Extra‐statutory Redundancy Payments In Britain
| Date | 01 November 1987 |
| Author | Alison L Booth |
| DOI | http://doi.org/10.1111/j.1467-8543.1987.tb00727.x |
| Published date | 01 November 1987 |
Ext
ra-stat
u
tory
Red
u
nd
a
n
cy
Payments
In
Britain
Alison
L.
Booth*
INTRODUCTION
In Britain there has been a rapid increase in the number of redundancies in
the years since the Thatcher government took office in 1979. This increase
had been accompanied by redundancy payments that are, in some instances,
quite large. This recent experience emphasises the importance
of
redun-
dancy payments in Britain. There are two broad types
of
redundancy
payments
-
statutory and extra-statutory. This paper focuses on extra-
statutory schemes, where redundancy payment provisions are made in the
absence of legal coercion. Such agreements are quite widespread in British
industry. The paper surveys the available evidence to highlight the
prevalence and variation of extra-statutory redundancy payments (ESRP)
across the economy. Some ‘stylised facts’ about ESRP, established in the
first part of the paper, are then used as a guide to theory. In particular, we
ask what economic rationale is there as to why such voluntary redundancy
payment schemes exist. Redundancy or severance pay is referred to in some
of
the literature, but it is predominately assumed exogenous. Thus while its
importance is explicitly recognised, there is little attempt to try to explain it.
Some theory concerned with non-wage labour costs incorporates redun-
dancy pay as part
of
the cost of firing workers. If it is costly for firms to fire
workers, they may hoard labour in a downturn, and thus labour mobility
may be reduced (Nickell, 1978). In addition, the financing
of
the statutory
payments system can be regarded as a form of payroll tax, and therefore its
incidence is important (Beach and Balfour, 1983). Redundancy pay is also
mentioned in some
of
the implicit contract literature. Yet in all this work,
the institution is assumed exogenous. Only recently have any attempts been
made
to
explain redundancy payments. This literature
is
briefly surveyed in
the theoretical section of the paper.
Although
statutory
redundancy payments are not a focus of the paper,
Section
I
briefly outlines the statutory provisions as a reference point, since
later we allude to the differences between statutory and extra-statutory
provisions. Section
I1
then surveys the available evidence about ESRP, first
as found in collective agreements relating to potential redundancies, and
*The City University,
London
402
British Journal
of
Industrial Relations
secondly as found in data on take-up following
actual
redundancies. Section
I11 summaries the ‘stylised facts’ emerging from this survey. The
microeconomic theory that might explain voluntary payments is critically
examined in Section
IV,
and Section
V
presents some conclusions and
suggestions for future research.
I. STATUTORY REDUNDANCY PAYMENTS
This section briefly describes the statutory provisions for redundancy pay in
Britain, as set out in the Redundancy Payments Act of 1965 and as re-
enacted in the Employment Protection (Consolidation) Act of 1978, (see
Metcalf (1984) for details and Parker, Thomas, Ellis and McCarthy (1971)
for discussion as to whether statutory legal provisions might be explained as
part
of
society’s concern with fairness, equity and reward for loyalty).
The legislation rules that workers made redundant are to receive lump
sum amounts based on years of continuous service, as set out in Table
1
below. The table shows that statutory payments are age-related, and
increase with the number
of
years
of
continuous experience. Thus a forty-
two year old person with twenty years
of
service would receive on
redundancy twenty-and-a-half weeks’ pay (comprising one week’s pay times
nineteen years, plus one-and-a-half weeks’ pay times one year).
TABLE
I
Statutory Redundancy Payments
1986
Age
of
Worker
18-21
22-40
41-59
(females)
41-64
(males)
Pay per Year
of
Service
(Min.
2
years, Max.
20
years)
Half a week’s pay
1.0
week’s pay
1.5
week’s pay
1.5
week’s pay
Note: In
1986,
the maximum reckonable weekly pay was
f
155
and average
gross
weekly
earnings
for
full-time males (including overtime and whose pay was not affected by
absence) was
f207.50.
Metcalf
(1984),
New Earnings Survey, April
1986,
and the Department of Employ-
ment Booklet No.
16
‘Redundancy Payments’.
Source:
The statutory payment is made by the firm. If the date
of
a redundancy
was prior to August 1986, the firm can claim a rebate of
35
per cent
of
the
payment (known as a Rebate Payment) from the Redundancy Fund
administered by the Department
of
Employment. If the redundancy date
was later, then only firms with less than ten employees can claim the rebate
(see the Wages Act
of
1986).
If
a firm is in a situation where the redundancy
payment might prevent the firm from continuing, then the Department
of
Employment will pay the worker, direct from the Redundancy Fund, (a
Direct Payment) and the firm must pay back its share later. If the firm is
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