Increasing statutory redundancy pay would hit manufacturers hard

In these difficult economic times, manufacturers are looking for the government to support them by reducing the costs of running their businesses or, at the very least, not increasing them.

However, the Private Member’s Bill on statutory redundancy pay that has been put forward by Labour MP Lindsay Hoyle – the Statutory Redundancy Pay (Amendment) Bill – would have just the opposite effect. The EEF strongly opposed this Bill when it had its second reading in the House of Commons earlier this month.

An employee’s statutory redundancy pay is calculated by using a formula that takes into account their age and length of service. This formula results in a number of weeks’ pay, which is then multiplied by the employee’s weekly pay subject to a maximum of, currently, £350 per week. This maximum week’s pay is uprated annually by the government in line with inflation, with this figure then being rounded up to the nearest £10.

However, the Work and Families Act 2006 also gives the business secretary the power to make a ‘one off’ increase in the maximum week’s pay used in this formula, instead of the figure arising out of this annual uprating exercise.

This unprecedented power was introduced by the government as the way in which it could implement part of the so-called Warwick Agreement; reached by the Labour Party and trade unions prior to the last general election. This stated, rather vaguely, that there would be ‘the uprating of redundancy pay’.

Hoyle’s Bill seeks to implement this part of the deal by raising the maximum week’s pay that is used to calculate statutory redundancy pay from £350 per week to the level of average earnings; currently £574 per week for full-time employees. This figure would then be increased annually in line with the movement in average earnings which, historically, has tended to rise faster than inflation.

This proposal would increase substantially the level of statutory redundancy pay for all employees earning more than £350 per week, although employees earning less than this would receive no financial benefit. The Bill would therefore have a disproportionate impact on manufacturers, as their workforce generally enjoys higher rates of pay than employees in many other sectors.

A number of manufacturers also have supplementary redundancy pay arrangements that have often been agreed with their unions. These manufacturers would face even higher cost increases as these supplementary arrangements are often a multiple of their employees’ entitlement to statutory redundancy pay and would be very difficult to change.

Since the Bill would provide no financial benefit for employees who are earning less than £350 per week, it seems to be at variance with the objective of ‘protecting vulnerable workers, supporting good employers’ that was set out in the government’s Success at Work policy statement for this Parliament, published in March 2006. The EEF supports this objective and recognises that vulnerable workers need to be provided with adequate protection.

One way in which the method of calculating statutory redundancy pay could be changed to try to meet this objective would be to introduce a minimum weekly pay of, say, £200 per week when calculating an employee’s entitlement to statutory redundancy pay. However, if this change was to be introduced, it would have to be accompanied by the withdrawal of both Hoyle’s Bill and the provisions in the Work and Families Act that give the secretary of state the power to make an increase in the maximum week’s pay used to calculate statutory redundancy pay.

In this way, the government could achieve its objective of protecting vulnerable workers as well as removing the serious concerns of manufacturers that, in these difficult economic times, they might be faced with a substantial increase in the cost of making employees redundant.

David Yeandle, head of employment policy, EEF

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