Difficult times: is redundancy the answer?

Sue Nickson of Hammonds LLP begins a series of articles on dealing with difficult times with a look at redundancy. Details of employers' obligations in a redundancy situation, particularly in relation to consultation, selection and alternative employment, are included.

Introduction

How should employers respond to the current economic situation? Cutting labour costs is one of the most obvious ways of reducing overheads and attention inevitably turns to whether or not redundancies are necessary. However, employers should not automatically rush into making redundancies. There are other cost-cutting measures that may be more effective or less damaging in the longer term. (The second article in this series will consider alternatives to redundancy.)

When are redundancies appropriate?

An employer considering redundancies should ask itself a number of questions. Does it need fewer staff because there is less work? If this is the case, is the reduction in workload seasonal, temporary or permanent? If it is seasonal or temporary, redundancies may not be the answer because employees will be required when the level of work increases. If the employer has the same amount of work but needs fewer employees to do it, redundancies may be the answer. However, if there is the same amount of work but the employer needs to reduce staff costs, changing terms and conditions, rather than making redundancies, may be the appropriate course of action. Alternatively, if the work could be carried out more efficiently or effectively elsewhere, outsourcing may be an option, although TUPE is likely to apply in these circumstances. (See the previous series of topic of the week for information on TUPE.)

If the employer does decide that making employees redundant is the most appropriate route to cutting staffing costs, it needs to follow the redundancy process carefully, to avoid successful claims in an employment tribunal.

Consultation

Under s.188 of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULR(C)A), the collective consultation requirements are triggered where an employer is proposing to dismiss as redundant 20 or more employees at one establishment. There is no definition of "establishment" and each case will depend on the facts. The duty to consult is triggered even where the employer is intending to offer alternative employment to all or some of the employees at risk, thereby bringing the number of employees actually dismissed as redundant to below 20 (Hardy v Tourism South East [2005] IRLR 242 EAT).

Employers should also consider the timing of redundancies as the duty to consult collectively is triggered only where the proposed redundancies are due to take place within 90 days.

Employers are obliged to consult with "appropriate representatives" of the affected employees. In the absence of a trade union, these will be employee representatives. The employer may need to build sufficient time into the consultation process to allow employee representatives to be elected.

When must consultation start?

TULR(C)A provides that collective consultation must begin "in good time" and in any event at least 90 days before the first of the dismissals takes effect where 100 or more redundancies are proposed, and at least 30 days before the first of the dismissals takes effect where between 20 and 99 redundancies are proposed. Following Junk v Kühnel [2005] IRLR 310 ECJ, "takes effect" means when notice is given, not when it expires.

Employers should not issue notices to dismiss before they have concluded the collective consultation process. If collective consultation is completed within the 30- or 90-day period (as appropriate), the employer may issue notices to dismiss at that point. There is a risk that this will be challenged, but the risk is small if the appropriate representatives agree that there is nothing more about which to consult.

Where the collective consultation obligations apply, the employer must notify the Secretary of State, in writing, of its proposals, before giving notice to terminate and at least 90 or 30 days before the first of the dismissals takes effect. Failure to do so is a criminal offence, punishable by a fine of up to £5,000. The employer must also give a copy of the notice to the appropriate representatives.

About what must employers consult?

There must be consultation about ways of:

• avoiding the dismissals;
• reducing the number of employees to be dismissed (for example by redeployment or reducing overtime); and
• mitigating the consequences of the dismissals (for example by offering severance payments and outplacement counselling).

Consultation must be undertaken "with a view to reaching agreement with the appropriate representatives" (s.188(2) of TULR(C)A).

Following the recent Employment Appeal Tribunal (EAT) decision in UK Coal Mining Ltd v National Union of Mineworkers (Northumberland Area) and another [2008] IRLR 4 EAT, employers may need to consult about the reasons behind the redundancy proposals rather than just the proposed redundancies themselves. This means that, particularly with site closures, employers should engage with trade unions or employee representatives at an earlier stage in the decision-making process than previously, and be clear in the commercial thinking behind redundancy proposals.

Selection criteria

Employers can choose the selection criteria to be used in a redundancy selection exercise, provided that the criteria are objective and fairly and consistently applied. There is no definitive list of selection criteria that should always be used - the criteria used will depend on the individual employer's needs and existing arrangements. The most commonly used criteria include skills and knowledge, attendance records and disciplinary records. Employers should ensure that selection criteria are not directly or indirectly discriminatory.

If there is an agreed procedure or arrangement in place (for example an agreement with the union) that determines which employees should be included in the selection pool, the employer should normally adopt this procedure or arrangement unless it can show that it was reasonable for it not to do so. If the employer recognises a union or there are elected employee representatives, it should, in any event, consider consulting with them with regard to the appropriate selection pool.

Where employees do jobs that are interchangeable, or do the same or similar work as those in other teams or departments not immediately under threat, the employer should consider widening the selection pool to include this latter group.

Following Alexander and another v Bridgen Enterprises Ltd [2006] IRLR 422 EAT, employers should provide employees at risk with details of selection criteria together with their individual scores, prior to any dismissal meeting taking place. This is necessary to comply with their obligations under the statutory dismissal procedure. However, employers are not required to provide employees with information about the "break point" (ie the mark that they need to achieve to remain in employment), or the scores of other employees in the selection pool.

