Implementing redundancies fairly to save staff costs
The tough economic climate means that many businesses are reviewing their operational costs; and difficult questions are being asked about where efficiencies can be made, and what resources can be cut.
In the first part of our Guide on Cost Savings we considered ways other than redundancies to save costs. If redundancy becomes the only option available to you, then this second part of our guide will provide an overview of the law which applies in redundancy situations.
When considering a claim from an employee arising out of a redundancy situation, an employment tribunal will generally consider four key questions:
- whether or not there was a genuine redundancy situation, as legally defined;
- whether the employee’s selection for redundancy was fair;
- whether there was adequate consultation with the employee on an individual basis about his or her potential redundancy;
- whether the possibility of avoiding the redundancy, by offering the employee alternative employment, was considered.
Redundancy dismissals are not covered by the ACAS Code of Practice on Disciplinary and Grievance Procedures and as such there is no prescribed procedure which must be followed. However, in order for a dismissal to be fair, a fair and reasonable procedure must be followed.
What constitutes a redundancy situation?
The Legal Definition
The first consideration is whether there is a redundancy situation, as legally defined. The legal definition states that a redundancy arises where an employee’s dismissal is mainly due to:
- the fact that his employer has ceased or intends to cease:-
- to carry on the business for the purposes of which the employee was employed by him; or
- to carry on that business in the place where the employee was so employee
- the fact that the requirements of that business:-
- for employees to carry out work of a particular kind; or
- for employees to carry out work of a particular kind in the place where the employee was employed by the employer
have ceased or diminished or are expected to cease or diminish
A business that is closing down entirely is the easiest form of redundancy to recognise.
Temporary business closures may also give rise to a redundancy situation e.g. closure of a business for refurbishment of premises. However, it should be noted that what constitutes a temporary cessation of business is a question for the tribunal to determine based on the facts.
A redundancy situation will also arise where an employer closes down a particular workplace. This includes the situation where the employer merely moves part of its business to another location.
The employer will need to establish where the employee worked to determine whether a redundancy situation exists. This will be clear if the contract of employment states where the employee is employed to work and the employee has always worked at that location.
This question may be more difficult where a mobility clause allows the employer to change the employee’s place of work. The correct test when analysing this issue is where the employee’s duties are actually carried out (as opposed to where the contract states is the place of employment).
However, it is worth noting that the existence of a mobility clause is still a factor that can be taken into account when considering if a redundancy situation exists, it is just not the determining factor.
Reduced Requirement for Employees
This situation tends to be the most difficult in practice and can occur for example in the following scenarios:
- There is the same amount of a particular kind of work but fewer employees needed to do it;
- There is less work of a particular kind and fewer employees are needed to do it;
- There is less work of a particular kind but the same number of employees is required overall.
In looking at whether there has been a reduction in the need for employees to do work of a particular kind the tribunal will not look behind the employer’s decision or require it to justify how or why the diminished requirement has arisen, provided it is genuinely the reason for the dismissal.
How to dismiss fairly for redundancy
An employer must establish that redundancy is the real reason for the dismissal and the employer acted reasonably in all the circumstances of the case, in treating redundancy as the reason for dismissing the employee. In practice this means ensuring that the dismissal was procedurally fair.
Was the decision reasonable?
The employer will not normally have acted reasonably unless it:
- Warns and consults employees or their representatives about the proposed redundancy;
- Adopts a fair basis on which to select for redundancy; and
- Considers suitable alternative employment
What is the correct redundancy procedure?
It is advisable that the following steps are taken:
- Initial warning of redundancy
The employer should meet with all the potentially redundant employees to explain the reasons for the potential redundancies. Redundancy should be presented as a possibility at this stage to avoid any claim that a decision has been made or the process is a fait accompli.
The employer will then need to mark each of the potentially redundant employees according to the selection criteria decided upon.
- Invitation to a consultation meeting
Once the employees with the lowest scores have been established the employer should write to each potentially redundant employee informing them of their provisional selection for redundancy and inviting them to a consultation meeting. They should also be informed of their right to be accompanied (see below).
