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How to deal with redundancy situations

The prospect of having to deal with redundancy situations can be daunting for employers.

Unfortunately, it’s becoming more and more necessary for many businesses.

Due to the recent hike in employer National Insurance Contributions (NICs), the job market is shrinking, with vacancies at the lowest level in nearly four years.

The law provides employees with a number of 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 and may also be able to challenge the termination of their employment as an unfair dismissal. A successful claim for unfair dismissal means that you might be liable for costly compensation payments.

That’s why it’s important to have a clear understanding of the law if your company is forced to issue redundancies.

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.
Reduction of workforce.

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 more than 20 redundancies are proposed, 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’ gross pay in respect of each affected employee where there has been a failure to collectively consult.

You may also be fined if you fail to notify the Secretary of State.

Redundancy and unfair dismissal

An employee who has sufficient qualifying service has the right not to be unfairly dismissed.

Redundancy is a potentially fair reason for dismissal, but whether it is fair or unfair to dismiss for that reason will depend on whether you (the employer) act followed a fair redundancy selection/ consultation process.

The process to be followed will vary based on the circumstances.

For a fair redundancy process, you 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 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.
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.

You are advised to take step-by-step guidance on adopting a fair procedure and to manage the risk of resulting employment tribunal claims.

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 you 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.

You should always consider at the outset whether compulsory redundancies can be avoided.

As a first step, you 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, you might 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, you must be aware that this, in itself, 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 or not 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 advice with Mander Hadley Solicitors

If the recent increase in employer NICs has left you with no choice but to make some redundancies, our specialist employment lawyers are here to help.

We can assist you in mapping out a fair redundancy process and support you with implementing that process, including providing template letters where required.

With our help, you can embark on a redundancy process with confidence, knowing that you have taken steps to effectively manage the risks and to put your business in the best possible position to swim through the mire of procedure, legislation and case law.

For further guidance on making fair and legal redundancies, contact our employment law team today.

Amanda Hyam

Head of Dispute Resolution and Employment

I have specialised in Dispute Resolution, Civil Litigation and Employment law for more than 15 years. I understand how daunting the prospect of litigation can be and because of this I am always available to discuss concerns.