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Making redundancies

Alternatives to making redundancies

If you are considering redundancies, take advice early. You may be able to avoid making redundancies at all. Options open to you might include:

  • cutting overtime
  • offering early retirement to employees who volunteer
  • terminating temporary contracts
  • retraining or redeploying workers – maybe to lesser jobs
  • deferring starting dates for new employees
  • offering sabbaticals or arranging secondments

If you are entitled to make redundancies, take advice on how to handle them effectively, to minimise the upset to your employees, to you and to your business.

If you are not entitled to make redundancies, you may still be able to negotiate a reduction in your workforce, offering payments as compensation. You can ask employees to sign a settlement agreement (formerly known as a compromise agreement) so they promise not to bring an employment tribunal claim. Again, advice is essential.

What redundancy means

You make employees redundant if you dismiss them because:

  • you are ending the business in which they are employed
  • you are closing a workplace where they are employed
  • the need for the particular work they do is less (or you reasonably expect it will become less), either at their workplace or in the business as a whole

When a redundancy is unfair

A dismissal on grounds of redundancy, fairly carried out, is not an unfair dismissal. However, you have to make statutory redundancy payments to employees who have at least two years’ continuous service. This includes employees who take voluntary redundancy.

If an employee is not genuinely redundant, or the procedures you follow in making redundancies are not fair, you face a claim for unfair dismissal and, possibly, discrimination.

Employees with less than two years' continuous service (one year’s service if employment commenced before 6 April 2012) cannot sue for unfair dismissal — unless the dismissal was for an ‘inadmissible’ reason (such as pregnancy, or involvement in trade union activities). However, if those selected for redundancy have characteristics which set them apart from the majority of your workers — for example, if they are women, from a racial minority group, disabled or in a particular age group — a claim for unlawful discrimination could be made against you.

Employees who have adopted 'employee shareholder' status also do not have unfair dismisal rights (apart from where there are automatically unfair reasons, where discrimination has taken place or in relation to health and safety).

There is no qualifying period of service in relation to discrimination claims, so if your employees can establish on the facts what appears to be a difference in treatment related to gender or gender reassignment, race, sexual orientation, religious or philosophical belief, age or disability, an Employment Tribunal may draw an inference of unlawful discrimination unless you can provide a satisfactory alternative explanation. An award of compensation for unlawful discrimination has no upper limit.

The importance of redundancy procedures

The best way to reduce the risk of an unfair dismissal claim is to introduce a formal redundancy procedure, and stick to it. It should cover:

  • identifying a reasonable ‘pool for selection’, ie the group of employees from whom the employees selected for redundancy will be chosen
  • adopting objective selection criteria and applying them fairly to the employees within this pool
  • warning and consulting employees about the potential redundancy situation
  • seeking a view from the union (if any)
  • informing and consulting employee representatives in cases of collective redundancy
  • considering alternative employment for those employees whose roles are redundant
  • giving reasonable paid time off to look for work or make arrangements for training for future employment

In addition, if you are making individual employees redundant you must follow fair and reasonable procedures.

The Acas Code of Practice on disciplinary issues, which provides practical guidance and principles to help you (and your employees and their representatives) establish and operate fair and reasonable disciplinary procedures, does not apply to redundancies (see Disciplinary issues: 30 FAQs).

Collective redundancies

The rules

If you are proposing to dismiss 100 or more employees for redundancy at one establishment within 90 days or less, you have a statutory duty to inform and consult employee representatives about your proposals. Consultation must begin at least 45 days (previously 90 days) before the first dismissal takes place.

If you are proposing to dismiss between 20 and 99 employees for redundancy at one establishment within 90 days or less, consultation must begin at least 30 days before the first dismissal takes place.

In either circumstance (a ‘collective redundancy’), you have to disclose, in writing, to the appropriate representatives during the consultation process:

  • the reasons for your proposals
  • the number and description of employees whom you propose to make redundant (for example, 10 shop floor workers)
  • the total number of employees of that description employed at the establishment in question (for example, 32 shop floor workers)
  • the proposed method of selecting people to be made redundant
  • the proposed method of carrying out the dismissals, including the period over which the dismissals are to take effect (for example, five notices to be issued within the next three months, and another five at the end of the year)
  • the proposed method of calculating the amount of any redundancy payments to be made (other than statutory redundancy payments)

Where you are proposing to dismiss smaller numbers, it is obviously reasonable to give as much notice as possible, and you must in any case observe the notice provisions within the employees’ contracts.

