Termination takes a strategic turn

A new survey reveals that redundancy is increasingly seen as a quick fix for
turning around struggling businesses. Jessica Davey and Vanessa Molyneux report

It is a sad fact that businesses, under constant pressure to perform in the
current economic climate, are now making redundancies on some scale. Recent
press reports suggest up to 20,000 imminent job losses in the City, for
example. In this difficult climate, international law firm Allen & Overy
has conducted a survey of employers to establish current trends in redundancy

On the whole, the results demonstrate that most employers have a good
understanding of the legal requirements on both collective and individual
redundancies. Nevertheless, some results were surprising.

In some sectors, collective consultation on redundancies has yet to catch
on. Within the financial sector, almost half of the organisations surveyed said
they never consulted collectively. The situation was dealt with on an
individual basis and, in the case of more than a quarter, by increasing
compensation packages to buy out the risk of a compensation award.

Also revealed was the fact that the days when UK employers selected for
redundancy on a ‘last in first out’ basis are over. Performance and skills are
now key factors in the selection process, with employers taking a more
strategic view in the highly competitive market conditions by retaining those
employees most able to drive their business forward.

The organisations

Taking part in the survey, conducted by Allen & Overy’s Workplace
Representation and Consultation Group, were 125 organisations, of which the
majority (68 per cent) had 500 employees or more, 27 per cent had 51 to 500
employees, and employers with fewer than 50 employees made up 5 per cent.

Respondents were from a wide range of organisations, from FTSE 100
companies, investment banks and City of London institutions to charities,
universities, regulatory bodies and small businesses. The questionnaire also
categorised respondents by industry sectors covering finance, manufacturing,
technology, media, retail, pharmaceuticals and leisure. The largest response
came from the financial sector (39 per cent).

Redundancy policies

Almost three-quarters of respondents had some form of redundancy policy in
place, either oral or written. What was surprising is that as many as 36 per
cent had a contractual policy. Adopting a contractual policy restricts an
employer’s flexibility in tailoring redundancy programmes as it means they have
to act in accordance with the policy at all times. Failure to follow a
contractual procedure could give rise to breach of contract cases and also
increases the likelihood of unfair dismissal claims.

Definition of ‘establishment’

Where between 20 and 99, or more than 100 redundancies are proposed at one
‘establishment’ within a 90-day period, collective consultation with employee
representatives is required for a minimum of 30 or 90 days respectively. The same
advance notice must be given to the DTI.

However, it is not always straightforward to define the relevant
establishment, and the approach adopted by employers may be different for the
purposes of notice to the DTI and for consultation. For example, employees in
one location may be employed by different legal entities. This means two
notices would have to be submitted to the DTI, even though there would probably
be one overall consultation exercise.

The DTI’s approach is to request one notice per employer per office
location. However, tribunals have held that one establishment may include a
number of different premises where the organisation and management of the
business is such that the individual locations are merely constituent parts of
one establishment.

Absurdly, this can lead to different notice and consultation periods on the
same redundancy programme. The majority of respondents to Allen & Overy’s
survey adopted a pragmatic approach to this problem. More than half defined
‘establishment’ by reference to office location, although a significant
proportion, 29 per cent, defined it by department or division.

DTI notification

Fifty-two per cent of respondents indicated they notified redundancies to
the DTI within the last two years, suggesting that the majority of recent
redundancy programmes have been collective. Forty-three per cent did not notify
the DTI and a small percentage were unsure.

The overwhelming reason for non-notification (86 per cent) was that
organisations were making fewer than 20 employees redundant and therefore the
obligation to notify did not arise. That still leaves 14 per cent that didn’t
notify the DTI for other reasons.

When this statistic is examined with the responses on definition of
‘establishment’, it suggests that the confusion over the statutory definition
is a real issue and a percentage of employers are not notifying the DTI because
they are assuming that the obligation is not triggered.

