We know that starting a redundancy process is a stressful time for employers. It is not something you want to do, but unfortunately it’s something that you have to do. This article will explain in clear terms what redundancy is, the procedure you need to follow and how you can remain compliant.
1. Redundancy in the context of Covid-19
According to McKinsey, around 7.6 million jobs (including permanent layoffs, temporary furloughs and reductions in hours and pay), or 24% of the UK workforce, are at risk because of Covid-19 related issues. Big name brands from Rolls Royce to British Airways have announced huge redundancy programmes either to cut costs in the light of dramatically falling revenues or as a consequence of a changing employment landscape with employees working from home and retailers moving online, leading to natural cost savings associated with the abandonment of offices and retail spaces.
The pandemic and the restrictions imposed by government to control the pandemic has caused the deepest recession for 300 years. UK GDP fell by 19% in the three months to May 2020 and the number of employees on company payrolls fell by 649,000 between March and June 2020. Companies have announced tens of thousands of redundancies and hundreds of thousands of employees are furloughed. You are not alone.
2. What is ‘redundancy’?
An employee will be considered having made redundancy if their dismissal is “wholly or mainly attributable” to the ceasing of the business for which the employee was employed or where the business continues, but the business no longer requires employees that carry out a particular kind of work or to carry out that particular kind of work in the place where the employee was employed. In other words, if your business has ceased operating, if the type of work the employee was doing is no longer required or if that type of work is no longer carried out at the location where the employee is working.
- Relocation of place of business
If you move or intend to move the place of business from where the employee is employed. The relevant factor is where the employee actually performed their work, not what the ‘place of business’ is stated in their employment contract. The Employment Tribunal will consider the distance between the old and new locations and the degree of inconvenience for the employee.
- Cessation of business
If you cease or intend to cease carrying on the business for which the employee was employed. This may apply where part of your business is closed, but other areas of your business continue to operate.
- Surplus labour
If you need fewer employees to carry out existing work or there is less work for existing employees. The Employment Tribunal will look at both the work they actually performed and the role as set out in their contract of employment. An example of this would be where fewer employees are required where a business has started using new technology or machinery in place of manpower.
3. How much do you need to pay?
Employees are entitled to redundancy pay if they have worked continuously for an employer for 2 years before they are made redundant. The level of redundancy pay depends on the employee’s age and how long they have worked for you. An employee’s contract of employment should state if they are entitled to more than the statutory redundancy minimum. There is a useful redundancy pay calculator that will help you calculate that minimum payment if the contract is silent.
We’ve set out a guide to the statutory minimum payment below:
Employee’s age (years)
Minimum statutory redundancy pay for each full year of continuous employment
17-21
0.5 week for each full year
22-40
0.5 week for each full year to 21
1 week for each full year from 22-40
41+
0.5 week for each full year to 21
1 week for each full year from 22-40
1.5 weeks for each full year 41+
The statutory redundancy compensation is capped at £538 gross per week. The maximum amount of statutory redundancy pay you can be liable for is £16,140. The maximum length of service you can be liable for is 20 years. These caps are reviewed every year on 6 April.
There is an excellent calculator on the government website that will help you make this calculation, see https://www.gov.uk/calculate-your-redundancy-pay .
You will also need to pay any contractual payment in lieu of notice (often referred to as a ‘PILON’ clause). This will be set out in the employee’s contract of employment. You may decide it is preferable for the employee to be paid in lieu of them serving their notice period. You will also need to make a payment in respect of any outstanding holiday entitlement and any contractual bonus or over-time payments due. Again, these entitlements should be set out in the contract of employment.
4. What if we cannot afford to pay the redundancy pay?
If you cannot afford to pay redundancy pay you can apply to the Redundancy Payment Service (“RPS”), part of the Insolvency Service, and they will make direct payment of redundancy payments to the employee on your behalf. Any business that is not party to formal insolvency proceedings can still apply. There is a limit on the amount the RPS will pay. There is a cap of 20 years redundancy that can be paid and there is a cap on the weekly wage. RPS cannot make other payments, such as payment in lieu of notice or holiday pay, unless your business has entered a formal insolvency proceeding. RPS will then look to recover the payments from your business.
Is there a process we must follow?
Yes, and if you get it wrong, it can be very costly. Much more expensive than instructing us! The process can be broadly explained using the diagram below:
Warning
Warn potentially affected employees that there may be a business need for redundancies.
Selection for Redundancy
Is there a reduced need for employees? This might be because the business is ceasing, the business is moving to a new location or the requirement for a particular type of work no longer exists.
