Difficult times: alternatives to redundancy

Sue Nickson of Hammonds LLP continues a series of articles on dealing with difficult times with a look at alternatives to redundancy where cuts in staff costs need to be made. Options such as recruiting temporary staff or agency staff, outsourcing, changing terms and conditions, and reducing bonuses are discussed.

Lay-off and short-time working

It may be appropriate to lay employees off, or put them on short-time working, where there is a seasonal or temporary reduction in work. Short-time working is defined in s.147(2)) of the Employment Rights Act 1996 (ERA), and is where an employee's pay for a week is less than half a week's pay because of a reduction in the amount of work provided. Some contracts of employment have a clause giving the employer the right to lay off employees or put them on short-time working. This means that the employer can ask its employees not to attend work as normal when no work is available, and not pay them, but not be in breach of contract as a result. The use of such clauses is limited to a certain extent because under s.148 of the ERA the employee has the right to leave and claim a redundancy payment if he or she is laid off or put on short-time working for a continuous period of four weeks or for six weeks in a 13-week period.

In the absence of a contractual right, or express agreement by employees, employers should not lay off employees or put them on short-time working or any other reduction in hours. To do so would amount to a fundamental breach of contract, resulting in possible constructive dismissal claims. The employer must instead negotiate an agreement with each affected employee, giving it the right to lay the employee off or put him or her on short-time working. Employers should also be aware that employees are entitled to a statutory guarantee payment for up to five days of lay-off (depending on the number of days normally worked under the contract of employment) in any three-month period. The daily amount is subject to a statutory cap, currently £20.40 per day.

Annualised hours

Annualised hours contracts, where an employee agrees to work a number of hours over the year, can also be an effective way for employers to respond to fluctuations in demand. Such contracts not only offer flexibility for employers and employees but can also reduce overtime payments and maximise productivity and efficiency.

Recruiting temporary and fixed-term employees

Employers that are uncertain of their future staffing needs often recruit employees on a temporary and/or fixed-term basis, on the grounds that they believe that such employees can be easily dismissed at a later date, should demand for employees diminish. It is often felt that recruiting employees in this way increases flexibility in the workforce. However, employers should note that employees who are on contracts that are described as "temporary" or on contracts for a fixed term have all the usual employment protection rights. Employees who are employed on fixed-term contracts also have specific rights and protection against discrimination conferred on them by the Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002 (SI 2002/2034). (See Temporary workers in the XpertHR employment law reference manual for more details on temporary workers' rights.) Temporary and fixed-term employees can be recruited to cover busy periods or carry out specific roles, but employers must be aware of their employment rights.

Using agency staff

Employers should consider using agency staff if they are cautious about recruiting their own employees and wish to retain more flexibility over the composition of the workforce. Following James v London Borough of Greenwich [2008] IRLR 302 CA, there is now a reduced risk of such workers being able to bring unfair dismissal claims against the end user. Provided that the end user sets up arrangements that accurately reflect the real relationship between the parties, an employment tribunal should not automatically imply a contract of employment between the worker and the end-user.

However, employers should bear in mind that agency workers in the UK are set to gain equal working and employment conditions with permanent staff after 12 weeks' work, following the European Parliament's recent approval of the much delayed Temporary Agency Workers Directive. The Government secured the 12-week qualifying period under an agreement previously struck with TUC and the CBI and said that it hoped to introduce implementing legislation in the coming Parliamentary session.

Changing terms and conditions

As a general rule an employee's contractual terms and conditions of employment can be changed only if he or she agrees. If an employer imposes a change without agreement it runs the risk of the employee bringing a claim for constructive dismissal, or damages for breach of contract. Where the change amounts to a reduction in pay an unlawful deduction from wages claim may be brought.

Some contracts of employment confer on the employer an express power to change terms and conditions. Usually employers have the right to make only minor and non-fundamental changes. Most employees will not agree to contracts that entitle the employer to make sweeping changes to terms.

Many contracts contain a mobility clause, giving the employer the right to require the employee to change his or her place of work, or a flexibility clause, giving the employer the right to require an employee to carry out different job duties. When enforcing such clauses the employer must not act in a way that undermines the duty of trust and confidence that is implied into every contract of employment. In Home Office v Evans and another [2008] IRLR 59 CA, the Court of Appeal held that, subject to this duty, the employer was entitled to rely on a mobility clause to relocate some of its employees, and avoid making them redundant on the closure of their workplace.

