Can you afford to make staff redundant?

Redundancy may seem like an immediate way to cut costs but there are other considerations

Faced with financial pressures, reducing headcount may seem the most straightforward next step. But redundancy carries its own direct and hidden costs, and there are a number of potential alternatives to losing jobs. Andy Taylor explains.

With financial support such as the furlough scheme winding down later this year, many employers will only now begin feeling the real impact of repeated lockdowns and restrictive measures.

In the face of adversity, some businesses may simply not be able to sustain their workforce and may have to let people go.

However, there are many costs, both visible and hidden, associated with redundancies that may put a company under even more financial strain. So, what should businesses consider before making people redundant and what alternatives are available instead?

Direct costs

The precise costs of undergoing the process will of course vary depending on individual circumstances, with the scale of the proposed redundancies being a major factor.

The first cost to consider will be redundancy pay. Statutory redundancy pay will only be available to employees with at least two years’ continuous service and will in most cases equate to between 1 to 1.5 week’s pay (depending on age) for each full year worked.

In addition, many employees are entitled to enhanced contractual redundancy pay. If a large number of employees qualify for enhanced redundancy pay, this could drastically push up the overall costs, particularly if those made redundant have longer service.

This is something that often catches employers by surprise, particularly when seeking volunteers for redundancy as those in line for higher pay-outs tend to account for the majority of the volunteers.

It’s also important to note that enhanced redundancy can transfer with employees from previous jobs under TUPE, so employers need to carefully profile who they are putting through the redundancy process.

The other main direct cost to consider is notice pay, including the possibility of paying in lieu of notice.

Longer serving employees will have longer statutory notice periods, as much as 12 weeks for those with 12 years’ service or more. Remember that if the statutory notice entitlement is longer than the contractual notice period, the statutory notice period takes precedent.

Furthermore, more senior employees will often have notice periods that exceed the maximum statutory. All this means that the cost savings will only start showing some way down the line, especially if the team being let go is generally long-serving and/or senior.

Alternatively, businesses may choose to pay in lieu of notice, which brings forward the ongoing savings but requires a significant amount of cash to fund a large initial pay out, which simply may not be an option for a lot of distressed businesses.

Hidden costs

Businesses also need to consider the indirect and less tangible costs that can arise. The mere fact of going through a redundancy process will have a significant short-term impact on productivity, as following the proper process can be extremely time consuming for everyone involved. Managers will need to hold a number of meetings with every individual who has been placed at risk of redundancy, for example.

The need for collective consultation – triggered when proposing to dismiss at least 20 employees in any 90-day period at one establishment – only exacerbates this where it applies.

Redundancies will also almost always impact the productivity levels of those not made redundant. Those who are placed at-risk but not made redundant, such as when there are successful challenges to redundancy scores, cannot be expected to function normally as they go through that process.

Even once the process has been completed, the remaining employees will often be much less motivated as they have seen colleagues and friends lose their jobs, which inevitably means they are likely to be less willing to go above and beyond or even to perform at the level seen prior to the start of the redundancy process.

Finally, there are also the legal ramifications and associated costs to think about. With good legal counsel businesses can ensure they are undertaking a fair redundancy process, but this does not prevent disgruntled ex-employees from bringing unfair dismissal claims.

Even if employers can successfully defend these claims, this comes with a significant cost in terms of legal fees and more wasted management time. Unlike in some other courts, in employment tribunals it is extremely rare for the successful party to be awarded their costs.

Businesses wanting to protect themselves from claims can make enhanced redundancy terms conditional upon employees signing settlement agreements. However, many employers may not be in a position financially to offer enhanced terms.

What are the alternatives?

In an effort to lower the number of redundancies required, employers could investigate cutting costs associated with the workforce.

In extreme circumstances this could include the possibility of salary cuts, but it could also include reducing or withdrawing discretionary benefits. However, it’s important to note that these actions can have a deep impact on the workforce, negatively affecting productivity and morale and thereby seriously jeopardising the future performance of the business.

Redundancies will also almost always impact the productivity levels of those not made redundant.”

When looking at cutting costs it is advisable for a business to look at all of the options available to it and what levers it can pull to increase efficiency and sustainability. From looking at internal cash flows to unnecessary outgoing costs, there are many other areas that should be considered as part of a wider review of viability.

Reviewing balance sheets should form an essential part of any company health check and businesses may be able to reduce unnecessary outgoings on a number of levels.

With workspace requirements potentially diminishing due to the acceleration of agile working practices, businesses need to consider whether their property portfolios are still fit for purpose.

If leasing, companies can look at reviewing contract terms and seek legal advice on renegotiating rent or perhaps a temporary deferral. On the other hand, if property is owned on a freehold basis a sale and lease back if a good way to generate cash.

It would also be prudent for a business to review its financial arrangements to see whether more beneficial rates are available in the market. If company assets, such as stock, machinery and invoices, are unencumbered, asset-based lending may be an option.

For businesses under pressure, reducing headcount may seem like the most logical first step. However, reducing the workforce could be more costly than originally expected. By looking at the company’s property portfolio or rethinking some of the costs, businesses may be able to avoid redundancies.

Reducing the workforce is never easy and may not be the right solution in isolation or as part of a wider range of measures, however if a redundancy programme is to be instituted, businesses need to be very careful to do what is required by law, look at the true overall cost and carefully consider if it is actually the best way forward.

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Andy Taylor

About Andy Taylor

Andy Taylor is partner and head of restructuring at Shakespeare Martineau.
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