Another reason for non-notification is there is an increasing trend for
employers to look for voluntary redundancies, which do not count towards the
thresholds. Half the respondents indicated they have sought volunteers,
although 92 per cent were not obliged to accept them. This demonstrates that
employers appear to be using many devices to take control of the redundancy
process, retaining those they need for the business going forward without
breaching statutory obligations.


Where collective consultation took place, most respondents (76 per cent)
indicated that they published minutes of meetings, 22 per cent by e-mail and 11
per cent by intranet. A Q&A format was used by 25 per cent, memo by 16 per
cent and feedback sessions by 26 per cent. Most respondents (79 per cent) gave
guidance to their employee representatives as to their duties and the scope of
their role, making the process more efficient.

Within the financial sector, 47 per cent of respondents said they never
consulted collectively. The lack of collective consultation was dealt with by
individual consultation and by increasing the compensation packages to buy out
the risk of a protective award (compensation for failure to consult
collectively) in the case of 27 per cent. Although it is not possible to
prevent a claim for a protective award in a compromise agreement, the survey
results indicated that claims for protective awards were rarely pursued.

Individual consultation

Whether or not collective consultation and notice to the DTI is required,
individual consultation is a fundamental requirement of fairness on any
redundancy. Most employers who responded to the survey conducted individual
consultation, although the extent of consultation varied considerably. Nine per
cent had one meeting, most organisations (40 per cent) had two consultation
meetings (including the one where notice of redundancy was given) with
individuals, 32 per cent had three meetings and 18 per cent had more than three

Maternity and sick leave absences

Failure to consult about redundancies on an individual basis with employees
on maternity leave or long-term sick leave makes any resulting dismissal unfair
and may also lead to claims for sex or disability discrimination. Yet 16 per
cent of respondents failed to consult with these employees. This may be because
employers are reluctant to intrude upon the privacy of those that are sick or
have young babies but, if claims are to be avoided, these employees should be
consulted in the same way as any others.

Garden leave

Many employers place employees on garden leave either during the
consultation period or during notice once redundancies have been confirmed.
Although this increases the risk of claims – for breach of contract or for
unfair dismissal if the consultation process is perceived to be a sham – the
statistics show that employers are concerned to protect the business from
misuse of confidential information or IT systems by aggrieved employees during
the redundancy process.

Selection criteria

The selection process is probably the most important aspect of any
redundancy process. No amount of consultation will protect the business from
unfair dismissal claims if the selection process is flawed. Selection criteria
must be objective, relevant and appropriate and applied fairly.

The survey revealed that the days of redundancy selection on a ‘last in
first out’ basis are over. Instead, performance and skills are key retention
factors in redundancy selection, with employers taking a more strategic view in
the current highly competitive market conditions by retaining those employees
most able to drive their business forward, irrespective of their length of
service. Most popular selection criteria were: skills (63 per cent),
performance (54 per cent), relevance to future business need (50 per cent),
experience (45 per cent), discipline (43 per cent) and attendance (38 per cent)
– ‘last in first out’ was used in only 14 per cent of cases.

Compromise agreements

Most organisations (54 per cent) required compromise agreements. This
statistic supports the commercial approach of employers. Generous packages are
balanced against the security of knowing that tribunal claims are an unlikely
consequence of the redundancy process. Fifty-seven per cent of respondents
contributed to legal fees with the majority (56 per cent) contributing between
£250 and £500.

Tribunal claims

Finally, the merits of compromise agreements were borne out by the low
percentage of claims. Only 22 per cent of respondents indicated that tribunal
claims resulted from their redundancy programme, most of which (67 per cent)
were for unfair dismissal. Sex discrimination accounted for 14 per cent of
claims, race discrimination 11 per cent and disability discrimination 6 per
cent. Protective awards hardly featured at all.

Jessica Davey and Vanessa Molyneux are associates in the employment,
pensions and incentives department at Allen & Overy

Find out more…

– on Employment Relations Act 1999 at www.dti.gov.uk/er

– on CAC decisions at www.cac.gov.uk/recent_decisions

– On information and consultation proposals at www.dti.gov.uk/consultation

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