Read the Acas guide 'How to manage collective redundancies'.

‘Protective’ awards

A ‘protective’ award may be made if you fail to comply with the obligation to consult appropriate representatives in a collective redundancy situation. The award is for a ‘protected period’, which may be up to 90 days. If a protective award were made, you would have to pay full pay to all the employees who have been dismissed or whom you propose to dismiss as redundant, for the duration of the protected period. This is why it pays to start collective redundancy consultation sooner, rather than later.

The qualifying period, and redundancy pay

An employee must have two years’ continuous employment at the relevant date in order to qualify for a redundancy payment. Employee shareholders do not have the right to redundancy payment irrespective of length of service. The maximum length of service that may be taken into account is 20 years.

The amount of the statutory redundancy payment depends on the employee’s age, length of service and pay, and is calculated using the following starting point:

  • one and a half week’s pay for each year in which the employee was 41 years old or more
  • one week’s pay for each year in which the employee was between the ages of 40 and 22
  • half a week’s pay for every other year

A week's pay is that which the employee is contractually entitled to, at the 'calculation date', ie the date on which you give them the minimum notice to which they are legally entitled. In any event, the week’s pay is subject to a statutory maximum (£464 per week from 6 April 2014). That means the maximum possible statutory payment for a redundancy is £464 x 1.5 x 20 = £13,920.

Statutory redundancy pay is paid gross to the employee (that is, tax free). It may be possible to pay any additional severance pay without deduction of tax and NI, but it will depend on the terms of the employment contract and any agreed terms of severance. Take legal advice.

Offering more than the statutory redundancy pay

You might want to offer more than the statutory redundancy payment, particularly if you want to encourage voluntary redundancies. However, you should be careful that you do not inadvertently create a contractual ‘right’ to such enhanced payments – for example, by always paying them out as a matter of course. Also take care if your scheme benefits older workers more than younger workers or provides greater benefits to workers with longer service who are, on average, likelier to be older employees. The latter may be able to claim age discrimination unless you can show that the benefit was a proportionate means of achieving a legitimate business aim. Take advice in these circumstances.

The fair pool for selection

To reduce the risk of being sued for unfair dismissal and unlawful discrimination, you should identify a fair ‘pool for selection’ for redundancy.

If there is an agreed procedure, or customary arrangement, which prescribes a particular selection pool, you would normally be expected to follow it unless you can show that it was reasonable not to do so. 

If there is no agreed procedure or customary arrangement, you have flexibility in identifying the pool for selection. Nevertheless, you should ensure that you act reasonably in identifying the pool for selection, for example, by considering whether employees’ jobs are interchangeable.

Having identified a fair pool for selection, you should then fairly apply objective selection criteria, in order to identify which members of the pool should be made redundant (that is, those who score lowest). Such criteria could include performance or attendance – although selecting on the basis of length of service is likely to be discriminatory against younger workers, who could bring a claim for age discrimination.

Alternative employment

You must offer ‘suitable alternative employment’ if you can, such as a move to a new location, or even a lesser job (‘bumping’). If a new location would mean moving house, or a considerable increase in travelling time, the Employment Tribunal would be unlikely to consider this ‘suitable’, although much will depend on individual circumstances, such as your entitlement to require your employees to work in different locations in their contracts of employment.

Whether it is reasonable for an employee to refuse an offer of suitable alternative employment is assessed subjectively, from the employee’s point of view. For example, relocation to a new workplace just two miles away from the old workplace appears, objectively, to be a relatively small change to terms and conditions of employment. However, if it poses particular problems for an employee in terms of travelling time or domestic commitments then, in those circumstances, a refusal to relocate could be reasonable.

Part-timers

Part-timers are entitled to the same employment rights as full-timers, and that includes the right not to be singled out for redundancy. It is unlawful to treat them less favourably than full-timers, unless you can justify the different treatment on objective grounds. If most of your part-timers are women, or from a particular racial or age group, you also risk being accused of indirect discrimination. 

