The government has announced today that it is introducing a new law which will require that redundancy pay for employees on furlough leave is based on their normal rate of pay. 

The government has said that it hoped employers would pay employees’ redundancy pay based on their normal wages (rather than any reduced rate during furlough leave). However, the government’s view is that many employers are not doing this and, therefore, it is introducing legislation to remedy the situation.

All employees with at least two years’ continuous service are entitled to redundancy pay if dismissed because their role has been made redundant. 

In brief, redundancy pay is based on the wages that an employee normally earns when given notice of redundancy.  If pay fluctuates (which would likely be the case if an employee is on furlough leave) pay is based on average earnings over the previous 12 weeks.  This means that most employees on furlough leave would receive a lower redundancy payment than if they were made redundant before being placed on furlough.

Under the new legislation, the same principles will apply to statutory notice pay, which will also be based on normal wages rather than furlough pay. 

Presumably this will apply regardless of whether notice is worked or a payment in lieu of notice is made.

It does not appear that the new rules will apply to contractual notice pay.  So employees receiving reduced pay whilst on furlough could have the contractual element of their notice calculated on the basis of their reduced wage.

The government has, however, stated that the new requirements will not affect any enhanced redundancy payments made under any arrangements agreed between employers and employees. So, employees’ enhanced redundancy payments, beyond the statutory scheme, can still be based on their reduced furloughed pay.

The government has also said that the calculation of a week’s pay for the purpose of the ‘basic award’ in unfair dismissal claims will be protected in a similar way. This will be based on ‘normal’ wages rather than reduced wages during furlough leave. 

Legislation implementing these changes is expected shortly.  We will update as further information becomes available.

You can follow our specialist employment law Twitter feed at @TLT_Employment

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Date published

30 July 2020

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