UK: Redundancies: Lessons Learnt From The Recession

Last Updated: 26 January 2012
Article by Kathryn Dooks

With economic uncertainty set to continue into 2012, redundancies and other cost-cutting measures are likely to remain firmly on the agenda. But if these measures are not implemented properly, the consequences for an employer can be significant and expensive.

With this in mind, we have set out below some "dos and don'ts" gleaned from the case law and practical experiences since the down-turn in 2008.

1. Do consider collective consultation obligations, if applicable

Where an employer dismisses as redundant 20 or more employees at any one establishment within a period of 90 days, that employer must undertake a collective consultation process either with the recognised trade union or representatives elected for the purpose.

20 - 99 dismissals: 30 day consultation period

100 + dismissials: 90 day consultation period

"Dismissing as redundant" is defined widely as "dismissals for a reason not related to the individual concerned". This includes (i) the non-renewal of a fixed term contract and (ii) dismissing an employee in order to re-hire them on new terms and conditions, to give effect to a change to contractual terms in circumstances where the employee is unwilling to consent.

There is a penalty of up to 90 days' pay per affected employee for failure to undertake collective consultation and the Tribunals tend to take a punative approach to the imposition of such penalty.

2. Don't forget to follow a fair process

Even if the collective consultation process does not apply, an employer will need to consult individually with affected employees when a redundancy proposal arises. Employers should consult regarding:

  • The reasons for the redundancy;
  • Ways of avoiding the redundancy situation;
  • Pooling and selection;
  • The availability of suitable alternative employment; and
  • The redundancy terms to be applied.

A fair process also encompasses other matters such as ensuring employees are selected fairly for redundancy. A failure to follow a fair process will render a dismissal unfair. We can provide checklists and standard letters to help you achieve a fair process.

3. Do take account of discrimination laws

Before you commence any redundancy consultation process, consider whether you have any employees at risk of redundancy who have any "protected characteristics" (such as disability, sex, pregnancy, etc.) who might be put at a disadvantage during the redundancy process when compared with other employees, as a result of that characteristic. In particular:

  • Bear in mind that you have a duty to make reasonable adjustments to any "provision, criterion or practice" which puts a disabled employee at a substantial disadvantage in comparison with those who are not disabled. The employer must take such steps as are reasonable to avoid the disadvantage.
  • Avoid or make adjustments to any potentially discriminatory selection criteria including length of service (indirect age discrimination); attendance (potential for discrimination against disabled employees) and "commitment" (possible indirect sex discrimination against working mothers).
  • However, it may be possible to justify certain discriminatory criteria if they are used in a proportionate/balanced way. For example, the Court of Appeal allowed the use of length of service as a selection criteria where: it was one of a number of criteria; it served the employer's legitimate aims of rewarding loyalty and achieving a stable workforce; and younger workers had accepted the policy during the consultation process (Rolls-Royce Plc v Unite the Union [2009] EWCA Civ 387).
  • Be aware that even apparently fair criteria can be discriminatory if not applied appropriately, for example performance. You should consider performance over a period not affected by the "protected characteristic". For example in a redundancy involving an employee on maternity leave, you should consider performance over a period where the employee was not on maternity leave, where possible.
  • Remember that employees on maternity leave have first right of refusal in relation to suitable alternative vacancies.

4. But don't overcompensate to the detriment of other employees

Whilst it is important to have regard to the potential for discrimination, you should treat employees with a "protected characteristic" proportionately when compared to other employees.

In the case of Eversheds Legal Services Limited v de Belin (UKEAT/0352/10), the law firm Eversheds made a number of redundancies. One of the selection criteria for redundancy was "lock-up" over the last six months, i.e. the time between work being done and fees being paid. Mr de Belin's lock-up period during the last six months was very high, so he was given a low score of 0.5 points (out of 2). The other employee in the pool, Ms Reinholz, had been on maternity leave for the past six months, so Eversheds was unable to assess her lock-up period and it therefore gave her the maximum score of 2 points. Mr de Belin scored a total of 27 points and Ms Reinholz 27.5. Mr de Belin was therefore made redundant and brought claims of sex discrimination and unfair dismissal.

The Employment Appeal Tribunal upheld his claims. It found that whilst an employee on maternity leave may need to be treated more favourably, that treatment must be proportionate and Eversheds could have used a more proportionate alternative by assessing lock-up for both employees over the period before Ms Reinholz went on maternity leave, rather than just awarding her the maximum score.

