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Higher unfair dismissal and redundancy payouts will increase cost to business by 84 million per year

Martin Warren , 29 Jun 2009

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The real cost of redundancy for employers will be significantly increased in many cases from October this year. In April's budget statement the Chancellor announced that the limit on weekly pay taken into account in calculating statutory redundancy pay is to be raised from its current level of 350 to 380.

But what the budget did not mention is that the increase will also affect compensation payments in unfair dismissal cases. That is something that only became apparent this month when the government published further information about the change and its likely impact on employers. 

Redundancy pay

The uplift in the cap on redundancy pay is a one-off rise which will take effect on 1 October. It fulfils a manifesto commitment given by the Labour party before the last general election and follows lobbying from trade unions and the government's own back-benchers who argued that, since average earnings are around £500 per week, the £350 cap was unacceptable. Under mounting pressure, the government agreed to lift the limit on weekly pay taken into account in redundancy pay from £350 to £380.

The change will benefit anyone earning above £350 per week who is made redundant in or after October this year.  So, for example, someone aged 45 with 10 years service who is earning £500 per week would be due £4,200 at present rates. From October the same individual would be entitled to £4,560. The maximum statutory redundancy payment will go up from £10,500 to £11,400.

From an employee's perspective, the amounts involved in individual statutory redundancy payments may seem fairly modest. For employers having to cut jobs in their tens, hundreds or even thousands, however, the costs are anything but.

The Government's own estimates place the cost to business of this increase in redundancy pay at more than £70m a year.  In fact, the impact could be even higher than predicted. The Government's figures do not acknowledge that some employers will have schemes for paying enhanced redundancy pay (ie better than the statutory amounts) which use the statutory calculation as their starting point and will be affected by a change in the cap on a week's pay.  An example would be an enhanced redundancy scheme that pays double statutory rates. October's change will result in payments under schemes like this being inflated above what could be already generous levels.

These are costs that some businesses will struggle to bear and could lead to a spiral of more redundancies and even closures.  For firms fighting to save their businesses the government's impact assessment recognizes that the temptation may be to select cheaper workers for redundancy to avoid being affected by the change. Consequently, younger and lower paid workers could find themselves targeted ahead of older or better paid colleagues.

Unfair dismissal compensation - going up

Employers counting the cost of increased statutory redundancy payments will be dismayed to learn that unfair dismissal compensation will also be going up in October. On the government's own figures that adds an extra cost of over £14m a year for employers.

The increase affects the basic award element of unfair dismissal compensation. Like redundancy pay, this is calculated by reference to age, length of service and weekly pay, with the amount of pay taken into account being capped at £350, soon to be increased to £380.

There is a superficial logic to increasing unfair dismissal basic awards in line with redundancy pay given that both types of payment are calculated in the same way.  Nevertheless, the government could have justified keeping the unfair dismissal payments at existing rates by pointing to the fact that employees who have been unfairly dismissed can claim additional compensation to cover their financial losses. This additional amount is known as the compensatory award.

The reason for increasing the basic award probably has more to do with pragmatism that principle. Because of the way the existing laws are drafted, an Act of Parliament would have been needed to increase redundancy payments without also raising the basic unfair dismissal award.  Instead, by increasing both types of payment at the same time all that was needed was a set of regulations, a much quicker and easier way of changing the law.

Unfair dismissal compensation - going down?

In the face of these increases it may be some consolation to employers to learn that the cap on unfair dismissal compensatory awards will probably go down in February next year. The limit, which currently stands at £66,200, is adjusted each year in line with September's retail prices index.  Based on government RPI predictions we could see the cap reduced to £63,600. If that happens it will be the first time there has been a reduction in unfair dismissal limits since index-linking was introduced in the 1990s.

To avoid diluting the newly inflated rates the annual adjustment exercise will not, however, affect the basic award or statutory redundancy payment.

Martin Warren, head of employment law at Eversheds

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