Do Small Businesses Have To Pay Redundancy?

When you run a business and hire employees, there are certain duties and obligations you will owe those employees as their employer. Even when you’re letting those employees go, their departure from your business does not immediately free you from legal responsibility. 

Prior to releasing an employee from their Employment Contract, you’ll need to make sure they have received everything they are legally owed, such as any annual leave payouts or a redundancy payment. 

So, what is redundancy and does it affect small businesses?

What Is Redundancy?

Redundancy occurs one of two ways: 

• When an employee’s job is no longer needed for the business’ operations
• The business has become bankrupt or insolvent 

The above are strict requirements and not general guidelines. Therefore, you cannot dismiss an employee and claim redundancy only to hire another employee to do the same or a very similar job the next day. 

One of the last things you want is a former employee claiming unfair dismissal. So, if you’re confused about whether or not your situation counts as redundancy, talk to an employment law expert to get some clarification. 

Do Small Businesses Have To Pay Redundancy?

While some businesses are smaller in capacity and may be a little financially restricted when it comes to redundancy, this does not exclude them from the requirement to pay eligible employees the standard redundancy payment.

As a general rule in the UK, if an employee has been in the same position for the last 2 years, they will be entitled to redundancy payments from you as their employer.

he exact amount for this payment will depend on matters such as how long the employee worked for their employer and how many hours they worked per week. 

What About Unfair Dismissal?

If you ‘unfairly select’ certain employees to be made redundant, you could be liable for unfair dismissal. For example, if you decide to make someone redundant based on their age or ethnic background, then these are grounds for an unfair dismissal claim.

Unfair dismissal territory revolves around any unfair treatment of an employee. So, if you are found to have dismissed an employee or made them redundant when you didn’t have fair grounds to do so, you could be facing heavy penalties.

Example Josh owns a company where some data entry tasks are required to be completed. Josh has hired Henry as his official data entry clerk. However, the introduction of a new software that Josh recently purchased means that Henry’s data entry task can be completed by a machine rather than manually. In this case, Henry’s redundancy is likely to be considered genuine.

We’ve written more about unfair dismissal and what you’d need to know as a business to avoid this situation altogether. 

Key Takeaways

If you’re a small business, there’s a chance you don’t need to pay redundancy to your employees. However, it’s important to make sure you’re following all the proper legal regulations and being aware of certain exceptions, such as modern awards. 

To summarise what we’ve discussed: 

• Redundancy occurs when an employee’s job is no longer required or their workplace has become bankrupt or insolvent
• When an employee’s job is declared redundant, their former employer owes them certain payments 
• A small business will generally not have to pay redundancy unless their employees are owed a particular modern award 
• In addition to a modern award, there are also industry-specific redundancy schemes that may need to be followed 
• If you haven’t followed the correct legal procedures or taken a misstep in your obligations as an employer, you could be accused of unfair dismissal 

If you would like a consultation on redundancy or 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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