5. Do consider bumping and suitable alternative employment

Employers are often uncertain about the extent of their obligations when it comes to "bumping" and considering suitable alternative employment.

"Bumping" involves including in the redundancy pool alongside the employee at risk a more junior employee who carries out a similar role and considering the more senior employee for the more junior role as part of the consultation process. Factors to consider include:

  • The similarity between the senior and junior roles;
  • The difference in remuneration; and
  • Differences in qualification experience.

Failure to consider bumping may by itself make the redundancy unfair (Fulcrum Pharma (Europe) Ltd v Bonassera and another UKEAT/0198)

In addition, the employer should always consider whether there are any suitable alternative vacancies available within the company. Failure to consider suitable alternative employment is likely to make a dismissal unfair. However, the employer does not have to offer a role if it is clearly not suitable (Simpson v Endsleigh Insurance Services Ltd and others UKEAT/0544/09). In selecting an employee for a new role, the employer may be able to rely partly on subjective judgment (Morgan v Welsh Rugby Union UKEAT/0314/10).

6. Don't overlook alternatives to redundancies

Redundancies can be expensive, disruptive, time-consuming (especially if collective consultation is required) and may only provide a short-term solution, so employers may prefer to consider alternatives to redundancy. Examples include:

  • Reduced hours and salary;
  • Unpaid sabbaticals;
  • Reduced pension contributions or other benefits;
  • Terminating arrangements with non-employees (although employers should bear in mind that long serving 'contractors' may in fact be deemed to be employees);
  • Termination of employees on fixed term contracts.

Bear in mind that some of these alternatives may require consultation processes of their own. For example, if you are making changes to pensions arrangements, there is a separate obligation to consult employee representatives for a minimum of 60 days and a fine for non-compliance of up to £50,000.

If you are considering imposing new terms and conditions (such as across-the-board reductions in salaries) in circumstances where employees are unwilling to consent to the change, you will need to dismiss staff on notice and re-hire them on the new terms, which may require collective consultation, depending on the numbers involved. Such a dismissal is likely to be unfair unless the employer can justify the dismissal on the basis that it was for "Some Other Substantial Reason". To show this, the employer should consult with staff about: the reasons for the proposal; any alternatives; mitigating the effect (e.g. a commitment to review the change after a specified period, non-cash compensation instead e.g. share options); and ensure that changes are applied fairly and consistently. In determining whether a dismissal fair on this ground, a Tribunal will also look at what proportion of the affected employees accepted the new terms voluntarily (without the need to dismiss them and re-hire them).

7. Don't assume that financial difficulties provide a "get out of jail free" card

In a case arising from the previous down-turn (Attrill and others v Dresdner Kleinwort Ltd and Commerzbank AG [2011] EWCA Civ 229), Dresdner announced a minimum bonus pool of €400 million in August 2008. In September 2008 Lehman Brothers went into liquidation and the economic climate changed significantly. In December 2008 letters were sent out to employees stating that the bonus pool was unchanged but that the bank reserved the right to review the level of bonus if there were "material deviations" from forecast revenue. In February 2009, bonuses were reduced by 90%. The employees argued that the earlier communications created an entitlement to a bonus at the advertised level. The bank sought a strike-out of the claims.

The Court of Appeal refused to allow the strike out application and said that the claims should be heard at a full trial as they had a reasonable prospect of success. We have yet to hear whether the bankers' claims were successful at a full trial but this case just goes to show that even the melt-down of the financial system wasn't necessarily enough to get Dresdner "off the hook" when it came to paying bonuses.

8. Key themes:

Certain overarching themes can be drawn from these do's and don'ts. These are as follows:

  • Carefully consider all of the issues before you start a redundancy process.
  • These include how you will select your pool of potentially redundant employees, how you will select employees from this pool for redundancy, whether you need to adjust your processes to take account of the impact of discrimination etc.
  • Consult with affected staff.
  • This may be required even where you are not proposing to dismiss staff;
  • Take a proportionate approach.
  • For example, don't over-compensate when trying to avoid discrimination.
  • Be rational in your decision-making!
  • If an employee challenges a decision to make them redundant, an employer will not generally have to persuade a Tribunal that the Tribunal would have done exactly the same thing in the circumstances. It will, however, usually have to persuade the Tribunal that it took a broadly reasonable/logical approach to the issues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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