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Redundancy Employment Law

This factsheet was written by CIPD staff and updated by Lisa Ayling, solicitor and employment law consultant, and CIPD staff.
Reprinted from website of Chartered Institute of Personnel and Development, April 2010.

This factsheet gives introductory guidance. It:

Predictions that the number of redundancies in the UK would rise sharply during the credit crunch have been substantiated by the figures from the Office for National Statistics. The impact of the economic slowdown has also been demonstrated by fewer job vacancies and a rise in the number of redundancies particularly in the finance, business services and construction industries.

Redundancy is one of the most traumatic events an employee may experience. Announcement of redundancies will invariably have an adverse impact on morale, motivation and productivity. The negative effects can be reduced by sensitive handling of redundant employees and those remaining.

The legal position

Both statute and case law determine redundancy obligations and rights. The main legislation governing redundancy includes:

Definition

A genuine redundancy only arises when either there has been, or is going to be:

In recent CIPD surveys, the primary reasons for making redundancies are listed as reorganised working methods and efficiency/improved competitiveness. Even during expansion, redundancies can occur if specific work is disbanded. In a minority of cases, redundancies are not accompanied by falls in total staff numbers and have either no effect on total numbers or are more than offset by recruitment.

Confusion may arise because 'making someone redundant' is often used as an euphemism for saying an employee is being dismissed for some reason other than redundancy.

Managing redundancy

If possible, it is preferable for an organisation to establish a formal procedure on redundancy. In many organisations a formal agreement may have been negotiated and agreed between management and trade union or employee representatives. Some organisations deal with redundancies by an informal arrangement with a practice which varies for each redundancy or they may only start to consider the appropriate procedure for the first time when a redundancy situation arises.

At the very least in order to plan and implement a redundancy situation properly, the following stages will be followed in most redundancies:

Of course the exact procedure varies according to the timescale and size of the redundancy. The core points concerning some of these stages are summarised below.

Planning and preventive measures

Organisations should always attempt to avoid redundancies. Ways of doing this include:

During the recent recession, many employers have adopted a wide range of alternatives to redundancy which has contributed to keeping the increase in numbers of unemployed people below what would have been expected from previous recessions.

However employers may be unable to implement such proposals without breaking their employees' contracts, so care needs to be taken before attempting to implement such steps.

Seeking volunteers

As part of the overall procedure, once the need for redundancies has been identified and careful planning has taken place, offering a voluntary redundancy package and then seeking willing redundancy volunteers may avoid compulsory redundancies altogether.

Individual and collective consultation

Individual consultation is necessary for all redundancies and the law requires that collective consultation is required in the multiple redundancy situations referred to below. Organisations should follow the stages their own redundancy procedure, which as a bare minimum should encompass the stages referred to in this fact sheet and adhere to the Acas guidance on handling redundancies.

Case law concerning consultation continually evolves, so keeping informed of relevant decisions is vital.

Consultation should also include:

Collective consultations with recognised trade unions or elected representatives must start at least 90 days beforehand for proposed redundancy dismissals of 100 or more employees, and at least 30 days before notification of redundancies for 20-99 employees. In cases where collective consultation is required, it must be completed before notice of dismissal is given to any of the employees concerned. The law requires meaningful consultation - it is not enough only to inform. The maximum compensation that can be awarded if an employer fails to consult is 90 days pay.

Selection

In the earlier stages, employers will need to carefully determine the initial selection pool for redundancy. Unless there is a customary arrangement, an employer should identify the group of employees at the planning stage who may be made redundant. This will usually be those who undertake a similar type of work in a particular department, or work at a relevant location, or whose work has either ceased or diminished, or is expected to do so. These will be the selection pool.

In the later stages of the redundancy process, individuals must be selected from within the wider pool. Where there is a choice between employees, selection must be based on objective criteria which may include:

Following the age discrimination legislation, 'last in, first out' (LIFO) is now risky as a selection method. Case law has held that LIFO may still be a relevant as part of a wider range of selection criteria, however it must not be used as a sole method of selection, and the employer must be able to justify its use. However LIFO remains a risky method, and is usually an unsatisfactory way of retaining the most competent.