Voluntary Redundancy
Finding employees willing to volunteer for redundancy may avoid/reduce the need for compulsory redundancies and the selection criteria process.
Selection Process
To ensure that you do not select employees to be made redundant unfairly, it is crucial that you follow the right process.
Selection Matrix
To ensure that you can evidence that the process has been fair, create a selection matrix to score employees against your selection criteria.
Your ‘Selection Criteria’
This should be objective, reasonable and applied fairly based on qualifications, experience, performance, time keeping, attendance and disciplinary record.
Individual Consultation
You must hold individual consultations with employees as part of your redundancy process. Inform the employee of the redundancy process, explain the redundancy pool, selection criteria and why the employee is ‘at risk’. Allow the employee to query their selection and listen to what they say. Explain the terms you are offering for the redundancy. Consider and discuss alternatives to redundancy, such as alternative employment. NB collective consultation will be required in circumstances where you intend to make 20 or more employees redundant.
Making Your Decisions
You will make your decision as to who should be made redundant based on the selection matrix and the individual consultations. For those who have been selected for redundancy, you must explain their right of appeal and during their notice period, you should continue to identify alternative employment for them.
5. What happens if we do not follow the process?
Employees who have two years’ or more continuous service can claim unfair dismissal. It’s vital to follow the correct procedure when making redundancies. Not doing so may lead to costly Employment Tribunal claims, which bring with them loss of management time, legal costs and reputational damage.
6. How does it work if our employee if on furlough when we make them redundant?
The government has passed legislation that confirms t hat employers can make furloughed employees redundant. However, you must calculate the statutory redundancy pay based on their pre-furlough salary. You will also need to consider how you will effectively consult with employees either furloughed or working from home.
7. Do I need a Settlement Agreement?
A settlement agreement is a contract between an employer and an employee under which the employee gives up any claims or potential claims against the employer, normally in return for an ex gratia payment. This offers certainty to the employer that moving forwards, the individual will not file a claim at the Employment Tribunal and allows both parties to move on from the termination.
You may want to consider entering into a settlement agreement when making an employee redundant. This is particularly important if the employer and employee have decided not to go through the required redundancy process and have reached a commercial agreement to end the employment, avoiding the loss of time associated with going through the process set out above.
Recent Redundancy Caselaw
Packman v Fauchon: Reduced hours was a redundancy
The Employment Appeals Tribunal held a redundancy had taken place where an employee who refused reduced hours and was then dismissed. There may be a redundancy where there is a reduced need for an employee to work full-time hours.
Fish v Glen Golf Club: Redundancy where other reasons exist
Here, the Employment Appeals Tribunal said that redundancy can be a reason for dismissal, even if there are other reasons, such as capability to do the job. The EAT decided that although there were other reasons to dismiss the individual, the principal reason was that the role was redundant due to financial constraints.
Fulcrum Pharma (Europe) Ltd v Bonassera: Who should be in the pool?
This is a reminder that a selection pool should include not only those employees carrying out work of that particular kind but also jobs that either interchangeable or similar with that employee’s role. In this case, the employee was an unfair dismissal claim where she was made redundant from her position as HR Manager and the HR Executive had not been included in the pool.
7 Top Tips When Undertaking A Redundancy Process
- Ensure that it is a genuine redundancy situation and that you are look terminating the employee’s employment for that reason.
- Genuinely think about alternatives to redundancy, such as change of role within your business (suitable alternative employment).
- Follow the statutory redundancy procedures when making an individual redundant and make sure you follow your own procedures.
- Make sure you pay the correct statutory redundancy payment when making an individual redundant. Employees who have two years or more continuous service are entitled to a redundancy payment. See link www.gov.uk/calculate-your-redundancy-pay . Remember to give the employee a written statement on how it was calculated.
- Pay any contractual entitlements, along with the statutory redundancy payment, such as notice pay, outstanding holiday entitlement and contractual bonuses.
- Allow the individua reasonable time off to look for employment.
- You may wish to enter into a settlement agreement with the employee if there is any risk of a future claim being brought against the company by the individual.
Conclusion
It is unfortunate that in the “new normal” redundancies are commonplace and we anticipate this being the case for at least the next two years as the economy recovers and start to grow again.
It is absolutely crucial that you follow the correct process when making redundancies. We are here to help you through that process and take the pain away. Employment legislation and caselaw is constantly evolving and it is important that you receive the right advice. If you have any questions or need any advice, do not hesitate to contact us.
