What is voluntary redundancy?

Redundancy has become more common in recent years, but many people don’t know the facts about voluntary redundancy. This guide aims to clarify what voluntary redundancy is in the UK, how the process works, what a typical redundancy package looks like, and the rights employees have when faced with this decision.

Understanding these factors can help you to make an informed decision if you’re ever offered voluntary redundancy.

What is voluntary redundancy?

Voluntary redundancy is when an employer offers employees the opportunity to leave their job voluntarily in exchange for what is often called a severance package. Unlike compulsory redundancy, where employees are selected and laid off by the employer, voluntary redundancy allows employees to opt out of their employment under mutually agreed terms.

Employers may offer voluntary redundancy for several reasons:

• Cost reduction: In order to cut costs and avoid more severe financial difficulties, employers may need to reduce their workforce.

• Organisational restructuring: Companies undergoing restructuring may offer voluntary redundancy to streamline their operations.

• Avoiding compulsory redundancy: Businesses may offer voluntary redundancy as a way to minimise the need for compulsory layoffs, which can be more difficult, stressful for employees, and legally complex.

This gives you a feel for how to ask for voluntary redundancy, as there are certain factors that will affect your eligibility. Voluntary redundancy can be attractive to employees who are already considering a career change, early retirement, or have other financial or personal plans that make leaving their current job an appealing option.

How does voluntary redundancy work?

This is the typical step-by-step process for initiating voluntary redundancy.

Employer initiation

The voluntary redundancy process typically begins when an employer identifies the need to reduce staff numbers. The employer will then invite employees to express their interest in voluntary redundancy. This invitation may be open to all employees or targeted to specific departments or roles.

Employers must approach voluntary redundancy fairly and transparently. The voluntary redundancy rules include clear communication about why voluntary redundancy is being offered, how the process will work, and the terms of the redundancy package.

Selection criteria

Even though voluntary redundancy is chosen by employees, the employer will still need to review and select which employees' applications to accept. This selection process should be based on fair criteria, which can include:

• Seniority: Employees with longer service might be prioritised for voluntary redundancy.

• Skills and experience: The employer may consider which skills and experience are most essential to the company's future needs.

• Performance: Employees’ past performance could also play a role.

Employers must ensure that the selection process for voluntary redundancy is non-discriminatory. Employees should be treated equally regardless of age, gender, race, disability or other characteristics.

The offer and decision period

Once an employee expresses interest in voluntary redundancy, the employer will make a formal offer. This will include details of the redundancy package, the notice period, and any other relevant terms. Employees typically have a set period to consider the offer before making a decision.

It’s critical that employees take this time to carefully evaluate the offer. Accepting voluntary redundancy is a significant decision that can have long-term financial and career implications. It’s also very unlikely that the process can be cancelled if you change your mind after accepting voluntary redundancy.

Voluntary redundancy pay

When considering voluntary redundancy, it’s crucial that you understand how much the voluntary redundancy pay will be. A typical redundancy package in the UK may include several components:

Statutory redundancy pay

Statutory redundancy pay is the minimum amount that employees are legally entitled to receive if they are made redundant, which also applies to voluntary redundancy pay. The amount is calculated based on:

• Length of service: Employees who have worked for the employer for two years or more are usually entitled to statutory redundancy pay.

• Age: You will receive half a week’s pay for each full year you were under the age of 22. One week’s pay for each full year you were 22 or above. One and a half week’s pay for each full year you were 41 or older.

• Weekly pay cap: There is a cap on weekly pay when calculating statutory redundancy pay, which is reviewed annually by the government. (At the time of writing, the weekly pay cap is £700 up to a maximum of £21,000 in total if you were made redundant on or after 6th April 2024.)

• Limitations: The maximum number of years that can be considered for redundancy pay calculations is 20.

• Tax: It’s worth noting that statutory redundancy pay is tax-free up to £30,000.

Additional payments

In some cases, employers may offer enhanced redundancy pay as an incentive for employees to take voluntary redundancy. This additional payment is above the statutory minimum and usually negotiated as part of the redundancy package. Enhanced redundancy pay is more common in larger organisations or in situations where the employer wants to avoid compulsory redundancies.

Notice period pay

Employees are entitled to a notice period when being made redundant. The length of the notice period is typically outlined in the employment contract. If it hasn’t been specified, statutory notice periods apply:

• At least one week’s notice if the employee has worked for the company between one month and two years.

• One week’s notice for each year of service, up to a maximum of 12 weeks, if the employee has worked for the company for more than two years.

If the employer chooses not to require the employee to work during the notice period, they must provide pay in lieu of notice (PILON).

Unused holiday pay

Employees are also entitled to payment for any unused holiday entitlement accrued up to the date of their redundancy. This payment should be included in the final redundancy package.

Employee rights when offered voluntary redundancy

When faced with the option of voluntary redundancy, employees have several rights to ensure that they are treated fairly and can make an informed decision.

Right to decline

Employees have the right to decline an offer of voluntary redundancy. Just because an employer invites you to apply for voluntary redundancy doesn’t mean that you’re obligated to accept. It’s crucial to consider whether voluntary redundancy aligns with your financial needs and career plans.

Right to consider the offer

Employees should be given sufficient time to consider the redundancy offer. This period allows you to weigh the pros and cons, seek financial advice, and explore your future employment options. Employers should not pressure employees into making a hasty decision.

Right to seek advice

Before accepting a voluntary redundancy offer, it’s advisable to seek independent advice. You can consult with a financial advisor, a legal professional, or a trade union representative if you’re a member. Remember that resources such as Citizens Advice and Acas offer free guidance on redundancy rights and options.

You may also want to consider the broader implications of taking voluntary redundancy, such as how it will impact your long-term financial planning. For instance, it’s crucial to think about how to save for retirement and how to maximise your pension if you leave your current job.

If I take voluntary redundancy, when can I start a new job?

You’re within your rights to start a new job immediately after taking voluntary redundancy and completing your agreed notice period. The only exception would be if your contract says otherwise, in which case you will need to wait the stated amount of time before taking on a role at another business. Check your contract or ask your line manager if you’re unsure about this, and definitely ensure that you understand any limitations before accepting voluntary redundancy.

Weighing the financial implications of voluntary redundancy

Voluntary redundancy can provide a financial cushion thanks to the redundancy package, but it also comes with the risk of being unemployed. Before making your decision, make sure to think about the following factors:

• Current financial situation: Assess your savings, debt and ongoing financial commitments. Will the redundancy package be enough to cover your expenses until you find another job?

• Job prospects: Consider the availability of jobs in your field. How long might it take to find a new role, and what salary can you expect?

• Career impact: Think about how voluntary redundancy may affect your long-term career goals. Will it allow you to pursue a new direction, or could it hinder your progress?

Taking time to carefully evaluate all of these factors is essential. Remember that the decision to accept voluntary redundancy should be based on your personal circumstances and career aspirations, so it must work in line with your own needs and goals.

For more insights, dive into our blog and find out if you could go a whole year without buying anything new, as well as advice on how to get out of debt. We’ve also got a helpful guide on 5 questions to ask yourself before taking out a loan.

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