Tribunals should look favourably on selection procedures based on a points system which scores each employee against the relevant criteria. However, great care must be taken in the choice and application of the criteria to avoid factors which may be discriminatory on any grounds. For example, selection of part-timers in preference to full-timers could be discriminatory if a high proportion of women are affected.

Notification

At least 90 days written notification must be given to BIS if 100 or more employees are to be made redundant, and at least 30 days for 20 to 99 employees. For less than 20 employees, no notification to BIS is required.

Unfair dismissals

In law, there are many reasons which are automatically unfair for selecting employees for redundancy, including:

A dismissal may also be a normal (ie not automatic) unfair dismissal if there is not a genuine redundancy or if the selection criteria are too imprecise or subjective. And although the reasons for redundancy may be completely fair, it may still be judged unfair on procedural grounds such as lack of consultation.

Appeals

Employees dismissed by reason of redundancy must be given the opportunity to appeal their selection for redundancy. The appeal must be handled carefully and comply with the organisation's own redundancy procedure (and/or any applicable disciplinary and dismissal procedure).

Alternatives

Employers must consider suitable alternative work and are expected to look for alternatives throughout the organisation. There is an offer procedure dealing with this. The law removes entitlement to a statutory redundancy payment if an employee unreasonably refuses a suitable alternative.

Time off

The law requires employees be given paid time off to look for work during the final notice period.

Compensation

Dismissed employees with two or more years' service are entitled to a minimum redundancy payments based on a formula similar to the basic award for unfair dismissal. There is a maximum statutory payment, but many employers pay more than the law prescribes.

Giving the bad news - counselling and support

Giving notice is unpleasant and need careful handling. Common faults include being brutally abrupt or too vague. Managers should be trained to handle redundancies with sympathy and clarity. Particular care will be needed to make sure that people know where to go for further advice or support.

Employees can be badly affected by redundancy and need support to accept reality and mount an effective job search. A well-designed redundancy programme should enable employees to refresh their interview skills, redraft CVs and reply effectively to job advertisements. Good counselling by outplacement consultants or others, also reassures those remaining that the organisation is prepared to treat redundant employees well.

The cost to employers of redundancy

There are a number of direct and indirect costs to employers associated with redundancy. These have been incorporated by the CIPD into a simple formula to calculate the real cost of redundancy. The elements of the formula include a number of direct financial costs and a number of indirect effects experienced in the form of higher labour turnover and lost output resulting from the impact of redundancy on the morale and engagement of survivor employees.

The precise costs of redundancy for an individual organisation will vary. Applying figures drawn from CIPD surveys, the average direct financial cost to employers of redundancy per worker being made redundant in 2008/9 is estimated as ranging from £10,575 (where redundant workers are not subsequently replaced) to £15,242 (where redundant workers are replaced by new hires). If replacement hires need to be inducted and provided with initial training, the cost rises to £16,375.

Survivor care

In any redundancy situation, the immediate priority is the fair and sensitive treatment of employees who are losing their jobs. Once this has been achieved, the organisation's ongoing effectiveness is largely dependent on the morale of the survivors. Clumsy redundancy handling is bad for the employer's business and long-term reputation.

A demoralised workforce, anxious about job security and critical of the handling of the redundancies of colleagues, is not likely to display commitment, enthusiasm and initiative. Therefore, the primary objectives of management should be to:

CIPD viewpoint

CIPD believes that, even during periods of high demand for labour, it is unrealistic to suggest that redundancy can always be avoided by a combination of human resource planning and employment flexibility. The future can never be forecast with total accuracy. Unexpected events may necessitate enforced workforce reductions and individual redundancies may also occur when a job is no longer needed. However, CIPD expects its members to:

CIPD acknowledges that even the most carefully handled redundancies are likely to result in damage to the psychological contract and a negative organisational culture. It always makes sense, therefore, to view redundancy as a last resort. This will also give a clear message to employees that they can trust the organisation not to make unnecessary redundancies.

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