Set clear terms for your redundancy packages

Linda Farrell looks at enhanced redundancy terms and asks are they
discretionary, or part of the employment contract?

Employers wishing to streamline their workforce will usually seek volunteers
for redundancy. Indeed, it is good industrial relations practice to seek
volunteers in the hope that compulsory redundancies may be avoided.

However, to tempt volunteers, employers need to be able to offer reasonably
generous redundancy terms.

With continuing technological advances and the usual swings in the economic
climate, this is a scenario an employer may face every few years.

However, what happens if the employer genuinely falls on hard times and
cannot afford the same enhanced redundancy package it has offered in the past?
Is it open to the employees to argue that they are contractually entitled to
the terms by virtue of custom and practice?

In Quinn v Calder Industrial Materials Ltd, 1996, IRLR 126, in 1987, the
group of which the employer’s business was a part issued a policy document
containing guidelines on enhanced redundancy payments.

The terms of that document had not been communicated to the employees, but
they had become generally known over the next seven years as there were four
occasions where the enhanced payments were made.

After the redundancies were announced, the employees claimed their employer
was in breach of contract in not paying the enhanced terms.

The EAT disagreed and said that, in deciding whether a management policy had
been elevated to the status of a contractual term, it was necessary to
determine whether the manner in which the policy was made known to the
employees and the length of time it had been in place showed that the employers
intended to become contractually bound by it.

In Albion Automotive v Graham Walker, 2002, (unreported), Albion’s parent
company had conducted six redundancy exercises on the same enhanced terms. The
employment tribunal found that these terms had been shown to the applicants and
were well known.

They had also been previously provided to some 750 employees and the
applicants had a reasonable expectation that they would receive those terms.
They were therefore contractually entitled to the enhanced terms.

The EAT and the CA both upheld that decision.

Drawing conclusions

Where enhanced redundancy terms have not yet been elevated to contractual
status, ensure it is made clear that such terms are discretionary and are for
the purpose of the current redundancy exercise only. If further redundancies
become necessary and enhanced terms are to be offered, vary the structure of
the package to avoid creating a precedent that could be construed as custom and

It is more difficult in the Albion situation. A term implied by custom and
practice has as much legal force as an express term that is written into the
contract of employment and, thus, can only usually be varied by agreement of
both parties.

Any variation will invariably need to be supported by an enhancement of
terms and conditions in other respects, to entice employees to forgo a
financial settlement designed to benefit them when they most need it – when
they have lost their job.

Ideally, an employer wants the flexibility to offer enhanced terms when it
can or to reduce the enhancement or pay only statutory redundancy if it faces a
choice between keeping the business afloat and insolvency.

To avoid problems, employers should review previous redundancy terms to
determine whether they have acquired contractual status. If not, the employer
should consider varying the structure of future terms. If they have acquired
contractual status, the employer should consider whether changes are required
and look at different methods of implementation

But terms and conditions should not be changed without a good business
reason. And employers should not seek to impose change unilaterally; there
needs to be full consultation with employees and their representatives to ensure
they understand and accept the need for change.

Linda Farrell is a partner at Bristows

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