As John Lewis announces that it is cutting enhanced redundancy pay by half, employers looking to follow suit should beware of the legal risks. Joanna Sutton looks at the problems around cutting redundancy pay.
Redundancies have risen sharply over the past year as employers have struggled to adapt to rapid-fire interest rate rises and persistently high inflation. This has meant many organisations have had to make difficult decisions about staffing levels.
According to the Office of National Statistics, the redundancy rate per 1,000 employees is up 56% over the past year from 2.3 to 3.6. The UK jobs market is also in turmoil, with vacancies experiencing their biggest monthly fall in three years in December, which suggests that more employers are likely to shed jobs.
One of the ironies of redundancy is that when employers find themselves contemplating it, they are generally least able to afford it. The temptation therefore will be to follow the example set by the John Lewis Partnership and make changes to the enhanced redundancy scheme prior to making layoffs.
Cutting redundancy pay
Last week the company, which owns both Waitrose and John Lewis brands, wrote to employees to confirm it would be offering one week’s pay per year of service instead of two for anyone being made redundant from 1 February 2024. It also reportedly considering cutting 11,000 jobs.
While many organisations are likely to be considering the affordability of their redundancy packages in the current climate, it is important to tread carefully and pay heed to the legal implications of making wholesale changes. This is particularly true when those changes immediately presage a round of layoffs.
End of bumper payouts?
Data from HMRC reveals that the number of employees receiving redundancy payments above the £30,000 tax-free threshold (based on self-assessment returns) fell from 8,240 in 2014/15 to just 4,030 in 2021/22, a decline of 51%. Employees receiving redundancy payouts up to the £30,000 tax-free threshold has also declined dramatically. The number dropped by 48% since 2014/15, from 18,670 to 9,710.
As the economic malaise continues to bite, employees may need to accept that bumper redundancy payouts may be a thing of the past. However, with the cost-of-living crisis eroding personal finances, some may feel aggrieved if they receive less in redundancy than they were hoping for. With opportunities for alternative employment dwindling, disputes and tribunal claims could proliferate.
Typically, employers may be liable for enhanced redundancy payments due to the contractual terms of employment for some or all of their employees. Redundancy terms may be set out in individual employment contracts, or in another document such as the staff handbook which may be contractual. Where employers often slip up is failing to realise that it is also possible for employees to benefit from an implied contractual entitlement to enhanced redundancy pay.
Implied contractual terms
Employers are likely to have long-serving staff who are contractually entitled to enhanced redundancy while more recent joiners are not. Even if enhanced redundancy is discretionary, the scheme can run the risk of becoming an implied contractual term over time if there is an expectation that it will continue to be paid due to custom and practice. This is a trap many employers fall into, which can spark claims from disgruntled employees who receive less than they were expecting.
Employers can therefore inadvertently find themselves bound by implied terms that are undesirable and should also be aware that previous custom and practice needs to be considered in the early stages of planning redundancies. One of the ways to offset this risk is to consider an express contractual term which makes it clear that enhanced redundancy payments are solely discretionary.
Even if enhanced redundancy is discretionary, the scheme can run the risk of becoming an implied contractual term over time if there is an expectation that it will continue to be paid due to custom and practice.”
Employers should also refrain from publicising enhanced redundancy payments, such as on an intranet or as part of a redundancy consultation process.
Benefits applied consistently whenever redundancies are made will point to a contractual entitlement. As such, the amounts and terms of payment should be varied and negotiated afresh in respect of each redundancy.
Employers should also take pains to use language which does not point to a contractual right. Avoiding the word “entitlement”, for example, may seem obvious but it is surprising how often that word appears in policies that are supposed to be discretionary.
Crucially, schemes which include age or length of service criteria must be objectively justified. As contractual enhanced redundancy pay used to be much more common, this may result in a two-tier workforce in which older workers may be more likely to be eligible for generous payouts. This can spark age discrimination claims from younger workers if they do not receive enhanced redundancy payouts calculated on the same basis.
There is a tendency to think of age discrimination claims as originating from older workers but in relation to disputes over redundancy payments the reverse is usually the case.
Enhanced redundancy payments are a way to cushion the blow for employees and tide them over while they seek alternative work. In these straitened times, however, employees are more likely to think they have little to lose by contesting changes to enhanced redundancy packages. Employers should tread carefully.