What does redundancy actually mean?
Redundancy is a potentially fair reason to dismiss any employee. It is a commonly used word, but the technical legal meaning refers to only three types of situation:
- A business closure,
- A workplace closure, and
- Reduction of workforce (reduction of headcount).
The dismissal of an employee will be by reason of redundancy if it is “wholly or mainly attributable to” the employer:
- Ceasing or intending to cease to carry on the business for the purposes of which the employee was employed by it (business closure)
- Ceasing or intending to cease to carry on that business in the place where the employee was so employed (workplace closure); or
- Having a reduced requirement for employees to carry out work of a particular kind or to do so at the place where the employee was employed to work (reduced requirement for employees).
The laws governing how a redundancy consultation must be carried out differ depending on how many people are being made redundant.
If 20 or more employees are being made redundant over a period of 90 days or less, an employer has a duty to:
- Inform and consult appropriate employee representatives.
- Where 100 or more redundancies are proposed, consultation must begin at least 45 days before the first dismissal takes effect. For less than 100 redundancies, the consultation period is 30 days.
- Notify the Secretary of State (in practice BEIS, on Form HR1)
- Notification must be received by the Secretary of State at least 45 days before the first dismissal, where the employer proposes to dismiss 100 or more employees within a 90-day period. Where less than 100 redundancies are proposed, the notification period is 30 days.
A tribunal may award up to 90 days’ pay in respect of each employee where there has been a breach of the information and consultation duty (a protective award).
An employer may also be fined if it fails to notify the Secretary of State.
In all cases both involving collective consultation and individual consultation the employer will also need to ensure that it has followed a fair procedure in relation to individuals, including consulting with them properly, so as to minimise the risk of claims for a protective award or unfair dismissal.
Redundancy selection and Unfair Dismissal
An employee who has at least 2 years’ service qualifying service may bring a claim of unfair dismissal. As we discuss above redundancy is a potentially fair reason for dismissal. However, even if a dismissal is genuinely on grounds of redundancy, whether it is fair or unfair to dismiss for that reason also depends on the application of the general test of fairness namely whether the employer acted reasonably in dismissing the employee in all the circumstances.
A redundancy dismissal is likely to be unfair unless the employer:
- Has a genuine redundancy situation according to the definition;
- Identifies an appropriate pool for selection; and
- Consults properly and fairly with all individuals in the pool and their representatives; and
- Applies objective and fair selection criteria to those in the pool; and
- Considers suitable alternative employment where appropriate, subject to a trial period; and
- Takes all reasonable steps to avoid redundancy wherever possible, including re-deployment and bumping.
ACAS have a step-by-step guidance on adopting a fair procedure when planning to make one or more employees compulsorily redundant which you can find here.
In certain circumstances, the selection of an employee for dismissal on grounds of redundancy will be automatically unfair for example, if the employee has been selected for a reason connected to pregnancy, or because the employee is on jury service, a health and safety reason, trade union activity or because they have refused to sign a working time opt-out agreement or work on a Sunday and are a protected worker.
At the outset of a fair redundancy procedure (and throughout the consultation process), an employer should consider whether it can avoid making compulsory redundancies or reduce the number of compulsory redundancies. If the employer is undertaking collective consultation, this is one of the matters over which it has a statutory duty to consult the employee representatives. It should also consider this during individual consultation as part of a fair redundancy procedure.
Steps that the employer should consider include:
- Suspending or restricting recruitment.
- Reduction or removal of overtime.
- Not renewing or cancelling the contracts of contractors.
- Ceasing or reducing the use of agency workers/temp or casual workers.
If these initial steps are not enough or aren’t an option, the employer should consider:
- Inviting potentially redundant employees to apply for suitable alternative vacancies.
- Inviting employees to volunteer for redundancy.
- Inviting employees to consider early retirement under the pension scheme.
- Lay off or short time working. However, prolonged use of this will itself entitle the employees to claim a redundancy payment
Employees who are dismissed by reason of redundancy may be entitled to a statutory redundancy payment. Additionally, they may have an express or implied contractual right to an enhanced contractual redundancy payment. In circumstances in which an employer is liable to pay an employee a statutory redundancy payment, if the employer either fails to make the payment because it is insolvent or refuses to do so, the employee may apply to the Secretary of State for payment out of the National Insurance Fund.
Statutory redundancy payments
Employees with a least two years’ continuous employment at the relevant date are entitled to a statutory redundancy payment if they are dismissed by reason of redundancy.
The government calculator can be used to work out an employee’s statutory redundancy payment.
Statutory redundancy pay is calculated according to a formula set out in legislation, which is based on age, length of service (subject to a maximum of 20 years) and pay (capped each year).
Claiming from the National Insurance Fund
Where an employer refuses to make a redundancy payment (or has made a part payment only), the employer is insolvent, or the employer is not insolvent but cannot afford to pay, an employee may apply to the Secretary of State for a redundancy payment out of the National Insurance Fund.