- Consultation meeting
The employer should consult about their scores, consider alternative employment which the employee is capable of performing, including available posts on a lower grade even if the employer feels certain the employee would not accept.
- Follow up
The employer should follow up on any suggestions and representations made by the employee. If this has no impact on the provisional redundancy selection then the following steps should be taken.
- Second consultation meeting
The employer should confirm the redundancy, explain the redundancy package and inform them of their right to appeal.
- Written confirmation
The employer should confirm the decision in writing and notify them of their right to appeal. This letter should also confirm whether notice will be served or payment in lieu of notice will be made.
If the employee does appeal, the employer should invite them to attend an appeal meeting. Following the meeting the employer should write to the employee confirming the outcome of the appeal and the final decision.
How to fairly select for redundancy?
It is important that the employer gives careful consideration as to how to select the employees who are to be made redundant.
Avoiding Compulsory Redundancies
Employer should give early consideration to whether it is possible to avoid the need for compulsory redundancies. A dismissal is more likely to be considered fair if the employer has considered ways to avoid redundancies. Potential options could include Lay off and Short-Time Working, Voluntary redundancies and Early Retirement
Lay off and short-time working
Employers do not have the automatic right to lay off staff during a downturn in work. An employer must have a contractual right to lay off and the contract should make it clear that employees will not receive their normal salary during the lay-off period. If the employee’s contract does not provide for lay-off an enforced lay-off could amount to a fundamental breach of contract entitling the employee to resign and claim constructive dismissal. The withholding of pay could also amount to an unlawful deduction of wages. In these circumstances the employer will need to seek the employee’s agreement to a lay-off.
Asking for volunteers
There is no obligation on an employer to consider offering voluntary redundancies but it can often be a useful tool in reducing head count. In order that the employer keeps control of the process and ensure that it does not lose key staff the employer should make it clear that it will consider all requests for voluntary redundancy but that it reserves the right not to accept all applications for voluntary redundancy particularly if it considers that it is in the interests of the business to retain certain employees.
The employer should also state that it may still have to make compulsory redundancies if it does not receive a sufficient number of appropriate volunteers.
Employers with an occupational pension scheme may consider offering an early retirement pension in situations where an employee would otherwise be made redundant. Employers should be wary of adopting a compulsory early retirement policy as this may:
- Amount to unfair selection, on the ground that older workers will be automatically selected for redundancy;
- Be unlawful age discrimination, because younger employees will be excluded;
- Indirectly discriminate against women and part-timers because such groups tend to have less pensionable service and early retirement will be more attractive to employees with longer pensionable service.
How to identify the selection pool?
When considering selection, an employer should begin by identifying the group of employees from which redundancies will be made. This is the pool for selection. Sometimes a pool may be a single employee because he is the only person performing the role that is no longer needed. At other times the pool will consist of several employees.
An employment tribunal must be satisfied that an employer acted reasonably in defining the pool. The tribunal will usually consider:-
- whether other employees are doing similar work to those in the pool. If so, selection should not be restricted to only that group;
- any background facts which may show that the selection pool was defined solely for the purpose of weeding out a particular employee;
- whether employees’ jobs are interchangeable. If so, employers may be expected to include in the pool those employees whose work is interchangeable.
The criteria applied for selecting employees must, so far as possible, be objective and capable of independent verification. Selection criteria should be measurable rather than just being based on someone’s personal opinion. In addition, the criteria used should not be inherently directly or indirectly discriminatory on one of the grounds prohibited by UK discrimination law.
It is important that the selection is capable of substantiation, preferably with written documentation. In addition to avoid discriminatory criteria, particular care must be taken when applying apparently objective selection criteria to avoid applying them in a way that could be discriminatory on one of the unlawful grounds. For example, absences which are for a reason related to an employee’s disability.
Selection criteria often used are:-
- skills and knowledge – (defined precisely);
- attendance records – (consider period for assessment, the frequency of absences and the reasons for absences);
- disciplinary records – (consider period to be considered and reason behind the disciplinary action. Avoid double penalties where the disciplinary action relates to a poor attendance record);
- performance and ability – (defined precisely);
- length of service – (use with caution – can give rise to allegations of age discrimination).
