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Redundancy pitfalls — top tips for employers

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Stuart Chamberlain examines 10 of the most common legal pitfalls in redundancy and suggests ways you can avoid them.

Redundancy seems to be back on the business agenda, especially in the High Street and local government. Implementing redundancies is a complex process and there are several legal hurdles that have to be jumped if the process is not to be open to legal challenge. As long ago as 1982, the Employment Appeal Tribunal (EAT) in Williams v Compair Maxam Ltd set out the standards expected of an employer in a redundancy process — in particular, the requirement to consult, to use fair and objective criteria in selecting those to be made redundant and the need to consider the opportunity of alternative work for the affected employees.

  1. Ensure that there is an actual redundancy situation

    The employer needs to be sure that the situation falls within the statutory definition of redundancy as set out in the Employment Rights Act 1996: the closure of the business or workplace or a diminished need for employees to carry out “work of a particular kind” — that is, a reduction in the size of the workforce. It is not the opportunity to get rid of unpopular or underperforming staff.

    A reorganisation of the business could also lead to redundancies.

    In order, therefore, to dismiss somebody fairly for redundancy, an employer will have to establish that the statutory definition of redundancy is satisfied, otherwise any dismissal is likely to be unfair.

  2. Give advance warning

    Always seek to give the workforce sufficient early warning of a redundancy situation and how it may affect them. This will enable trade unions and employees the time and opportunity to consider alternatives to redundancy.

    Further, employers should always consider alternatives, such as freezing recruitment, reducing working hours and pay, including overtime, or inviting voluntary redundancy, before leaping into compulsory redundancies. It is advisable for this to be confirmed with those “at risk” of redundancy.

  3. Consultation on collective redundancies

    Consultation is fundamental to a fair redundancy procedure. If an employer is considering making 20 or more redundancies at any one establishment, then it is under a strict legal duty to consult with elected representatives of the workforce for a minimum of 30 days — if laying off 100 or more staff, the minimum period of consultation is 45 days. If there is no trade union or elected representatives, an employer is under an obligation to arrange elections and then enter consultation with such representatives.

    The consultation must be “meaningful”; it must not be a “sham”. The decision to make an employee redundant must not have been taken before the consultation begins and the employer should avoid implying that a final decision on the redundancies has already been reached: redundancy is only a possible option at this stage.

    The financial penalties for getting this wrong (the “protective award” for failure to consult) can be considerable.

    The Redundancy Payments Service (RPS) has to be notified of the number of proposed redundancies before the consultation starts.

  4. Individual consultation

    Furthermore, even if such collective consultation takes place, an employer is also under a separate duty to consult individually with each employee selected for redundancy. This duty applies in all cases, regardless of the number of redundancies being made. Again, the consultation must be proper and “meaningful”. As with the collective consultation process, it should be a two-way dialogue exploring ways of avoiding, or at least mitigating the effect of, the redundancy.

    This individual consultation with the “at risk” employees is an essential and integral part of a fair dismissal. Again, failure to consult can lead to the award of hefty compensation for an unfair dismissal.

  5. The selection pool

    In some circumstances only one employee may be potentially affected by the redundancy and there will be no need to identify a pool for selection. In all other situations the pool of selection must relate to the reason for the potential redundancies. Do not define the selection pool too narrowly. This is a problem area where employees hold similar positions or where employees’ skills are interchangeable and/or where employees have been involved in undertaking other jobs throughout the course of their employment. It is preferable to put the whole pool of those “at risk” from redundancy and consult them on the selection criteria.

    In such circumstances, therefore, consideration ought to be given to all employees employed in similar positions or whose skills and tasks are interchangeable in a pool for selection for redundancies before deciding through the selection criteria which employee(s) should be made redundant.

  6. Objective selection criteria

    Another pitfall is a failure by employers to establish fair and objective selection criteria when determining which employees should be selected for redundancy. There may be a policy or agreement in place that can be used but subjective criteria and personal opinions should be avoided at all cost. Potentially fair criteria include: performance; attendance and sickness record; skills connected with taking the business forward; and flexibility. Length of service (including last in, first out (LIFO)) can be used as part of a matrix but not on its own, as this could be age-discriminatory. It is helpful to use a redundancy matrix to select those who are to be made redundant using the selection criteria and avoid discriminatory criteria.

    The process of scoring employees against the objective criteria should be rigorous. It is good practice to allow “at risk” employees to see their scores against the selection criteria otherwise they would be unable to take part in any appeal process, or allegations may arise that the scoring is unfair. Employers are not obliged, however, to reveal the scores of their colleagues. “At risk” employees could be provided with a copy of the scoring matrix, with the names blanked out (“redacted”).

  7. Consider suitable alternative employment

    Even though vacancies may be few and there is no legal requirement for the employer to create a vacancy, it is still under an obligation to consider suitable alternative employment in the organisation or its associated bodies.

    The employee has a four-week trial period in this alternative post. If they unreasonably reject it, then the redundancy payment may be forfeited.

    Remember that a woman on maternity leave must be offered a suitable alternative post before those “at risk” staff that are not on maternity leave.

    Employers should certainly consider “bumping” — ie where an employee, whose own position is redundant, is transferred to another position, thus making the holder of that second post redundant. It would be prudent for the employer to explore with senior members of the workforce “at risk” whether they would accept a more junior role at a reduced salary.

  8. Set up a dismissal meeting and the right of appeal

    Redundancy is a potentially “fair” reason for dismissal under the Employment Rights Act 1996. A failure to follow the proper procedure outlined above may render the dismissal unfair. No notice of dismissal should be given until the consultation process is completed.

    The employer should hold a meeting with those “at risk” of redundancy and confirm the impending dismissals in writing. This letter of termination should set out the terms of appeal to a more senior manager than the one that undertook the consultation process and outline the right of accompaniment.

  9. Termination payments

    Statutory redundancy payments are based on length of service (capped at 20 years), age and salary (subject to a statutory weekly cap). Croner-i has a calculator that enables employers to calculate statutory or enhanced redundancy pay.

    Remember that if payment-in-lieu-of-notice (PILON) is to be offered instead of the employee serving their notice period, from May 2018 all PILONs, whether contractual or not, are subject to tax and National Insurance contributions (NICs) in full. The PILON payment includes all the basic pay and entitlements.

  10. Tying up the loose ends

    There may be a number of loose ends to tie up, including the following.

    • The employer may decide to mitigate any future risk of the employee bringing a claim of unfair dismissal by using a settlement agreement.

    • Those who remain after the redundancy exercise should be given hope and encouragement of a secure future.

In summary

It is essential that employers get the planning and documentation right during a redundancy exercise. Effective communication is vital. An employer should not underestimate the level of compensation that may be awarded by an employment tribunal if it gets something wrong, let alone the legal costs and wasted management time in defending any such proceedings. Nor should the employer underestimate the effect on staff morale of a redundancy situation in the workplace.

Last reviewed 12 September 2018

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