Legal implications of redundancy: Cutting the headcount

If your redundancy policies have not been update recently, the bleak employment outlook for 2008 should prompt an urgent review. Ross Bentley reports.

No one likes to mention the ‘r’ word but with warnings of a global credit crunch and experts forecasting a slowdown in the economy, the issue of redundancy is likely to raise its ugly head for an increasing number of employers over the coming year.

In fact, some leading organisations have already announced job cuts in the past month or so. Almost 3,000 workers are expected to get the axe at the BBC, while insurance company Norwich Union may shed up to 4,000 staff. Cadbury Schweppes and BP have also gone public with redundancy plans while the City as a whole, which is directly affected by the turmoil in the markets, is bracing for job cuts – possibly up to 6,500, according to the Centre for Economics and Business Research.

“It was already clear in the summer that the jobs outlook was set to weaken next year,” says Chartered Institute of Personnel and Development chief economist John Philpott.

“The question now is: ‘By how much?’ If the slowdown is bigger than expected, it could result in a wave of job cuts and higher unemployment.”

And if there is a high likelihood of redundancies in your organisation, Nick Robert, partner in the employment department at law firm Mayer Brown, advises you start thinking about the matter sooner rather than later.

“It’s important that any collective redundancy is given sufficient planning to reduce claims for unfair dismissal. In general, the quicker redundancies are pushed through the more expensive they end up being,” he says.

The area where cutting corners could become the most costly is during the consultation stage, says Julie Parsons, director at HR consultancy Jaluch.

Consulting time

Employers have a statutory duty to consult those affected by redundancy, and in the case of collective redundancies, this must be with an appropriate representative, such as a trade union representative. Where there are 20 or more employees to be dismissed within a period of 90 days, consultation must take place at least 30 days before the first dismissal. Where there are 100 or more employees, consultation must take place at least 90 days before the first dismissal.

But a decision recently handed down by the UK Employment Appeal Tribunal (EAT) on a case involving UK Coal Mining Limited and the National Union of Mineworkers may significantly change the scope of these consultations, according to David Bradley, head of employment at law firm DLA Piper.

Traditionally, consultation has involved discussions about ways of avoiding and reducing the number of dismissals and about mitigating the consequences of dismissals. To date, however, there has been no obligation on the employer to talk to the representatives about the underlying reasons for the redundancies. The EAT’s judgment changes this and requires employers to consult over the original closure decision.

In the UK Coal Mining case, the employer’s reason for closing a coal mine, and so making the redundancies, was safety. But the tribunal did not believe it and criticised the employer for not producing documentary evidence supporting that reason. The tribunal concluded that the employer’s reason was deliberately false and concluded that the real reason was one of business economics.

“Employers who aim to abide by the legal requirements will now find themselves in the uncomfortable position of having to disclose business information which they have previously been at pains to keep secret,” said Bradley.

“Some commentators have focused on whether or not this decision will increase the amount of time required to complete an effective redundancy consultation process. This is an unlikely outcome of the EAT’s judgment but the much more significant business impact is the issue of who now gains access to critical business information,” he added.

Age awareness

For many employers eyeing potential redundancies in their organisation it will be the first time they have dealt with the issue in light of age discrimination legislation, which came into force last year. And there are several areas where it is likely to impinge on redundancy processes.

Beware, says Audrey Williams, a partner at employment law firm Eversheds , if you use the “last in, first out” method to select who should be made redundant. “The likelihood is that this approach will encompass younger workers who haven’t had the chance to accrue years of service and could lead to claims of indirect age discrimination.

And, although Williams admits this issue has yet to be tested in the courts, she points to the conciliation service Acas age guidance that recommends employers steer clear of this approach.

By the same token, Maya Cronly-Dillon, senior associate at law firm Lovells, says employers should revisit any enhanced redundancy packages they have previously negotiated to ensure they aren’t potentially ageist.

An area rife with potential discrimination is severance pay, as it is based on length of service and age – criteria that could be seen as unfair to young employees, she warns.

While this has also yet to be tested at tribunal, Cronly-Dillon says employers that continue with this approach may find themselves having to justify that the business imperative outweighs any potential for discrimination, in the same way that long-service awards have to be justified.

Employers have three choices, she says. “Remove it follow statutory government guidelines on redundancy or wait and see what is decided by case law.”

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Withholding severance pay

It has been widely reported that Alan Johnson, the health secretary, has instructed the Maidstone and Tunbridge Wells NHS Trust to withhold a severance payment, believed to be in the region of £500,000, to its departing chief executive Rose Gibb following the outbreak of Clostridium difficile that contributed to the deaths of more than 90 patients.

But, says David Sykes, partner at Averta Employment Lawyers, if this is a negotiated agreement where, usually, the employee receives a payment of money in return for a waiver of any claims they might have against the employer, it is a binding contract.

“Assuming that Gibb and the trust signed such an agreement, an attempt by the trust to withhold payment could be in breach of contract,” he says.

But, according to Sykes, there are one or two areas where the trust might have an argument. Firstly, if it was persuaded by Gibb to enter into the agreement because of something she said that turned out to be untrue, the trust might argue misrepresentation.

“However, arguments based on misrepresentation, in these circumstances, are uncommon,” he says.

The second argument is similar. Sykes says many compromise agreements (particularly a high-value agreement like this) require the departing employee to give a warranty that they have not withheld any information, which if disclosed to the employer might have led the employer not to enter into the agreement.

And even if Gibb ends up facing criminal charges, as some reports have suggested, Sykes says it is likely that the trust would still have to pay.

“While the concern over this reported payment is understandable, this is a case of trying to close the stable door after the horse has bolted,” he adds.

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