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Employment Law

Redundancy

What is Redundancy?

Redundancy occurs when the employer ceases to carry on business or where the employers business is contracting out work and the employee’s position is redundant as a result.

Redundant employees that have worked for their employer for a continuous period of at least two years have the right to receive statutory redundancy pay.

Section 139 of the Employment Rights Act 1996 describes an employee who has been dismissed for reasons of redundancy:

“if the dismissal is wholly or mainly attributable to –

(a) The fact that his employer has ceased or intends to cease –

(i) to carry on the business for the purpose of which the employee was employed by him, or

(ii) to carry on that business in the place where the employee was so employed, or

(b) the fact that the requirements of that business –

(i) for employees to carry out work of a particular kind, or

(ii) for the employees to carry out work of a particular kind in the place where the employee was employed by the employer,

have ceased or diminished or are expected to cease or diminish.”

Redundancy pay

The calculation of redundancy pay is based on weekly gross pay, the age of the employee and the length of service. The relevant entitlement is calculated for each year of service and is paid in a lump sum. The entitlement per year of service is:

• half a week’s pay where the employee is 22 years of age or less,

• a week’s pay where the employee is under 41 years of age but not younger than 23, and

• one and a half weeks pay where the employee is 41 years of age or older.

The entitlement is capped at £450 a week and payment per year of service up to a period of 20 years’ service.

Selection process

The employer has a duty to be fair in selecting the employees to be considered for redundancy and the reasons must backed by objective evidence. There may be instances where there is only one employee who may be potentially redundant but where there is potentially more than one employee who is at risk of redundancy then the employer must identify a pool of employees who are being considered and must demonstrate that the type of work that they do has decreased or there is no longer a demand. The employer must also be able to identify the criteria used to select the employees for redundancy if they are selected from a pool of employees (or simply the reason for selecting the individual employee). The reason for selection can be based on for example a scoring system devised by the employer for certain job skills but this again must be fair.

‘Last in first out’ has been a popularly used selection criteria in redundancy situations. However, this should only be used as one factor in the selection criteria as it is a crude and ineffective measure of an employee’s performance.

What is essential for employers to keep in mind is that the selection criteria must be fair in all aspects and must not be discriminatory against any of the legally protected characteristics. If the selection criteria used by the employer is for example Trade Union membership or age, then this can lead to claims for unfair dismissal or claims under discrimination law.

Consultation process

Employers must consult each affected employee before dismissal notices are handed out. Employees have the right to be informed of the reasons why they have been considered for redundancy and their scores according to the selection criteria used. This is to ensure that employees are given a real opportunity and time to respond and are not merely being informed of a decision already made by the employer. Failure to do so would be grounds for unfair dismissal. The employer should consider the views expressed by the employee in an effort to find an alternative to dismissal, such as through an agreement to job share or reduced hours of work.

The consultation essentially requires that there be a meaningful two-way dialogue between the employer and the employees affected.

Suitable alternative job offers

Employers must look at all the options available before making employees redundant. This includes making a genuine effort to ascertain whether there are other suitable employment alternatives available for the affected employees within the employing entity. For an alternative job to be ‘suitable’ will depend on what the job is and its similarities in what it entails with the original position held. The hours worked, payment, general employment conditions and the individuals own skillset and abilities will also be factors taken into account.

Any offer for an alternative position should be made at the consultation stage of the redundancy process so that the employee has time to consider their options. The start date of the new job should not be later than 4 weeks after the original employment ends.

The employee can of course decide not to take up the offer of alternative employment. If this is an unreasonable refusal then the employer may be able to avoid paying redundancy pay to that employee. However, any refusal is considered from the perspective of the individual employee and any personal reasons behind a refusal to accept. For example, the new alternative employment may require more travelling to and from work for one employee and less for another.

Further, any alternative employment offer will carry with it a 4 week trial period after which the employee can leave and claim redundancy pay. Failure to offer employees suitable alternative job offers where one exists could amount to unfair dismissal so this is something employers should properly consider before the consultation process begins.

Notice of Redundancy

Redundant employees have the right to be given statutory notice similar to that for unfair dismissal. If the employee has been employed for at least one month but less than two years then they will be entitled to one weeks’ notice. If they have been employed for at least two years then they are entitled to one week’s notice per year of employment up to a maximum of twelve weeks. The employees’ contracts of employment may provide for longer periods of redundancy notice in which case this must be adhered to and failure to do so could give rise to wrongful dismissal claims.

Compromise or Settlement Agreements

Compromise agreements are useful in situations of redundancy and are something all employers making redundancies should consider. Compromise agreements are contracts between the employer and employee that can state that the employee being dismissed for redundancy reasons will not bring Employment Tribunal proceedings for unfair selection or dismissal in exchange for an ex-gratia payment. This payment will be in addition to the statutory redundancy pay to which they are entitled and acts as an incentive for the employee to accept (and sign away any future claims that they may have) and also enables the employment process to be brought to an end more quickly and smoothly. There is also the added peace of mind for the employer that there is unlikely to be any future liability lurking around the corner. Compromise agreements also provide a good opportunity for the employer to have terms in the contract of employment reinforced, such as any restrictive covenants or confidentiality clauses.

Collective Redundancy

This is where an employer is considering making 20 or more employees redundant at one establishment within a period of 90 days. In situations of collective redundancy there are additional redundancy processes to the above to be followed. Employers need to be cautious in such situations as failure to follow correct procedure can result in liability for additional payments called‘protective awards’.

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