How to implement and manage a redundancy process

Sadly, there comes a time at many startups where it’s necessary to downsize. That’s tough – nobody wants to tell their team they’re out of a job, but the reality is that in many cases that is the only option if the company is to survive to grow again when it has the revenue or raises funding to do so.

Who has a say on redundancy decisions?

It is likely that redundancy decisions will need to be made, reducing the wage bill to ensure businesses can continue to trade their way back to health.

The law is not particularly intrusive with respect to redundancy decisions. The rationale held by the courts is that business owners generally understand what is in the best interests for their business better than judges. It is not for judges to interfere too much with whether a redundancy process should or should not have been started. 

This means that as a business owner, if you feel like you will need to make redundancies once the CJRS support ends, it is very unlikely your decision to instigate a redundancy process could be successfully challenged. What the judges are concerned with, is whether that process, once started, was implemented in a fair way.

What is a legitimate redundancy in the eyes of the law?

Redundancies do fall under the unfair dismissal legislation but the law says that redundancy is one of the potentially fair reasons for dismissing an employee.

What counts as a legitimate “redundancy” is defined in S139 Employment Rights Act 1996. A dismissal will be classed as a redundancy if the dismissal is “wholly or mainly attributed to the fact that his employer has ceased or intends to cease to carry on the business for the purposes of which the employee was employed by him or the fact that the requirements of that business for employees to carry out work of a particular kind have ceased or diminished or are expected to cease or diminish.”

In other words, what counts as a valid redundancy is very broad. Taken at its lowest, you can legally make someone redundant merely because of a subjective expectation that work of a particular kind (that the employee did) is likely to diminish. It is a reasonable conclusion that coronavirus will lead to a diminution of work in nearly every department of nearly every company, and so redundancies due to coronavirus are almost always likely to be considered legitimate.

What employers need to be more careful of, once they have decided which departments will need restructuring, is that the specific individuals selected for redundancy are chosen in a “fair” way. This is often how redundancy decisions are challenged, on the basis of procedural unfairness.

How to conduct a fair redundancy process (for under 20 redundancies)

If you decided that you needed to lay off some of your sales team because you are experiencing less inbound inquiries for your services, that is a legitimate decision. What would be illegitimate and unfair would be to then select one individual in the sales team for redundancy because you didn’t like them, or perhaps because they had a disability or because they were a man or a woman etc.

There are also additional steps an employer will need to follow for any employees that have been working for the business for more than two years. So, this section will be split into the redundancy process that should be followed for employees with less than two years’ service and those with more than two years.

Redundancy Process

For all redundancies there is a statutory obligation to make an alternative job offer to someone being made redundant if there are suitable alternative vacancies in the business.

Other than that obligation to offer alternative work, there are no other formal processes you have to carry out, provided the selections for redundancy remain fair. You might be able to rely on a LIFO process (‘last in, first out’) although be mindful that this could be considered automatically unfair if it disproportionately impacts a protected group. If all of your latest hires were women, then making them all redundant could be seen as unfair. You might instead undertake some analysis of wage spend per department and select one relatively high earner from each department etc. Or, you might create a selection matrix and grade and compare skills, experience and performance of the employees being considered for redundancy and whoever scores lowest is selected.

The point here is that the formal processes you have to follow for employees with less than two years’ service are very minimal.

Additional redundancy processes for employees with two years’ service or more

Staff that have had two years’ continuous employment or more in your business by the time their job ends are entitled to at least one individual meeting with you to discuss redundancy.

Your employee is also entitled to understand your redundancy process and so if you do not have a redundancy policy in place (you can make on on the SeedLegals platform within our staff handbook) you should consider writing one. It should cover the following issues:

• How you will choose people for redundancy
• How long the decision will take
• What meetings your employees can go to and when
• How they can appeal if they are chosen for redundancy

At your employee’s meeting, you should discuss:

• Why you need to make redundancies
• Why you are considering them for redundancy
• What other suitable alternative employment may be available
• Any other questions your employee may have about what happens next

Following that first meeting, if you are still intending to dismiss the person in question, it would be good practice to invite them to a second individual meeting to explain your final decision and remind them of their right to time off to seek alternative employment.

Following that second meeting you should write to your employee confirming the decision to dismiss them as redundant and specify the termination date. You should explain your redundancy payment calculations in this letter (details on how to calculate that is below). You should also confirm to the employee that they have a right to appeal and explain how they can appeal and the time limit to do so.

If they do appeal you should invite them to a further meeting to hear the appeal. If possible this meeting should be held by someone senior to the person who held the previous redundancy meetings. Following this meeting you should write to the employee confirming the outcome of the appeal and emphasise this is a final decision.

How to conduct a fair redundancy process (for over 20 redundancies)

Where you are proposing to make 20 or more redundancies in a 90-day period then the collective consultation obligations arise under the Trade Union and Labour Relations (Consolidation) Act 1992. You are also required to notify the Secretary of State of the proposed redundancies.

You must notify the Secretary of State at least 30 days before the first dismissal takes effect or at least 45 days before if over 100 or more employees are being dismissed in a 90-day window. The notification must be in writing using form HR1 and copies must be sent to employee representatives. Employees cannot be given notices of dismissal until the Secretary of State has been notified.

How much will you need to pay your staff as a consequence of making them redundant?

You will still have to comply with your employee’s notice periods and either let them work out their notice period or pay them in lieu of notice.

If your employee unreasonably refuses alternative employment that you offered them, then you can refuse to make a redundancy payment to them. Otherwise, there is a statutory entitlement to redundancy payment (and their employment contract or your staff handbook may offer more generous redundancy arrangements than the statutory minimums).

However, this statutory payment is only available to employees with more than two years’ continuous employment and is based on age, length of service and gross weekly pay. The statutory formula is:

• One and a half weeks’ pay for each complete year of service in which you were aged 41 or over;
• One weeks’ pay for each complete year of service in which you were aged 22 or over but under 41; and
• Half a weeks’ pay for each complete year of service in which you were aged under 22.

Age is determined at the beginning of each year of service, counting backwards from the termination date.

There is a cap of 20 years of service and the award is subject to a statutory ceiling on the gross weekly wage (currently £538 a week). Therefore, the current maximum award is £16,140 (for 20 years of service where all those years were given after the employee was 41.)