There are various reasons why a person’s employment may be terminated – redundancy, a breakdown in the relationship, or poor performance. For each type of termination, employees have statutory entitlements they are offered.

On occasion, an employer may offer a termination payment (also known as an ex-gratia payment), in exchange for the employee signing a settlement agreement.

Below, Alex Hodson, Senior Associate at Redmans Solicitors, explains the different types of entitlements on termination, the limits imposed on redundancy payouts, and explores if the thresholds should be increased.

Employee Statutory Entitlements on Termination

Holiday Pay

In all circumstances of termination, an employee is entitled to their accumulated but untaken holidays at the time of their dismissal.

So, for example, if a full-time employee is entitled to 20 days plus bank holidays in the year, and they are dismissed halfway through the year, they could be owed a payment for their remaining holiday entitlement.

However, keep in mind that, if the employee has taken more than they are entitled to at the point of termination, the employer may deduct this from the employee’s final salary.

Notice Period and Pay

Employees are also entitled to notice pay in all circumstances, except if being dismissed for gross misconduct. However, notice pay depends on how long someone has been employed. As such,

1. If someone was employed for more than one month (up to two years), they are entitled to one week’s pay.
2. If someone was employed for more than two years (up to 12 years), they are entitled to one week’s notice pay for each year of continuous employment. For example, 3 years’ service would equate to 3 weeks’ pay; and,
3. Anyone employed for more than 12 years will be entitled to 12 weeks pay.

While the above is the statutory minimum, an employee could have a longer notice period if it’s stated in their employment contract.

In fact, in some industries, it is common to see that once an employee passes their probationary period of 6 months, their employment contract mentions a mandatory 12 weeks’ notice.

Redundancy Pay Entitlements

If someone is being made redundant, they are entitled to redundancy payment. Under current UK laws, employees who have been employed for 2 years or more are entitled to a payment that is calculated based on the employee’s age, length of service and gross weekly pay.

The weekly pay for this statutory entitlement is capped at £700 – set to increase to £719 in April 2025 – and the maximum redundancy amount that can be paid is £21,000 (this will change to £21,570 from April 2025). It is not expected that this sum would be subject to tax and national insurance as it is below the £30,000 threshold required under the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”)

If an employee is being made redundant, it is worth reviewing the contract of employment to check if they are entitled to an ‘enhanced redundancy payment’. This can sometimes equate to one month’s pay for each completed year of service.

In some circumstances, possibly if the relationship has broken down or if the employer is offering an enhanced redundancy payment that is not mentioned in the employment contract, the employer may ask the employee to sign a settlement agreement which waives their rights to pursue a claim against them.

In the above scenario, the employee will be required to seek legal advice on the settlement agreements. Depending on the figures, they may wish to gain advice on the tax implications, if it is significantly high.

Impact of Limits and Thresholds

The redundancy calculator was created in 1965 when the cost of living and mortgage payments were far lower, and a week’s pay would have been sufficient to cover a person’s outgoings. Moreover, the £30,000 threshold under ITEPA 2003 was also set in 1998 and since then, inflation has increased by 63%. However, the figure of £30,000 has never increased in that time.

Recent data by the Office of National Statistics (“ONS”) say that the current weekly average earnings in the UK are £667 for regular earnings (base wages only) and £711 for total earnings (base wages plus bonus, commissions etc).

Given that the weekly redundancy pay calculations are capped at £700, most employees earning more than average in total earnings would likely have their income capped at £700, for redundancy pay calculations.

This presents a challenge as, according to ONS, the average monthly mortgage repayment is about £1,262 per month for a semi-detached property. Plus, household expenses on average for a family of four can be an additional £2000 per month. So, if an employee, who earns more than the average, has been employed for 5 years and is facing redundancy, would 5 weeks’ pay sufficiently support them before they can find a new job?

Today, from the point when someone is dismissed, the process of applying for jobs, starting a new role and receiving an income could take an average of 3-4 months at a minimum. Hence, while the cap on the weekly pay increases each year to keep up with the average earnings, it is unlikely to support an average person’s outgoings during the time that it takes them to find new employment.

Should The Threshold Be Increased?

The current redundancy pay formula and the £30,000 threshold under ITEPA 2003 have not increased for over 20 years, while inflation has significantly increased in this time.

The potential risk is that if an employee finds that they will be significantly impacted by this threshold, they may choose to proceed with an employment tribunal claim, rather than accepting the payments being offered by their employer.

Currently, there are 450,000 open cases and each case can go on for at least two years. There is an urgent need for these thresholds to increase realistically now more than ever, or else businesses are likely to face the brunt of it and be caught up in tribunal claims for longer than anticipated.