If, following a consultation process, employees refuse to accept proposed changes to their terms and conditions of employment, the only "safe" way to make the change (from a contractual point of view at least) is to serve notice to dismiss them in accordance with their contracts of employment, and offer them re-engagement on the new terms and conditions when their notice expires. Dismissing employees in these circumstances is a potentially fair reason for dismissal provided that the employer can show that it had a good business reason for making the changes, and that it followed a fair procedure.

Ideally, employees will agree to changes to terms and conditions of employment, particularly where the changes are to their benefit. It is likely to prove more difficult where changes are detrimental, for example a reduction in wages or annual leave or an increase in hours without an increase in pay. These are the most common changes to terms that employers that need to cut staffing costs make. It is important that employers explain the business rationale for any proposed changes, as part of the consultation process. They should spend time at the outset formulating the business case for proposed changes to terms and conditions, and planning how this should be presented to the workforce. If employees understand the commercial drivers behind a proposed change they are more likely to agree to it. They may also recognise that, by agreeing to changes to their terms, they reduce the likelihood of redundancies having to be made. Dismissals that arise as a result of employees refusing to agree to the change are more likely to be fair where the employer has a sound business case and has invested time explaining it to employees.

Employers should also bear in mind that if employees refuse to accept proposed changes to their terms and conditions and are dismissed as a result, where the number of affected employees is at least 20, this may trigger the obligation to consult collectively under s.188 of the Trade Union and Labour Relations (Consolidation) Act 1992 (even if they are subsequently offered re-engagement under new terms). From a practical point of view, if an employer thinks that it is going to be difficult to obtain employees' consent to the changes and that it may be necessary to dismiss some or all of them, it should consider commencing collective consultation at the outset. (See Difficult times: is redundancy the answer? in this series, for more details of the collective consultation requirements.)

Outsourcing

Employers should always ask themselves whether or not there are good business reasons for outsourcing. While there may be tangible cost benefits to be gained from outsourcing non-core activities like cleaning or catering there are compelling business reasons for not outsourcing core activities, such as the potential loss of control, expertise, and investment in training, and the likelihood of reduced loyalty from the outsourced employees.

The most important employment issue to bear in mind is the implications of TUPE. Nearly all outsourcing situations (eg contracting-out, contracting-in or second generation contracting-out) come within the TUPE Regulations and the parties concerned need to consider how the associated liabilities should be apportioned, and the warranties and indemnities that should be included in the underlying commercial agreement. (See topic of the week article TUPE: checklist for transferees for more information.)

Restricting pay rises and bonuses

Whether or not an employer is obliged to give its employees a pay rise depends on the terms of their contracts. Very few contracts give employees the right to a guaranteed pay increase each year.

In the unlikely event of an employee having the contractual right to a pay increase, the employer's failure to award such an increase would amount to a fundamental breach of contract. The employee could resign and claim constructive dismissal, or bring an unlawful deductions or damages claim (in the same way as an employee who had his or her pay reduced without agreement). However, employees may be willing to agree to waive the right to a pay increase where the employer successfully argues a good business case for not giving it. Any agreement obtained should be in writing.

In relation to bonuses, the type of bonus scheme determines how flexible the employer can be. Under a contractual bonus scheme the employee is guaranteed some form of bonus payment in a given period (assuming that he or she meets any qualifying criteria). The scheme or relevant clause in the contract of employment normally sets out the criteria that have to be met, how the bonus will be calculated, and when it becomes payable. There is usually very little room for manoeuvre for not making payments. If the employee satisfies the criteria but the employer refuses to make a payment, a breach of contract or unlawful deduction from wages claim may result.

Under a discretionary bonus scheme the employer has some discretion over the payment of the bonus. However, merely labelling a scheme "discretionary" will not give the employer carte blanche to do what it wants. Even if a scheme is discretionary, the employee may argue that he or she has a right to a bonus as a result of custom and practice if bonuses are regularly paid at the same rate. Employers are also under an obligation to exercise their discretion in a way that is not discriminatory, irrational, arbitrary or perverse.

In Commerzbank AG v Keen [2007] IRLR 132 CA, the Court of Appeal said that, as a general rule, employers should provide employees with reasons for their bonus payment decisions. Failure to do so could provide powerful support to an allegation that the employer has breached the implied duty of trust and confidence. In any event, employers should be aware that there is more scope for dispute if their decision-making process is not transparent.

Next week's article will be a checklist on retaining and motivating staff after redundancies and will be published on 17 November.

Sue Nickson is Chief Operating Officer, Partner (Employment) and International Head of Human Capital at Hammonds LLP (sue.nickson@hammonds.com).

Further information on Hammonds LLP can be accessed at www.hammonds.com.