A tribunal can only interfere with the selection criteria used if no reasonable employer would have used those criteria.
Fair application of selection criteria
The unfair application of fair selection criteria can result in an unfair dismissal.
Application of the criteria should therefore be as objective as possible and not rest on personal opinions. If possible, two or three people with “hands on” knowledge of the employees should be appointed to undertake employee assessments to avoid personal bias.
As already explained, an employee is dismissed by reason of redundancy if the reason for his dismissal is that there is an actual or anticipated cessation or diminution in “the requirements of the business for employees to carry out work of a particular kind”. However, this does not require that the employee shall be dismissed because of a diminution in his particular kind of work. Therefore an employee can be dismissed as redundant because of a diminished need for another’s work. This situation is known as “bumping”.
Employers should consider whether bumping would be appropriate in every potential redundancy situation. They should keep a paper trail to demonstrate that bumping was considered, even if they ultimately conclude that it is not appropriate.
It will of course not be appropriate to bump in every redundancy situation. There must be compelling reasons for making employee B redundant and giving employee A his job. This could apply where employee A for example has key skills that the business will need going forward.
Consultation is fundamental to the fairness of any dismissal for redundancy.
Where there is a proposal to dismiss as redundant 20 or more employees at one establishment within a 90 day period, the employer will have to engage in collective consultation with a trade union or elected employee representatives. We do not deal with the collective consultation requirements in this guide. If your potential redundancy numbers amount to 20 or more please contact us for further advice.
Individual consultation should take place when employees have been provisionally selected for redundancy. Employees should be:
- Told why the redundancy situation has arisen, why they have been selected and the selection criteria used including their individual scores;
- Given the chance to make representations and challenge their redundancy selection, to put forward suggestions for ways to avoid their redundancy and to discuss the possibility of alternative employment.
There are no prescribed timescales for individual consultation.
Is there a right to be accompanied?
Whilst strictly there is no statutory right to be accompanied to redundancy consultation meetings, it is good practice to allow this to avoid any possibility that the dismissal could be deemed to be unfair.
The Legal Duty
Before making an employee redundant, an employer should consider whether there is any alternative employment it has which the employee is capable of carrying out that it can offer the employee.
The employer’s obligation to offer suitable alternative employment extends to all potentially redundant employees in priority over any other applicants (whether internal or external). Consideration of alternative employment should be made during the consultation process and during any notice period.
Refusal of Alternative Employment
If an employee unreasonably refuses an offer of suitable alternative employment, he will lose the right to a redundancy payment. Whether or not an employee’s refusal is unreasonable depends on whether the terms and the conditions of the alternative employment mirror those enjoyed by the employee in their previous role as well as the employee’s personal reasons for not accepting the role.
If the terms of the alternative employment differ in any respect to the existing employment, then the employee is entitled to a statutory trial period of at least 4 weeks without prejudice to his redundancy rights.
An employee with at least two years continuous service is entitled to a statutory redundancy payment from his employer, even where they get a new job immediately.
Statutory redundancy payments are calculated on the basis of age and length of service.
For each complete year of service, up to a maximum of 20, employees are entitled to:-
- for each year of service at age under 22 – half a week’s pay;
- for each year of service at age 22 or over but under 41 – one week’s pay;
- for each year of service at age 41 or over – one and a half week’s pay.
There is a statutory limit on the amount of a week’s pay which is reviewed on 6 April each year. Employers can calculate statutory redundancy payments using the Government Calculate your statutory redundancy pay tool.
Contractual Enhanced Redundancy Payments
Employees may also have a contractual entitlement to an enhanced redundancy payment. This might be an express entitlement or one implied though custom and practice.
As a team, we have a broad range of experience when advising clients who are going through the redundancy process. We provide full and comprehensive advice to ensure that you follow a fair process and prevent any claims against your organisation.
If you have any questions, please do not hesitate to contact the Employment Team below.