The prospect of having to manage redundancy is daunting for any business owner.
The law provides employees with several rights in a redundancy situation and, in order to avoid expensive mistakes, it is essential that employers and managers understand those rights.
Employees who are dismissed by reason of redundancy may be entitled to a statutory redundancy payment in addition to an enhanced redundancy payment and may also be able to challenge the termination of their employment as an unfair dismissal. A successful claim for unfair dismissal means that employers might be liable for costly compensation payments.
Employers should know the following regarding managing redundancy effectively.
When is there a “redundancy” situation?
The legal definition of “redundancy” covers three types of situation:
- Actual or intended business closure.
- Actual or intended workplace closure.
- Diminished requirements of the business for employees to do work of a particular kind.
If fewer than 20 employees are being made redundant at one undertaking (work site) within a 90-day period, this is treated as a number of individual redundancy processes.
If an employer proposes to dismiss more than 20 employees as redundant within a period of 90 days or less this would be a collective redundancy situation.
In the latter situation, an employer must:
- Inform and consult appropriate representatives (these may be trade union representatives or, where no union is recognised, elected employee representatives).
- Notify the Secretary of State on form HR1.
This is called “collective consultation.”
It is important that the requirement for this is observed because a tribunal may award up to 90 days’ actual gross pay in respect of each affected employee where there has been a failure to collectively consult.
An employer may also be fined if it fails to notify the Secretary of State.
Redundancy and unfair dismissal
An employee who has been employed for at least two consecutive years has the right not to be unfairly dismissed. There is a possibility that the Government may reduce this two-year qualifying period requirement, however, this is simply a proposal at the time of writing.
For a dismissal to be fair, an employer must have the following:
- A potentially fair reason for dismissing the employee. There are five potentially fair reasons, one of which is redundancy.
- In the circumstances, acted reasonably in treating that reason as sufficient to justify dismissal.
For a fair redundancy process, an employer will typically need to:
- Inform potentially affected employees of the business case for making redundancies and why their roles are at risk.
- Consider how to fairly select those to be made redundant, which typically involves putting employees with similar skillsets in a selection pool and applying measurable and objective selection criteria to score employees.
- Consult with those at risk about the business case for redundancies and any ways they might think of whereby redundancies might be avoided.
- Consider whether the criteria or scores should be adjusted in response to any points raised in consultation.
- Consider whether where is any suitable alternative employment available and this must be right up to the date when dismissal takes effect.
- Give notice of redundancy to those employees with the lowest scores if no way of avoiding their redundancies has been identified (e.g. a suitable alternate role).
- Offer a right of appeal.
Employers are advised to take step-by-step guidance on adopting a fair procedure and to manage the risk of resulting employment tribunal claims. An employer must ensure that consultation with its employees occurs at a formative stage where the employee can make a meaningful contribution that the employer pays more than lip service to. The case of Haycocks v ADP RPO UK Ltd is a useful example of this, where the Employment Appeal Tribunal held that the employer waiting until the appeal to correct any flaws in the redundancy process was too late and so the dismissal was deemed unfair. In certain circumstances, selection of an employee for dismissal on grounds of redundancy will be automatically unfair, such as selecting an employee for a reason connected to pregnancy.
Indeed, pregnant employees, mothers on maternity leave and some recent pregnancy returners are entitled to be offered any suitable alternate roles even if they may not be the best candidate for the role or where others in the same redundancy selection pool have higher redundancy selection scores.
Section 105 of the Employment Rights Act 1996 prescribes various grounds that will make a redundancy dismissal automatically unfair and employers should seek specific legal advice to minimise the risk of employees making redundancy selections any of these grounds.
Careful consideration should be given to any redundancy selection criteria used to ensure they are not discriminatory.
For example, using attendance as a criterion could discriminate against those on maternity leave or who have disabilities.
Offering voluntary redundancy only to employees whose age makes them eligible for early retirement could give rise to age discrimination claims.
However, a voluntary redundancy offer made to all employees could include an early retirement package for certain age groups.
Alternatives to redundancy
A redundancy should never be a foregone conclusion.
An employer should always consider at the outset whether compulsory redundancies can be avoided.
As a first step, an employer should consider restrictions on recruitment, overtime, hours given to staff whose hours are not guaranteed, and the use of contractors/agency workers.
Some employment contracts allow for workers to be laid off/put on short time working where there has been a diminution in work with a guaranteed fall-back rate of pay
If these avenues are not available or sufficient, employers could consider inviting employees to:
- Apply for alternative vacancies.
- Volunteer for redundancy.
- Consider early retirement under the pension scheme, if applicable.
Alternatively, where contractual terms allow, it may be appropriate to temporarily lay off employees or reduce their working hours, for example where there is a diminution in work which it is hoped might be very temporary. Such employees may be contractually entitled to a guaranteed fall-back rate of pay.
However, employers must be aware that this could quite quickly entitle employees to claim a redundancy payment.
Redundancy payments
Employees with at least two years’ service are entitled to a statutory redundancy payment if they are dismissed by reason of redundancy.
Statutory redundancy pay is calculated according to a formula set out in section 162 of the Employment Rights Act 1996, which is based on age, length of service (a maximum of 20 years’ service can be taken into account) and pay (there is an upper limit on the amount of a ‘week’s pay’ that changes annually in line with the Retail Prices Index).
In addition to a statutory redundancy payment, employers should consider whether employees are entitled to an enhanced redundancy payment.
This entitlement could be expressly included in contracts of employment or incorporated by being set out in another document, such as a redundancy policy in a staff handbook.
Employment law for owner-managed businesses with Mackrell
At Mackrell, our expert Employment Law team can assist employers in mapping out a fair redundancy process and help with implementing that process.
With our help, employers can embark on a redundancy process with confidence, knowing that they have taken steps to effectively manage the risks and to put their business in the best possible position to swim through the mire of procedure, legislation and case law.
For tailored advice on redundancy law, contact Joanna Alexiou, Senior Associate and Head of Employment & HR, on 0207 420 4195 or via email at joanna.alexiou@mackrell.com and Neil Emery, Senior Associate, on 0203 542 2557 or via email at neil.emery@mackrell.com.
