondents from the same sectors choose to offer enhanced terms. This may suggest individual perceptions of the market differ considerably and there is little actual consistency or that market forces operate much more narrowly than across a sector, for example according to role or seniority, possibly.

For those organisations which do offer enhancements, the principal reason provided is to support staff morale and the sense of financial security enhancements can offer (45%).

What enhanced redundancy terms tend to be offered?

 Amongst those organisations offering enhanced terms, use of the statutory redundancy payment formula (i.e. reliant upon capped weekly pay multiplied by certain years of service) as a basis for an enhanced approach is less prevalent than might have been expected. Overall, just 35% of respondents use something close to the statutory formula, with just over half of these organisations (19%) applying the statutory redundancy calculation but with no cap on a week’s pay.

In contrast, 53% respondents adopt an approach which is considerably more favourable. The most commonly offered form of enhancement, and one adopted in some shape or form by over 45% of respondents, is a redundancy package based upon a formula of a number of weeks’ actual salary x additional multiple x years of service, as follows:

  • 20% respondents adopt this approach by paying a full month’s salary per year of service
  • 14% do this by paying 2 weeks’ salary per year of service
  • 8.5% do this by paying 3-3.5 weeks’ salary per year of service

There does not appear to be obvious consistency of approach across sectors (outside of public sector terms), or even across business size. Organisations, large and small and across many sectors offer the more generous terms. It is also apparent that many organisations have adopted provisions unique to themselves.

Must employees work their notice?

Only 11% of respondents to our survey indicate that they standardly require redundant employees to work a period of notice, whilst a further 22% have a practice of offering payment in lieu of notice. The remaining, and very large, majority prefers to reserve flexibility over this and to allow the circumstances to dictate whether to enforce notice periods or release employees early.

Making a payment in lieu of notice can, of course, present its own complications for employers, in terms of the tax implications and access to a £30,00 tax exemption where there is no contractual right to such payment. The essential starting point is to consider whether the employer expressly reserves a contractual right to make a payment in lieu of notice or whether such a payment is so common as to be deemed automatic. Where neither of these elements apply, employees may potentially receive some pay in lieu of notice tax free. However, employers should bear in mind that important changes are afoot in this area and that the Government is currently consulting on proposed changes to the tax treatment of termination payments. These changes, which are due to take effect from April 2018, could mean that the ability to make a tax free damages payment where an employee does not work their notice period will be removed altogether, impacting upon redundancy packages as a whole.

Does the organisation consider the enhanced redundancy terms it offers to be discretionary?

A large majority of respondents believe that their enhanced schemes are not contractually binding and therefore that they retain flexibility in operation. Sectors which suggested they were perhaps tied more than others in this respect, though not exclusively so, include those within the manufacturing, charities and chemical/pharmaceutical sectors (again, amongst those outside public sector terms).

Of those respondents who claim their schemes are discretionary in nature, 2/3 have exercised that from time to time and deviated from enhanced terms. The survey results suggest those within the transport and chemical/pharmaceutical sectors were more likely to have done so in some way.

For just under half of those organisations who have made use of their right to exercise a discretion, 44% (or just under 1/3 of all those of those claiming to have discretionary schemes), claim this has involved limiting redundancy terms to statutory minimum payments only.

Contractual or discretionary – how can you tell?

It is well-established by now that, whatever the belief or intentions of the employer, enhanced redundancy policies which are stated to be discretionary can nonetheless be deemed contractually binding in the eyes of the law. This will depend on the specific circumstances but there are a number of important indicators established by the courts. In particular, consider:

  • Is your redundancy policy recorded in writing and, if so, where? Provisions in a handbook, for example, may inadvertently become incorporated into the terms and conditions of individual employees
  • How are the terms described? Employers need to ensure the messages concerning the nature of enhanced payments are consistent – by actions as well as words – so that employees are clear they are not considered or intended to be binding in every case
  • To what extent are employees aware of any enhanced redundancy pay scheme? Depending upon how a scheme is publicised or communicated, employers could potentially create a reasonable expectation on the part of employees that enhancement will be available to them
  • How often have enhanced redundancy payments been made and over what period? The greater the frequency, the greater the risk that a binding “custom and practice” will have arisen
  • Have the same terms been applied consistently? Again, a lack of variation of approach as between individual redundancy exercises could support a pattern and a finding of custom and practice

Redundancy: food for thought

Final comment

That so many employers responding to the survey profess to offer enhanced redundancy pay provides at least some degree of contingent reassurance to staff. It is interesting nonetheless that the results obtained do not suggest employer-motivation for this emanates from industry-wide pressures or norms, certainly not to any considerable degree. Instead, the largest proportion of those who enhance pay claim to do so for reasons of staff morale and increased financial security. That is not to say, of course, that competitive pressures and expectations do not arise with respect to specific roles within an industry or sector.

The results are interesting also to the extent they reveal that the majority of employers who offer enhanced redundancy consider that they do so as a matter of discretion, not contractual commitment. 2/3 of those employers have sought to exercise that discretion from time to time and, presumably therefore, to have gone relatively unchallenged in terms of their ability to do so. However, the law of contract and its ability to imply terms in certain circumstances is something of which employers should be wary, particularly those within the remaining 1/3 that have been in the fortunate position to avoid redundancy exercises and to have the contractual status of their enhanced terms tested.

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