Redundancy occurs when an employer no longer needs a role to be performed in a business and can be due to a number of reasons. Once the job role is no longer needed, the holder of that job can either be offered suitable alternative equivalent employment or will have their contract of employment terminated.

Employment protection legislation has developed considerably over the past 30 years. There are two sets of rights to be considered, Statutory Rights (which cannot be contracted out of) and Contractual Rights - those contained in your contract of employment signed by both you and the company when you joined.

Statutory Rights include suitable notice period, ensuring that the selection process for whose role is made redundant is fair and a minimum compensation that must be paid. Here, where an employee has completed at least two years' continuous service, a payment equivalent to one (or one and a half if aged over 40) weeks pay for each completed year or service must be paid. However, the maximum amount of weekly pay used in this calculation is capped at £330 for the tax year 2008-9. Hence, a 30 year old with 10 years service who is made redundant can expect a maximum of 10 weeks pay up to a maximum of £3,300. This will be paid free from tax.

Contractual compensation is payable where the employment is terminated either without justification of notice. The amount of compensation should relate to the salary that should have been paid for any notice period and must include any other benefits such as company car, pension contributions, bonus' and medical insurance. In this situation, there is a requirement for the employee to try and reduce their loss by actively looking for a new job. Whilst this is the minimum, many companies operate a redundancy policy (not usually published) under which they have a more generous payment programme to make the transition to unemployment more palatable and less likely to be challenged at an Industrial Tribunal.

Whilst the rules above work effectively where the employer is still in business, the rules are different when the company ceases to trade. If an Insolvency Practitioner has been appointed to the company, then employees will rank as unsecured creditors with some priority for payment after insolvency payments have been made. The priority items include holiday pay and salary, overtime and contractual bonuses. However, the maximum amount of the preference is only £800, so it may not go far in compensating for the true amount owed. Anything else due will be paid from the remains of the assets after secured and preferential creditors have been satisfied. This may amount to pennies in the pound if anything.

For employees of insolvent companies, some money may be claimed from the National Insurance Fund. Anyone with less than two years service will be entitled to one week's salary; those with more than two years service can claim one week per year of employment up to 12 weeks. The maximum amount that can be claimed is capped at £330 per week (tax year 2008-9). Claims can be made by completing form RP1, which can be found at www.insolvency.gov.uk.