Navigating Redundancy: Legal Considerations and Strategies for Workforce Reduction

The current issue is to explore the options of redundancy in order to reduce the workforce cause by the financial difficulties. In case a company management is considering a company’s reorganisation due to financial difficulties, there are few points of law that need to be dealt with.

Firstly, according to employment and labour laws, reorganisation must keep the experience between the employers and their employees as fair as possible. Reorganisation may involve redundancy, where employment contracts may be amended and altered to make way for the reorganisation requirements. For conducting reorganisation, it needs to be determined if there exists a genuine redundancy in the company. If the company intends to offer voluntary redundancies to certain groups of employees, it needs to firstly determine whether it could claim a genuine redundancy for the situation of the company. The Employment Rights Act 1996, s139 provides three situations that could satisfy genuine redundancy. The first situation is where there is a business closure and the employer ceases or intends to cease to carry on the business where the employee was employed. The second situation is where there is workplace closure and the employer ceases or intends to cease to carry on that business in the place where the employee was employed. The third situation is where there is a reduced requirement for employees and where the business requirements of employee to carry out work of a particular kind ceased or diminished.

In order to reduce the workflow, the company’s management may go with either the second situation where it closes a workplace to make the intended number of employees redundant or the third situation where the company’s management determines that the business requirements of the intended number of employees to be made redundant no longer exists. In relevance to the third situation, it must be specifically pointed out to the company’s management that reorganisation also involves restructuring attributable to economic pressure a company faces. Consequent changes may involve downsising its labour force. The current circumstance of the company falls under the third situation of redundancy.

Secondly, there are two types of redundancy, non-compulsory redundancy, which the company intends to offer to the employees, and compulsory redundancy. In the former, the company’s management, as an employer, can ask the employees for volunteer redundancy. The company must adopt a fair and transparent selection process, and the employees are also notified that there is no automatic selection. There is another alternative non-compulsory redundancy where the company’s management can offer employees incentives to retire early. The company’s management cannot be selective in this regard and it must make this offer across the entire workforce. Early retirement is an employee’s choice and using force is not permitted. In the latter case of compulsory redundancy, the company’s management, as an employer, must comply with fair selection criteria when it identifies employees to be made redundant. There must not be any discrimination and must consider reasonable factors, including qualifications and aptitude; skills; attendance; disciplinary record; and standard of work/performance.

In case of any dismissal decisions, it has to be read with the terms of genuine redundancy in order to avoid unfair dismissal claim. The exercise has to pass the test of the “band of reasonable responses test” in regard to the provisions under Employment Rights Act 1996, s98(4) and the principles of fairness, as was laid down in the case of Polkey v A E Dayton Services Ltd [1987] IRLR 503 that cover the terms of redundancy explained in the second point in the paragraph. Employees have to be warned and consulted about the proposed redundancy. Redundancy selection must be on fair basis and the company management must consider suitable alternative employment within the company, which must be unconditional and made before the employee’s current contract ends. The company management must identify an appropriate pool from which you select potentially redundant employees.

Thirdly, in the current case the company’s management intends to offer voluntary redundancies to all employees over the age of 60 and those that have joined the company in the past two years. In this regard, it must be noted that selection of employees that are based on the length of employees’ service (‘last in, first out’) must be subject to justification. There cannot be selective employees and thereby indirect discrimination. Therefore, relying on length of service could lead to unlawful age discrimination. Thus, for the age group above age of 60, the company’s management, as an employer, cannot just offer voluntary redundancy to age groups, such as this group, eligible for an early retirement package. However, the law permits early retirement package for certain age groups as a part of voluntary redundancy to all employers. To avail this option, the company’s management needs to make a group above age of 60, and also see the age of those who joined past two years to include in this group. This selection criterion has to meet the requirements as explained under the second point in the above paragraph.

The law permits the company to reduce the workforce by at least 25 employees. If the number of employees is 20 or more and the redundancy is to be made within 90 days, then the company’s management must consult any recognised trade union and elected employee representative, start consultation at least 40 days before the first dismissal takes place, give statutory notice period and agree to a leaving date once redundancy consultation is complete, attempt to reduce the numbers to be made redundant and mitigating the effect of the dismissals, and notify the Department of Business, Innovation and Skills (BIS) at least 45 days in advance of the first dismissal taking effect.

Fourthly and lastly, redundancy dismissal requires the company’s management to make statutory redundancy payment to redundant employees. Only those employees who have at least 2 years’ continuous service are entitled to such payment. But, they should not have been dismissed, laid off or put on short-time working. The company’s management must pay the employees when they are dismissed or soon after. The rate of payment is subject to age and length of employment with retrospective effect from date of dismissal. The redundancy payment is half a week’s pay for each full year if the employee was under 22; one week’s pay for each full year the employee were 22 or older, but under 41; one and half week’s pay for each full year if the employee were 41 or older. The law caps the length of service at 20 years. Currently, if the employee is made redundant on or after 6 April 2020, the weekly pay is capped at £538 and the maximum statutory redundancy pay is £16,140. If they were made redundant before 6 April 2020, the amounts may be lower. Tax is exempted for redundancy pay (including any severance pay) under £30,000, but there will be deduction of tax and National Insurance contributions from any wages or holiday pay the company owes the employee.

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