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When you run a business and hire employees, there are certain duties and obligations you owe them as their employer. Even when you’re letting those employees go, their departure from your business does not immediately free you from all legal responsibilities – a standard principle that remains true in 2025.
Prior to releasing an employee from their Employment Contract, you must ensure they receive everything they are legally owed, such as any outstanding annual leave payouts or a redundancy payment.
So, what is redundancy and does it affect small businesses?
What Is Redundancy?
Redundancy occurs in one of two ways:
- When an employee’s role is no longer required for the business’ operations
- When the business has become bankrupt or insolvent
These are strict legal criteria and not mere guidelines. You cannot dismiss an employee and label it redundancy only to recruit someone else to perform the same or a very similar role the following day.
One of the last things you want is a former employee claiming unfair dismissal. So, if you’re uncertain about whether your situation qualifies as redundancy, it’s wise to seek advice from an employment law expert for clarity.
Do Small Businesses Have To Pay Redundancy?
Although many small businesses may have limited financial capacity, this does not exempt them from the obligation to pay eligible employees a statutory redundancy payment. Whether you’re operating as a sole trader or running a limited company, the legal requirements remain the same.
As a general rule in the UK in 2025, if an employee has continuously worked in the same position for at least two years, they are entitled to redundancy payments. It is essential to stay current with the updated statutory guidelines, which now also consider factors such as recent inflation adjustments and industry-specific changes.
The exact amount for this payment depends on factors such as the employee’s length of service and their weekly working hours. Recent revisions in redundancy formulas ensure that the payment is fairer and more reflective of current economic conditions.
What About Unfair Dismissal?
If you ‘unfairly select’ certain employees for redundancy-for instance, basing your decision on age, ethnic background, or another discriminatory factor-you could be held liable for unfair dismissal. Such actions not only expose you to legal penalties but can also damage your business reputation.
Unfair dismissal encompasses any unjust treatment of an employee. If you dismiss someone or declare their role redundant without proper and fair grounds, you risk facing significant fines and compensation claims.
It’s important to note that the legal landscape continues to evolve. In 2025, amendments to employment law have refined the criteria for genuine redundancy. For example, advancements in automation and outsourcing now play a part in assessing whether a position is truly obsolete. If you’re considering restructuring, you may wish to review your practices and even consider changing your business structure to better align with current legal standards.
| Example Josh owns a company where data entry tasks are essential. He employed Henry as his dedicated data entry clerk. However, after investing in advanced software that automates these tasks – a technology upgrade common by 2025 – Henry’s role became redundant. In this instance, Henry’s redundancy is likely to be considered genuine, provided all legal redundancy procedures are followed. |
We’ve written more about unfair dismissal and what you need to know as a business to avoid such claims altogether.
Key Takeaways
If you’re a small business, you might sometimes question whether you need to pay redundancy to your employees. However, it’s crucial to follow all proper legal regulations and be aware of any exceptions-particularly with the updated modern award frameworks and industry-specific schemes now in place in 2025.
To summarise what we’ve discussed:
- Redundancy occurs when an employee’s role is no longer required or their workplace has become bankrupt or insolvent.
- When an employee’s job is declared redundant, their former employer is obligated to provide certain payments.
- Small businesses must pay statutory redundancy if employees have met the qualifying period, regardless of financial size, unless specified exemptions apply.
- Modern awards and recent industry-specific redundancy schemes may influence the payment calculations.
- Failing to follow correct legal processes could leave you open to claims of unfair dismissal.
If you would like a consultation on redundancy or any other employment obligations you may have as a small business owner, you can reach us at 08081347754 or [email protected] for a free, no-obligations chat.
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