More information can be found here.
Contractual redundancy payments
In addition to a statutory redundancy payment, an employee may also be entitled to an enhanced contractual redundancy payment.
- If the employee’s contract of employment expressly sets out a redundancy policy, the policy will be an express term of the employment. However, such a contractual policy is rare, it is more common for a redundancy policy to become expressly incorporated by being set out in another document or collective agreement which is referred to in the employee’s contract of employment. Another way in which a redundancy policy can be expressly incorporated into an employee’s contract of employment is where someone with authority makes a verbal or written statement that results in a commitment by the employer to pay enhanced redundancy payments.
- The most common way in which redundancy terms may be implied into an employee’s contract of employment is where a set of redundancy terms are regularly applied in a particular trade or industry or by a particular employer, known as “custom and practice” In order for employees to show implied incorporation of the enhanced redundancy terms into their contracts of employment, they must show that the custom in question is “reasonable, notorious and certain” in other words the terms must be fair, must be generally established and well known, and must be clear cut.
In operating an enhanced redundancy payments scheme, an employer must be careful to ensure that the manner in which it applies an enhanced redundancy scheme has not disadvantaged some employees over others in a way which is discriminatory. Age discrimination is a common issue in schemes which use age and/or length of service to calculate the payment, unless they follow the statutory redundancy pay model, in other words a multiplier according to years’ service and pay.
Here are some common misunderstandings and mistakes for employers to avoid:
Pitfall #1 – Failing to count voluntary redundancies towards the trigger for collective consultation
The obligation to inform and consult with recognised trade unions or employee representatives kicks in when you are proposing to dismiss as redundant 20 or more employees at one establishment.
If any employees have volunteered for redundancy, they must still be counted.
If you omit them from the calculation and do not collectively consult when you should, you could face claims for up to 90 days’ actual pay for each affected employee.
Pitfall #2 – Failing to consult with employees out of the workplace
An essential element of a fair redundancy is individual consultation, so do not forget about employees who are not in the workplace due to furlough leave, sickness absence, family-friendly leave or homeworking.
You must still consult with them, even if you have concerns that they may find it too stressful. We can help you find the most appropriate way to do this, and can advise you on how to handle the discussions.
You may need to schedule more time in your redundancy process and may need to adjust your scoring, for instance relating to recent performance, to ensure that absent employees are not at a disadvantage.
You may also need to make adjustments to your process for disabled employees.
Pitfall #3 – Believing that ‘last in, first out’ is a fair selection approach
The approach of ‘last in, first out’ was once seen as a fair and uncontroversial selection criterion but it now carries the risk of age discrimination claims as younger employees are more likely to be the last ones in.
Another reason to avoid this approach, is that it is a blunt tool and may result in losing your best performers.
Pitfall #4 – Holding interviews instead of selection assessments
Making an employee apply for their own job is a risky way to select employees for redundancy when you are just reducing the number of existing posts and the remaining jobs remain largely the same.
An employment tribunal is likely to find this selection process to be unfair. Instead, you should use selection criteria and an assessment process. However, it may be safe to use an interview process where the available jobs are new or have been significantly redesigned.
Pitfall #5 – Concealing assessment scores
One area for individual consultation is the employee’s assessment scores. To ensure that this consultation is meaningful, the employee needs to know:
- their own scores;
- the break point (the score above which their job would be safe);
- within which quartile they scored; and
- the anonymised scores of the other employees in the pool.
Data protection rules only prevent you from disclosing these if individuals could be identified from the anonymised scores.
Pitfall #6 – Treating employees on family-friendly leave equally
Having selected employees for redundancy, you must offer them any suitable alternative roles in your business.
Make sure that you give priority to any employee you are making redundant while on maternity, adoption or shared parental leave. They have the right to be offered first any suitable alternative roles, so long as the terms of the job are ‘not substantially less favourable’ than their current job. If the job meets these conditions and you do not offer it, the redundancy dismissal will be unfair.
You must actually offer them the job; they do not have to apply, even if other redundant employees would make better candidates. The job must then be held open for the employee until they return to work.
Pitfall #7 – Using furlough pay to calculate notice and redundancy pay
For many employees, statutory redundancy pay is calculated using average pay figures from the last 12 weeks.
Under new rules introduced on 31 July 2020, employers cannot base statutory notice and redundancy pay on reduced pay received during furlough leave. Instead, employers must calculate these payments using the full pay an employee would have received if they had not been furloughed. A week’s pay for these payments is currently capped at £538.
How we can help
Speak to us as soon as you are considering making any employees redundant to ensure that you follow the correct procedure from the outset. We can advise you on tricky issues such as what is ‘an establishment’ for purposes of collective consultation and when is a job a ‘suitable’ alternative? With our advice, you can avoid jeopardizing your business with a costly and disruptive employment tribunal claim.