Voluntary redundancies

There is no statutory obligation for employers to seek volunteers for redundancy. However, it is good practice to do so, and helps to establish the reasonableness of redundancy dismissals. On the downside, voluntary redundancies can be more expensive because longer-serving employees often volunteer, leading to potentially higher redundancy payments and a loss of valuable experience. Employers should, therefore, reserve the right to turn down particular applications for voluntary redundancy.

Where there are fewer volunteers than redundancies, the redundancy process will be prolonged by the employer having to go through both voluntary and compulsory redundancy stages, with a consequent drain on management resources. It is also inevitable that, to attract volunteers, the employer will have to offer enhanced redundancy terms. Employers should note that using a voluntary redundancy scheme does not remove the obligation to consult.

Individual consultation

It is important that employers do not neglect individual consultation, even if they are carrying out a collective consultation exercise. It is advisable for an employer to have at least two meetings with the employee concerned, so that he or she has an opportunity to go away and consider what has been said at the first meeting, the information provided about criteria and scores, and whether or not he or she has any questions or suggestions before a final decision is made. The employer should hold the second meeting some time (ie several days) after the first meeting. The employer must also be seen to consider any points raised by the employee. There is no hard and fast rule about how much time there should be between meetings - the important thing is that the process is seen to be genuine and not a sham.

The employer should comply with the statutory dismissal procedure (until the statutory dispute resolution procedures are abolished). As a general rule the standard dismissal procedure applies to all dismissals on grounds of redundancy unless the dismissal is one of a number of dismissals in respect of which the duty to consult collectively applies. Even where the collective consultation rules do apply, it makes sense to follow broadly the same process.

Alternative employment

Employers must take reasonable steps to try to find alternative employment for employees who may otherwise be made redundant. Failure to do so could render an otherwise fair dismissal unfair. The safest course of action is for an employer to provide employees with details of all vacant positions, including those within other group companies, and actively to support employees in their applications for alternative positions.

Redundancy payments and costs

At the outset the employer should factor in the cost of a redundancy exercise in both cash and non-cash terms, to ensure that the costs do not outweigh any potential financial gains.

Redundant employees with two or more years' continuous service are entitled to a statutory redundancy payment, calculated in accordance with a formula based on age, number of years' service and normal weekly pay (currently capped at £330). An employer wishing to avoid enhanced redundancy payments over and above the statutory amount becoming contractual should ensure that they are stated to be discretionary and that no precedent is being set. Ideally payments should be varied from time to time.

Where an employer wishes to reduce the benefits payable under a contractual redundancy scheme without agreement by employees (which is likely to be forthcoming only in return for something else), it will have to show a good business reason for the change if it wants to be able to justify dismissals arising from the failure to agree. This may be difficult to do in this context. If the employer is not proposing any redundancies it will not incur financial hardship as a result of the scheme. However, if it is proposing redundancies the only obvious rationale for changing the scheme will be to reduce its redundancy costs. An employment tribunal may not view this as a good business reason unless not reducing redundancy costs would put the business at serious risk.

Employers should ensure that termination payments are structured tax efficiently, for example by taking advantage of the £30,000 tax exemption where applicable. Employers can also benefit from other tax exemptions that are available (for example for legal costs and outplacement counselling).

The cost of failing to carry out the collective consultation requirements (see above) correctly is high. Appropriate compensation (ie the protective award) for each relevant employee is a sum not exceeding 90 days' actual pay that the tribunal considers just and equitable, having regard to the seriousness of the employer's failure to comply with its duties. In Susie Radin Ltd v GMB and others [2004] IRLR 400 CA, the Court of Appeal made it clear that, when deciding the protective award, the focus should be on the extent of the employer's default, not whether or not it made any difference to the end result. In Hutchins v Permacell Finesse Ltd (in administration) EAT/0350/07, the EAT confirmed that the starting point is 90 days, even where fewer than 100 redundancies are involved.

Employers must also be alert to the implications of failing to carry out fair redundancy dismissals. Failure to consult with individual employees, carry out a fair selection process, or offer suitable alternative work can result in successful claims of unfair dismissal and awards of compensation.

During the redundancy process, management focus is inevitably on the cost, in cash terms, of the redundancy programme. However, there are a number of non-cash costs that should also be taken into account. For example, how the employer's effectiveness in a competitive market will be affected by the morale of the remaining employees should be considered. A demoralised workforce is less likely to show commitment, enthusiasm or initiative. This may result in an increased risk of errors, lower productivity and consequent loss of business. (The third article in this series will look at ways of retaining and motivating the employees who "survive" redundancy.)

Fire and rehire?

One variation on redundancy is to dismiss employees as redundant and require them to reapply for the remaining jobs, with or without significant changes in the terms of employment. There is surprisingly little case law on this point. In Ralph Martindale & Co Ltd v Harris EAT/0166/07, two senior managers were competing for the one job that remained after a restructure. Both managers were ostensibly capable of carrying out the new role. The EAT accepted that the normal rules on how to select employees for redundancy do not apply when selecting potentially redundant employees for new positions. However, it said that because the selection for alternative employment was effectively also determinative of the selection for redundancy, the selection process had to meet at least some criteria of fairness.

Next week's article will look at alternative means of cutting staff costs in difficult times and will be published on 10 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.