As the credit crunch continues to take hold, organisations are inevitably considering the prospect of redundancy. Martin Warren advises on the correct procedures to follow to ensure employers don’t fall foul of the law.
A year on from the onset of the global credit crunch, businesses are starting to prepare for the impact of the economic downturn and many are now looking at ways to reduce their overheads and costs. Inevitably, one area of focus for employers will be staff levels.
After 16 years of economic prosperity, for many employers it may be the first time that they have considered making staff redundant and, as a result, there is a risk that those facing this difficult decision will be unaware of the procedures to follow.
Is it a redundancy?
A redundancy situation is usually straightforward to recognise, however there are some borderline cases which must be correctly identified at the outset. Getting the diagnosis wrong in the early stages risks a subsequent finding of unfair dismissal.
Redundancies are triggered by one of three situations (regardless of the size of the employer or the number of employees affected); a business closure, a workplace closure or a reduced need for employees. It is usually this third category which requires closer inspection to avoid a mistaken diagnosis. Examples include a reorganisation, or change in the type of work, leading to fewer employees being required.
How a redundancy situation is handled differs according to the number of employees involved; larger scale redundancies trigger the need to inform and consult with elected employee representatives whilst smaller scale redundancies do not. The trigger point is where the employer proposes to make redundant 20 or more employees at a workplace within a period of 90 days. Where this duty arises, the employer must also notify the Department for Business, Enterprise and Regulatory Reform of the proposed redundancies.
Collective consultation requires the employer to go through a defined process with their trade union or employee representatives.
Employers also need to be aware that the legal landscape changed last autumn when the Employment Appeal Tribunal (EAT) decided that employers must consult on the business reasons for making redundancies, and not just how they would be handled. Previously, employers were under no compulsion to share this information with their representatives.
The key principle for handling individual redundancies has changed little over recent years. However, their enduring nature should not lull employers into complacency given the risks of getting it wrong. These key principles will include:
- Warning and individually consulting with the affected employee
- Ensuring the correct pool for selection is identified, where appropriate. For example, considering employees with interchangeable or similar jobs.
- Adopting a fair basis on which to select for redundancy. Selection criteria should be non-discriminatory and capable of objective verification.
- Applying that selection process fairly, for example, requiring two managers to agree selection scores
- Taking reasonable steps to avoid or minimise redundancy, for example, including the offer of suitable alternative employment
- Providing the employee with a right of appeal against the decision to dismiss
Recent case law has confirmed that, as a minimum, before the employer holds a consultation meeting with the employee, it must set out in writing why it is making redundancies, why the employee is being provisionally selected as well as details of any selection criteria and the employee’s assessment under those criteria. The employee must be given an opportunity to discuss the selection, put forward suggestions to avoid the redundancy and to consider any alternative positions which might exist. Employers should be very cautious about abandoning consultation altogether. Tribunals take a harsh approach to a complete lack of consultation.
With the introduction of the 2006 age discrimination laws, redundancy exercises must not unjustifiably disadvantage employees because of their age. Be alert to early retirement schemes which disadvantage the young, enhanced redundancy pay which rewards age and long service (although some enhancement is lawful under the age laws) and selection criteria that penalise short service or lack of experience.
Whilst all of these may be capable of justification, and therefore lawful, employers must ensure that any justification bears up to close scrutiny.
Employers with discretionary enhanced redundancy pay policies must also guard against such policies becoming a contractual right. The High Court recently held that such a policy placed on the employer’s intranet had become contractual. Restricting circulation of such policies, ensuring that its terms are not routinely applied and that it is truly discretionary, are all necessary steps if this is to be avoided.
Getting it wrong
An unfair redundancy dismissal usually entitles the employee to compensation for lost wages and benefits (currently capped at £63,000), as well as a statutory redundancy payment (capped at £9,900). These statutory caps do not apply if the redundancy was discriminatory. A protective award of up to 90 days actual pay (not subject to a statutory cap) may also be awarded for breach of the collective consultation duties. Given these financial penalities, many businesses enter into a compromise agreement to extinguish the risk of potential employee claims.
Martin Warren is head of employment law at Eversheds international law firm.