Legal opinion: Redundancy consultation under the threat of insolvency

Employers facing urgent and large-scale redundancy programmes often complain that their obligation to collectively consult under the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA) is impractical. Now, it seems, the courts are beginning to appreciate the challenges facing business in this particular respect – although the relief remains limited. Victoria Clark, associate at Clarion, looks at the case of AEI Cables Ltd v GMB.

What TULRCA says

An employer considering the redundancy of 20 employees or more is obliged to embark on a collective consultation period of at least 30 days – rising to 45 days if 100 or more staff are affected. A key point of TULCRA is that such a consultation should take place “in good time” before any dismissals take effect.

That consultation must be with appropriate employee representatives, although it is considered best practice to also carry out individual consultation. The minimum timescales do not take account of the time that it takes to elect employee representatives and so this step should be completed before the “consultation clock” starts ticking.

Electing employee representatives is rarely a swift and straightforward matter, and neither is the consultation process. It is not difficult to understand employers’ frustrations – especially in a situation where finances and timescales are extremely tight.

Breach of TULCRA

Timescales have rarely been tighter than they were for AEI Cables Ltd when the company’s accountants announced that the pot was empty. The company, a copper wiring manufacturer, had been operating under increasingly tight margins as the cost of raw materials rose while downward pressure on prices remained.

The relentless squeeze finally meant that the company needed to reduce its costs and fast, as it was on the brink of trading in insolvency. The only viable option was to make 124 employees at its cable manufacturing plant redundant – triggering collective consultation obligations under TULRCA. But there was no time to do it properly and so, on 27 May 2011, the 124 employees were dismissed with immediate effect.

Some general discussions about the company’s redundancy proposals had taken place with trade unions, including the GMB, in early 2011. However, no election of representatives or formal consultation had taken place. At that time, the minimum consultation period for 100 or more staff was 90 days.

As a result, many of the dismissed employees complained to the employment tribunal, which in turn ruled that the company had completely failed to comply with TULRCA. The tribunal awarded each employee 90 days’ pay as compensation.

On appeal to the Employment Appeal Tribunal (EAT), the company stressed that it had not deliberately flouted its obligations under TULRCA and had been doing its “incompetent best” to inform the trade unions of its redundancy proposals at the same time as trying to save the business from insolvency. A 90-day consultation would have required the company to trade in insolvency, which would not have been lawful.

The EAT sympathised with the company and recognised that TULRCA is simply not commercial in pressing insolvency situations. However, as the company had not “pulled out all the stops” to carry out its obligations in the time it had, it was not let completely off the hook. The EAT instead reduced the employees’ compensation from 90 to 60 days’ pay.

What employers can learn

Although this case offers a bit of sympathy and reprieve to struggling companies, an insolvency situation still does not remove the duty to consult collectively. It does, however, provide some reassurance that financial and trading situations will be taken into account by the courts if a dispute with redundant employees later arises.

The key is to be able to demonstrate that all reasonable steps to inform and consult with affected employees and their representatives have been taken in the time available. Leaving things until the last minute or taking no action at all is unlikely to attract any sort of sympathy from the courts.

Planning ahead and keeping a close eye on forecasts is absolutely essential for employers to ensure that they are always able to comply with their duties under TULRCA. That, together with taking specialist legal advice, remains the only safe way to avoid costly and time-consuming disputes following redundancy or insolvency situations.

Victoria Clark is an associate at Clarion