This factsheet explains all aspects of the redundancy process for employers, including the redundancy consultation process. It also explains why you might want to use a Settlement Agreement (formerly known as a Compromise Agreement) to terminate your employee’s contract of employment.
When it comes to redundancy, it is vital to follow the correct procedure, including the correct redundancy consultation process. A genuine redundancy situation can result in a finding of unfair dismissal at Employment Tribunal if you do not adhere to the correct processes. To ensure you follow the correct procedures it is advisable to take legal advice from specialist redundancy solicitors when considering making any employee redundant.
While the right to claim unfair dismissal only arises after two complete years of service, including the statutory notice entitlement not the contractual period, selection for a discriminatory reason can result in a claim from the onset of the employment relationship. We therefore strongly advise a best practice approach for all employees.
An employee dismissed by reason of redundancy and who has been continuously employed for two years or more is entitled to a statutory redundancy payment. The amount is based on weekly gross pay, age and length of service. This is subject to a cap of £489 a week and 20 years’ service. Some employers provide for enhanced redundancy payments, either contractually or on a discretionary basis.
All employees, defined as any individual who had entered into or who works under a contract of service, are covered. Employees need at least two years’ continuous employment to claim a redundancy payment, but only one year’s continuous service to bring a claim for unfair dismissal. However, where an employer selects an employee for redundancy for a reason that is automatically unfair, no qualifying period is required and an employee can bring a claim without any qualifying period. In addition, if an employee has been selected for any discriminatory reason, with reference to the Equality Act 2010, they do not need to complete any qualifying period to bring a discrimination claim.
An employee is regarded as redundant where a dismissal is wholly or mainly attributable to:
This is where an employer moves, or intends to move, the place of business from the place where the employee was employed. The test here is where the employee worked, not where they could be required to work under their contract of employment. Whether the move is sufficient to warrant a redundancy situation is based on the distance between the old and new premises, and the level of inconvenience to the employee.
This is where an employer has ceased, or intends to cease, to carry on the business for the purpose for which the employee was employed. It also applies if the part of the business where the employee works is closed, but the rest of the business continues.
This is where an employer requires fewer employees to carry out existing work, or there is less work for existing employees. An Employment Tribunal will not simply look at the actual work the employee was doing at the time of dismissal, but also the work they could be required to perform under the contract of employment. Redundancies can arise out of a work re-organisation where fewer workers are needed because of the introduction of labour-saving devices or where different skills are required.
An employee would not be regarded as redundant where a dismissal is wholly or mainly attributable to:
Bumping in redundancy is where an employee, whose own position is redundant, is transferred to another position, making the holder of that second position redundant. Redundancy bumping is legally permissible provided the correct procedure is followed in respect of the bumped employee.
By linking a dismissal to a diminution in the need for employees, a redundancy situation arises for the bumped employee, notwithstanding that it may not be a diminution in the work which the dismissed employee carried out or could have been required to carry out.
When a redundancy situation arises, the following steps should be followed.
Give employees sufficient advance warning of the impending redundancy situation and the fact that it may affect them. It is advisable for this to be confirmed in writing in the form of an ‘at risk’ letter. Ensure employees who are absent for whatever reason, including maternity and disability reasons, are also contacted.
In some instances, there will only be one employee potentially affected by redundancy and therefore there will be no need to identify a pool for selection. For example, a local office may be closing where only one employee works. In all other cases, you should identify a pool of employees from which to select those who are potentially redundant. The type of work the employees do will be important and the pool of employees must relate to the reason for the proposed redundancy. For example, it would be inappropriate to include canteen or administrative staff in the pool if you needed to reduce the number of shopfloor workers.
You are entitled to determine the make up of the pool. However, it may be advisable to consult with employees beforehand and reach an agreement on its correct membership. You can create a number of pools to reflect redundancies being made in different parts of the business and at different levels.
Once the pool has been agreed, you should determine how employees will be selected from that pool. A list of criteria should be drawn up to reflect the employer’s business priorities in order to retain the best employees.
