How to cut the costs of redundancies

Many companies face making redundancies. Nick Robertson and Michelle Last look at ways to save costs when cutting staff.

An employer faced with making a reduction in headcount in an effort to reduce costs may understandably be concerned about the potentially significant cost implications of actually making employees redundant. There are steps employers can take to help mitigate against those costs. This article looks at some of the issues employers face when it comes to making part of their workforce redundant.

Are there any alternatives we may be able to consider instead of making redundancies?

One of the few benefits of the economic downturn has been that employers have been more willing to consider alternatives to redundancies and employees have seemed more willing to accept them.

quotemarksIf the employee refuses to comply with a contractual obligation, then potentially they would be guilty of misconduct in failing to obey a reasonable instruction.”

Here are some of the options you might wish to think about – subject to employees’ contractual rights, of course:

  • placing a freeze on any new recruitment (whether permanent or temporary) within a given business area;
  • withdrawing new job offers or deferring new joiners;
  • terminating contractors and agency workers;
  • offering secondments and sabbaticals;
  • reducing overtime opportunities and/or pay and bonuses;
  • changing shift patterns or working hours; and
  • offering early retirement.

An employer may also wish to consider whether or not the employee’s contract affords any other potential opportunities for change. In particular, it may be possible to relocate an employee to a different place of work or redeploy them.

If the employee refuses to comply with a contractual obligation, then potentially they would be guilty of misconduct in failing to obey a reasonable instruction.

It would always be prudent to investigate the reasons for refusal, and we would recommend seeking specific legal advice before heading down this route.

Cost-effective redundancy payments

Many employers allow employees to be paid in lieu of their notice, but there is no obligation to do so. The employer is entitled to require the employee to work out their notice, thereby reducing their severance to statutory redundancy pay (and enhanced, if applicable).

Alternatively, it may be possible to make a payment in lieu of notice in a tax and national insurance-efficient way.

Provided the employee is not contractually entitled to a payment in lieu of notice, usually the first £30,000 of any such payment can be made without deduction for tax and the whole payment can be made without being subject to national insurance contributions. We would also recommend seeking specific advice in this scenario.

Employers need to be aware that, where there is no contractual right to make a payment in lieu of notice, an employer who opts to make such a payment will be in breach of contract and consequently unable to enforce the remaining provisions of the employee’s contract, such as any restrictive covenants.

The employer can make it a term of the lump-sum payment that the employee accepts the payment on the basis that the covenants remain unchanged. The employee can then choose to accept the offer or leave and try to recover damages at some later date, at a time when the covenants will no longer apply.

What is the earliest point at which employees can be made redundant?

An employer who wishes to avoid hefty compensation claims should refrain from terminating employment until the proper consultation process has been completed. Where an employer proposes to make 20 or more employees redundant within a period of 90 days or fewer, it must engage in collective consultation with employee representatives.

quotemarksIt is a common myth that employers must wait for the 30- or 90-day collective consultation process to be concluded, but notice of termination can be given before then provided the collective and individual consultation process has been exhausted.”

That collective consultation process must last a minimum of 30 days before the first dismissal takes effect where the employer proposes to dismiss 20 to 99 employees within a 90-day period, and at least 90 days before the first dismissal where the employer proposes to dismiss 100 or more employees within a 90-day period. In addition, the employer is obliged to consult with individual employees on their own selection for redundancy.

It is a common myth that employers must wait for the 30- or 90-day collective consultation process to be concluded, but notice of termination can be given before then provided the collective and individual consultation process has been exhausted and the actual date of termination falls after the end of the relevant 30- or 90-day period. In this instance, management would be well advised to obtain the representatives’ express written agreement that the consultation process has been exhausted within the 30- or 90-day period.

Can we require employees to accept alternative roles after the redundancy?

The employee’s contract of employment may entitle the employer to relocate or re-assign the employee. An employee who is offered a role in line with their contract will be contractually obliged to take up the role offered. Even if the job is outside the scope of the contract, do not despair. In a redundancy situation, employers are obliged to search for suitable alternative employment for employees.

Where an employer makes an offer of suitable alternative employment and the employee unreasonably rejects that offer, the employee will forfeit their right to a redundancy payment. Employment tribunals view suitable alternative employment objectively, so employers should beware.

We would like to revisit our redundancy package in the next redundancy wave. Can we do this?

This will depend on the particular facts. If there is an express redundancy policy incorporated into an employee’s contract of employment, the employer will need to check if the contract contains a clause permitting changes to be made. If there is such a clause, arguably it should be used only to implement minor changes, as significant changes could result in the risk of constructive dismissal claims.

While a policy that is non-contractual can be amended, employers should be aware that even if a policy purports to be non-contractual, there is a risk it could have become contractual. This can happen where the policy has been followed without exception for a substantial period of time and employees have been made aware of the policy and that the employer will be applying it.

Is there anything we can do now to help reduce costs in the event that there are redundancies in the future?

You might consider reviewing new and existing employment contracts to provide greater flexibility in terms of relocation, duties, role and redundancy entitlements.

Nick Robertson is a partner and Michelle Last is a senior associate at Mayer Brown International LLP

Comments are closed.