Severance Pay in the UK

What is Severance Pay and How Does It Work in UK?

The term “severance pay” refers to the monetary compensation given to a departing employee by their employer upon an enforced termination of their employment contract.

This type of payment is offered for many reasons. For example, an employer might offer it out of goodwill, as a way to acknowledge the employee’s hard work and efforts, to defend itself against any legal lawsuit brought by a former worker for unfair hiring, unjust termination, or unpaid compensation, and to gain a competitive benefit against other employers.

Severance compensation must be given to workers as quickly as feasible after a dismissal. If the employer withholds the payment, the employee may file a claim with an employment tribunal or file a lawsuit.

Is Severance Pay the Same as Redundancy Pay?

Severance pay and redundancy pay are similar in many ways but differ slightly based on a few factors. The main similarity between the two is that both forms of financial settlements are offered to employees who are leaving an organisation.

Redundancy pay is offered to employees for three reasons; if the role no longer exists, functions performed by the employee are no longer needed, or the job no longer exists. In the UK, this is a legally required payment if the employee meets the qualifying criteria.

However, severance pay often refers to optional compensation that is offered to employees when their job suddenly ends. Employers frequently provide severance compensation as part of a severance package that may include additional perks like the continuance of the employer-sponsored health insurance plan.

Understanding the Legality of Severance Pay in the UK

The best way to describe severance pay is redundancy pay plus additional employee compensation, such as perks and incentives, in a more extensive package.

The UK law regulates redundancy compensation, but to receive a good severance package, people must negotiate with their employers to make it a part of their employment contracts.

This is important because severance pay, unlike redundancy pay, is not a legal requirement as per UK law unless it is covered under employment contracts. If it is a part of the employee’s contract, then the employer must abide by all legal obligations and pay them the amount as soon as possible.

If an employer offers severance payment to its employees, the entire process should be transparent and per UK employment law. This means that the complete process of paying the severance pay to the employees must be followed through in a non-discriminatory manner.

Additionally, the employees must be given all their legal rights. This means that the employers must refrain from using the severance pay to make up or avoid other legal entitlements of their employees, such as notice pay or similar payments if they do not pay in lieu of notice. Failure to abide by the rules described under the UK employment law can result in a hefty fine for employers.

Severance Pay Checklist for Employers

Overview

Since severance pay combines statutory redundancy pay and additional bonuses, knowing how both are calculated is crucial. It should also be noted that employees are eligible for a severance package only if their employment contract covers it. Therefore, the detailed checklist below will help employers calculate employees’ redundancy pay and severance pay.

• Determine Eligibility of Severance Pay
• Calculate the Amount of Severance Pay
• Ensure Employees are Aware of Severance Pay Criteria
• Deduct Tax and National Insurance
• Follow the Correct Procedure
• Seek Legal Advice

Determine Eligibility of Severance Pay

Before providing severance and redundancy pay, you need to determine whether your employees are eligible for them or not. Employees who have worked for you for at least two years are entitled to redundancy pay.

On the other hand, the main eligibility criteria for severance pay is to have an employment contract that states whether or not the employee will be paid their severance pay upon unwilling termination of their work contract.

It must also include any additional eligibility criteria, requirements and notice duration necessary for getting the severance pay. It must highlight the benefits and how they will be calculated.

Severance is calculated on an individual contract basis as no law regulates this type of pay. One individual’s severance pay might differ from the severance pay of another individual who has the same work history based on their contract with the employer.

Calculate the Amount of Severance Pay

The amount of severance pay you need to provide to your employee will be based on their redundancy pay and additional benefits agreed upon by both parties when signing the employment contract.

The redundancy pay calculation depends on multiple factors, such as the total length of service, weekly pay, and whether payment in lieu of notice was paid. The statutory redundancy payments are cappedat  £643 per week and the maximum statutory redundancy pay you can get is £19,290.

Ensure Employees are Aware of Severance Pay Criteria

It is important to communicate with your employees about the terms and conditions of their severance pay. Make sure that you provide them with a written statement of the amount and the calculation used to determine it.

Deduct Tax and National Insurance

Severance pay is subject to tax and national insurance deductions, so make sure that you deduct them from the payment before you give it to your employees.

Follow the Correct Procedure

It is important to follow the correct procedure when providing severance pay to your employees. You need to provide written notice of termination, give employees the opportunity to appeal, and provide them with a notice period.

Seek Legal Advice

If you need clarification on providing severance pay to your employees, seek legal advice. An experienced employment lawyer can guide you through the process and ensure you comply with the law.

Our legal experts at IAS offer help and handle severance pay cases for employers to ensure the entire process goes smoothly. For further information, please leave a message on the online chat or call us directly at 0333 305 9375.

When Do Employers Have to Pay Severance Pay?

As highlighted above, UK regulations do not force employers to pay a severance payment to dismissed employees unless stated in their employment contract.

However, employers must pre-inform or notify the employees being laid off as per their severance agreement. In case no such contracts have been signed before, the statutory minimum notice period in the UK is:

• One week’s notice is required for workers who have been on the job for between one month and two years.
• Individuals working for two years or more are entitled to one week’s notice for each year of employment, up to 12 weeks’ notice.

Some employees might also agree to leave their job upon mutual understanding under a settlement agreement with the employer in return for receiving a voluntary severance package.

If the employer holds the payment, the employee can claim to an employment tribunal or take legal action against the employer.

Employees may not be entitled to a severance pay if they are fired due to misconduct or any similar reason. The details of the qualifying circumstances will be detailed in the employment contract.

How Can IAS Help?

At IAS we recognize the importance of severance pay in recruiting and retaining staff and can provide comprehensive support for employers and workers concerning severance compensation matters.

Understanding the legal implications around severance pay can be very challenging and this is why our help is always available. You may contact our experienced legal staff by sending a message on our live chat. Alternatively, you can call us at 0333 305 9375 to speak with one of our knowledgeable experts.