Criteria must not be discriminatory and must be capable of objective assessment or measurement. In particular, attention should be paid to avoid indirect discrimination. For instance, could your criteria have a disproportionately adverse effect on an ethnic group, gender group or disabled person? For example, criteria based on flexibility in working hours might adversely affect single parents – a greater proportion of which are women – and this may constitute indirect sex discrimination.
A dismissal will be automatically unfair if the employee has been selected for an inadmissible reason, for example, because the employee is pregnant. No qualifying period of continuous employment is needed for an employee to bring a claim where it is alleged that they have been selected for an automatically unfair reason.
Last in first out, or ‘LIFO’ has previously been a popular sole selection criterion. While this method is both simple and, on the face of it, fair, it may not produce the desired result for the employer. By using this method, you may lose the employees best able to drive the business forward. It may also indirectly discriminate against younger employees. Length of service should therefore only be used as one of a number of potential criteria which can be weighted according to priority. LIFO should not be given the greatest weight.
It is advisable to consult with employees as to the criteria to be used, explaining:
Give employees time to consider the proposals and comment on them. You should carefully consider employees’ responses and act accordingly (for example, amend the criteria, or explain why the criteria are not to be amended).
One commonly used system is point scoring. There will usually be several criteria, including:
These should be applied to all employees in the pool, and scores allocated for each employee. Criteria may be weighted to reflect those values which hold the most value to you. Totals can then be added up and compared. Avoid potentially subjective criteria if these cannot be assessed on the basis of existing records such as appraisals.
You must enter into meaningful and proper consultation process for redundancy with employees selected for potential redundancy. A meaningful redundancy consultation process means more than simply informing the employee(s) of a decision already made. You need a two-way dialogue with the objective of finding ways of avoiding the dismissal if at all possible; for example, job sharing, sabbaticals and a reduction in hours. At least two individual consultation meetings are recommended. Employees are entitled to know why they have been selected for redundancy and to see their selection scores.
The employer must make genuine efforts to ascertain whether suitable alternative employment exists within the employing entity of any associated company. Suitable alternative employment, if available, should be offered during the course of the redundancy consultation process.
You should not give the employee notice until the consultation process has been completed. And any contractual redundancy procedure must be followed in addition to the above.
Before effecting any dismissal it is important that in addition to the above you send a written statement to the employee setting out the reasons they have been selected for redundancy. The employee must be invited to attend a meeting with the employer, where they are entitled to be accompanied by a chosen representative. This is usually a work colleague or trade union representative. After the meeting you must inform the employee of your decision and notify them of their right to appeal the decision.
There are some situations where you might want to consider offering a Settlement Agreement to employees you are making redundant. For example, where you and your employee agree that this is the best way to end the employment relationship but neither of you want to go through the process, which usually takes about a month. You may also want to repeat post termination restrictive covenants contained in your employee’s contract to ensure they do not contravene them.
A Settlement Agreement ensures those dismissed by reason of redundancy do not bring claims against you for unfair selection/dismissal. This may require you to pay a contribution towards their legal costs as a Settlement Agreement must be ‘signed off’ by an appropriate legal adviser.
It is usual to offer an ex-gratia payment over and above their statutory redundancy payment as an incentive for them to waive their rights to bring a claim over and above their statutory and contractual rights.
Where an employer is proposing to dismiss as redundant 20 or more employees at one establishment within a period of 90 days or less, they must follow a collective information and redundancy consultation process in addition to the redundancy procedures above.
The law requires employers to consult about the dismissals with all ‘appropriate representatives’ of those who may be affected by the proposed dismissals. The redundancy consultation process should cover and seek to reach agreement about ways to:
In addition, employers should disclose in writing to the representatives:
Where special circumstances render it not reasonably practicable for the employer to comply with these requirements, they need to take all reasonably practicable steps in the circumstances. The failure of an employer to follow collective redundancy consultation obligations leads to additional awards known as ‘protective awards’.
Our specialist redundancy solicitors are expert in providing redundancy advice for employers and employees.