Taking on more people after redundancies

If you take on more people after redundancies, and your ex-employees can convince an Employment Tribunal that you used redundancy as an excuse to get rid of them, you are likely to end up paying compensation for unfair dismissal.

Take advice in these circumstances. If you have taken on new workers to do a different job, or in a location that the original employees would not have worked in, you have a defence against their claims that their redundancy was not genuine.

Also, you may have made redundancies in expectation of a downturn that has not materialised. If you can prove you had a reasonable expectation that the business in which your former employees worked was about to turn down, then — even if you were wrong — you have a defence.

Selecting for redundancies

A common criterion used to be ‘last in, first out’ (‘LIFO'). This is unlikely to be valid if new workers taken on tend to be younger than older workers, as LIFO is then disproportionately affecting a particular sector of your workforce — ie younger workers — and is therefore discriminatory unless you can show that the application of LIFO is objectively justified.

LIFO is also likely to be discriminatory if it affects those in your workforce of a particular gender or gender reassignment, age, race, sexual orientation, religious or philosophical belief or disability, unless it can be objectively justified.

If you want to use length of service as a criterion, be very careful – and take legal advice. Older employees are likely to have been with you longer, so using length of service as a criterion is potentially age discrimination against younger employees. Men are also more likely to have longer service than women, so it is potentially sex discrimination too.

However, the High Court has said in one case that using length of service as one of the criteria when selecting employees for redundancy can, in some circumstances, be objectively justified – it is not necessarily age discrimination.

In that case, the employer argued that taking long service into account was a ‘benefit’. The age discrimination rules contain an exception that allows an employer to use length of service as a criterion in relation to the award of a ‘benefit’ that is potentially discriminatory, where it fulfils a business need (eg by encouraging the loyalty or motivation, or rewarding experience, of some or all of the workers).

The court decided that the policy of giving credit for long service on a redundancy amounted to a benefit for the employee concerned – the benefit was the retention of employment which would otherwise be lost.

The tribunal also found that the criterion fulfilled a business need, because length of service equated to loyalty and experience, and meant that older workers were better protected from losing their jobs than younger workers in a difficult economic climate. The employer had therefore justified the impact of the age-related benefit.

However, in another case concerning a pay scheme that rewarded longer service (but, significantly, a claim based on indirect sex discrimination on grounds women generally have shorter periods of service than men, rather than an age discrimination claim) the European Court of Justice accepted that, in general, length of service went hand in hand with experience, and experience would enable a worker to perform better. So normally, employers do not need to provide a justification for using length of service as a criterion in pay schemes in order to avoid indirect sex discrimination claims.

But in the particular case, the Court also accepted the ‘serious doubts’ the claimant had raised as to whether, once a worker had reached a certain level of experience, further service made a real difference to their performance. So where a worker can raise serious doubts about the benefit provided by extra experience, using length of service may be a form of indirect discrimination. It is unclear whether this “serious doubts” test could also be applied in an age discrimination case in relation to a redundancy to defeat a justification that, by rewarding length of service, the employer is rewarding experience.

You can select on the basis of performance, provided it is a genuine criterion. You would need to produce as much objective evidence as you could — for example, sales figures, productivity records, appraisals — to demonstrate that you are losing the people who make the least contribution to the business, rather than merely exercising favouritism. For example, you can’t use ability to speak and understand English as a criterion unless it is essential to the job, and both native and non-native speakers would have to take the same tests.

Making employees redundant if you buy a business

If you buy a business (or part of one), employees in the business will often be protected by the TUPE regulations (Transfer of Undertaking (Protection of Employees) Regulations). In that case, they become your employees, on the same contract terms that they worked for the previous employer.

You take over any collective agreements they benefit from, obligations under any occupational pension scheme, and all other rights and obligations (except criminal liabilities) related to their employment.

If you want to dismiss any of them on grounds of redundancy, you must therefore follow the usual redundancy procedures.

The transfer of an undertaking does not affect an employee's period of continuous employment for calculation of redundancy entitlements. The start of the continuous employment period is taken from the date on which the employee commenced work with the previous employer.

Financial difficulties

If you are unable to make your statutory redundancy payments, they will be paid out of the National Insurance Fund. If your employees are entitled to more than the statutory payments, they join your other (unsecured) creditors in waiting for whatever assets can be released from the business.

Always take legal advice before making redundancies.