Policy clinic: redundancy schemes

There are only a few weeks left before the new age discrimination rules come into force on 1 October, and if you have not already taken a good look at your enhanced redundancy scheme, now is the time to do so.

Until now, media attention has focused on the headline-grabbing elements of the new law, such as: “Will ageist birthday cards become a thing of the past?” and “Will the university milk-rounds survive?” However, amid the grey text of the legislation lies a much darker topic – the new rules governing enhanced redundancy payments.

Why review your scheme?

Until now, employers have had more or less a completely free hand to design whatever enhanced redundancy scheme they feel best suits their business. As a result, there are countless variations of enhanced redundancy schemes in place. However, from October 2006, an enhanced redundancy scheme will only be lawful if it:

  • mirrors the statutory redundancy scheme.

  • enhances the statutory scheme in one of the strictly prescribed ways.

The statutory scheme

Statutory redundancy pay is calculated using multipliers (ranging from 0.5-1.5), which provide that a redundant employee is entitled to half a week’s pay in respect of every year of employment under the age of 22 a week’s pay for every year aged 22-40 and one and a half weeks’ pay for every year aged 41 and over, subject to an overall maximum of 20 years. A week’s pay for these purposes is £290, but this will change in February 2007.

Even though this formula discriminates against younger workers (because they receive less redundancy pay), it will nonetheless be retained following the introduction of the new law on 1 October. This is because the statutory scheme fits with the government’s policy of providing greater financial assistance in a redundancy context to older workers.

The only change to the statutory scheme is that the upper and lower age limits on the right to claim redundancy payments (previously 18 and 65) and “tapering payments” for employees over 64, will be removed.

New-style enhanced schemes

After the new law is introduced, employers will still be able to offer enhanced redundancy payments that vary according to the employee’s age, providing they do not depart from the statutory formula or if they do depart, then only in the prescribed ways. Employers will be permitted, for example, to enhance the amount offered in a redundancy scheme by doing any or all of the following:

  • treating a week’s pay as not being subject to the maximum amount set by law (currently £290 per week).

  • imposing a limit on a week’s pay in excess of the (£290) limit .

  • multiplying the monetary sum allowed for each year of employment by a figure of more than one.

  • increasing the total amount of the payment by using a multiple of more than one.

Any other redundancy scheme will fall foul of the new law if you are not able to objectively justify the formula used. If your business has a scheme that does not mirror the statutory one, you must make a decision about it.

What are the options?

There are two main choices: bringing your scheme into line with the new law regulating enhanced redundancy payments or removing your existing scheme altogether.

Any change (including removal) will need to be negotiated with the workforce before 1 October.

If the change affects 20 or more employees, consultation must comply with statutory collective consultation requirements. Works councils and trade unions may also need to be consulted.

Alternatively, you may decide to leave the scheme unchanged and, if challenged, be prepared to rely on the “objective justification” defence. In other words, you must be able to show that the way in which payments are calculated is a proportionate means of achieving a legitimate aim. It will not be easy to provide a full objective justification and there are many unanswered questions on the subject.

For example, will a redundancy package based purely on salary and length of service need to be objectively justified even though it is less discriminatory than the formula for statutory redundancy pay?

Currently there is no guidance from the government and, without any case law, there will inevitably be some uncertainty as to whether a justification for a scheme is adequate.

Why act now?

If a redundancy scheme is challenged and found to discriminate, the tribunal may make an injury to feelings award as well as an award of (unlimited) compensation. It goes without saying that any successful challenge is likely to force an employer to re-evaluate the enhanced scheme in question – so it is important to make the necessary changes now.


  • Review your enhanced redundancy scheme and assess whether it mirrors the statutory redundancy scheme or enhances the statutory scheme in one of the prescribed ways described.

  • If your scheme does not ‘fit’ with the new law, can you objectively justify it?

  • If you think you can objectively justify your scheme, ensure you have an impact assessment and factual evidence, such as financial information, minutes of consultation meetings, and specialist recruitment advice to supportyour position.

  • Even if you think you can establish an objective justification, you will need to keep the situation under constant review to check for the continued existence of the “legitimate aim” and to ensure your method remains proportionate. Whether your arguments are successful will depend on the circumstances (such as the state of the job market for older and younger workers in that sector and geographical area) at the time of any challenge.

  • If your scheme does not ‘fit’ with the new law and you cannot objectively justify it, consider changing it or even removing it. You will need to consult with employees and/or their representatives about change or removal.

By Karen Black, partner, Boodle Hatfield

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