With many employers claiming that the financial impact of increased national insurance contributions and higher a minimum wage could lead to job losses, Daniel Peyton looks at why businesses cannot rely on this reason alone for a fair redundancy.
Recently, 82 CEOs of the UK’s largest retailers wrote to chancellor Rachel Reeves stating that her budget measures “create a cumulative burden that will make job losses inevitable”.
These employers share a common view that redundancies are a natural cost-saving mechanism when placed under cost-pressures.
However, there are limits on the extent to which reliance on cost-saving alone will be sufficient to render redundancies fair and avoid unfair dismissal claims.
The ‘cost-plus’ rule in discrimination
It has long been the case that cost saving alone will not be a “legitimate aim”, justifying otherwise discriminatory acts under the Equality Act 2010, because the so-called “cost-plus” rule also requires the presence of a “plus factor”.
Redundancy process
This could be, for example, that the cost savings are required for an employer to avoid insolvency, preserve employment or operate within funding constraints.
The cost-plus rule does not apply to redundancies but dismissing an employee on grounds of cost alone will often not satisfy the requirements for a fair redundancy. This is because a fair redundancy involves a number of factual and procedural requirements which extend beyond employment cost alone.
True or fair redundancies
True redundancies must fall within the definition in the Employment Rights Act 1996, which requires the elimination of a role, whether because of business closure or because the need for the role has ceased or diminished.
Simply dismissing costly employees and replacing them with cheaper employees will not be a redundancy.
A redundancy may be driven by the need to save costs but effectively a “plus factor” is required, such as the commercial decision to cease, reduce or change elements of the business, such that the need for particular roles has ceased or diminished.
A fair redundancy also requires that a fair redundancy consultation process is carried out, including employers considering and consulting about whether redundancy can be avoided, alternatives to redundancy and suitable alternative employment.
In other words, even when a redundancy is driven by a need to save costs, employers must consider whether savings may be made elsewhere to avoid or reduce the number of redundancies.
Furthermore, redundancy solely on the basis of an employee’s cost to the business risks unfairly pre-judging the outcome of the redundancy consultation process, the outcome having been pre-judged because the salary spreadsheet effectively renders the outcome inevitable.
Selection process
Where a redundancy requires pooling and selection, the selection must be fair. Simply selecting the highest paid employees in a particular role may result in an unfair dismissal (as in the EAT case KGB Micros Ltd v Lewis).
In some cases, such a selection method may not be objective, properly measurable or even rational on its own logic. Payroll costs alone will often not properly identify the true cost or value of an employee to the business, for example; some employees may incur higher indirect costs, some may generate more revenue or provide other value to the business.
However, factors beyond direct payroll costs will often effectively be “plus-factors” anyway. For example, if the comparative cost of several employees in the same role includes an assessment of their revenue generation, this is effectively a performance assessment, meaning that cost alone is not the sole criteria for selection.
Risk of discrimination
Making an employee redundant or selecting from a group of employees on the basis of cost alone, may touch upon elements of indirect discrimination. For example, more expensive employees may tend to be more senior, experienced, longer serving and, therefore, older employees.
Payroll costs alone will often not properly identify the true cost or value of an employee to the business.”
This may open the door to an argument that the selection process is indirectly discriminatory against older employees. If so, would cost alone justify this otherwise discriminatory act as a proportionate means of achieving a legitimate aim? No, because the cost-plus rule would apply and require reliance on “plus factors”.
Changing contracts
In the past, employers have sought to cut employment costs by changing employees’ terms and conditions and, as an act of last resort, firing and rehiring on less generous terms if employees did not agree to the proposed changes.
It appears that the government’s proposed changes in the Employment Rights Bill will put an end to this practice, outlawing fire and rehire except for the most distressed businesses.
Ultimately, the desire or need to cut costs will almost always be a motivating factor in making redundancies and there is nothing wrong with that.
The point is simply that once an employer moves from recognising there is such a need, into a redundancy process, these financial pressures are not a reason to ignore the need for a fair redundancy and redundancy consultation process.
These factors make it very difficult for employers to make the commercial and selection decisions required, solely on the basis of cost alone, without exposing themselves to unfair dismissal and other claims.
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