Dealing with redundancy can be daunting for both employers and employees: employers need to ensure that they follow correct procedures and apply them fairly. Employees have a number of rights in a redundancy situation and both parties need to understand what these are. Before you read this article you may find it useful to check our settlement agreement calculator to see our estimate of what you should be entitled to receive from your employer if you are made redundant.

Dealing with redundancy from an employee perspective

Employees who are dismissed by reason of redundancy may be entitled to a statutory redundancy payment and they may be able to challenge the termination of their employment as an unfair dismissal.

The definition of “redundancy”

The definition of “redundancy” encompasses three types of situation: business closure, workplace closure, and reduction of workforce. The dismissal of an employee will be by reason of redundancy if it is “wholly or mainly attributable to” the employer:

  • ceasing or intending to cease to carry on the business for the purposes of which the employee was employed by it (business closure);
  • ceasing or intending to cease to carry on that business in the place where the employee was so employed (workplace closure); or
  • having a reduced requirement for employees to carry out work of a particular kind or to do so at the place where the employee was employed to work (reduced requirement for employees).

Redundancy payments

Employees who are dismissed by reason of redundancy may be entitled to a statutory redundancy payment. Additionally, they may have an express or implied contractual right to an enhanced contractual redundancy payment. In circumstances in which an employer is liable to pay an employee a statutory redundancy payment, if the employer either fails to make the payment because it is insolvent or refuses to do so, the employee may apply to the Secretary of State for payment out of the National Insurance Fund.

Statutory redundancy payments

Under section 135 of the Employment Rights Act 1996 (ERA), employees with at least two years’ continuous employment at the relevant date are entitled to a statutory redundancy payment if they are dismissed by reason of redundancy.

Statutory redundancy pay is calculated according to a formula set out in section 162 of the ERA 1996, which is based on age, length of service (subject to a maximum of 20 years) and pay (subject to the upper limit on a week’s pay).

Claiming from the National Insurance Fund

Where an employer refuses to make a redundancy payment (or has made a part payment only), or the employer is insolvent, an employee may apply to the Secretary of State for a redundancy payment out of the National Insurance Fund under the scheme contained in section 166 of ERA 1996.

Contractual redundancy payments

In addition to a statutory redundancy payment, an employee may also be entitled to an enhanced contractual redundancy payment. This entitlement may be either express or implied:

  • If the employee’s contract of employment expressly sets out a redundancy policy, the policy will be an express term of their employment. However, it is more common for a redundancy policy to become expressly incorporated by being set out in another document or collective agreement which is referred to in the employee’s contract of employment. Another way in which a redundancy policy can be expressly incorporated into an employee’s contract of employment is where a person with ostensible authority makes a verbal or written statement that results in a commitment by the employer to pay enhanced redundancy payments.
  • The most common way in which redundancy terms may be implied into an employee’s contract of employment is where a set of redundancy terms are regularly applied in a particular trade or industry or by a particular employer. In order for employees to show implied incorporation of the enhanced redundancy terms into their contracts of employment, they must show that the custom in question is “reasonable, notorious and certain”. This means that the policy’s terms must be fair (and not arbitrary or capricious), must be generally established and well known, and must be clear cut.

In operating an enhanced redundancy payments scheme, an employer must be careful to ensure that the manner in which it applies enhancements will not leave it open to the accusation that it has disadvantaged some employees over others in a manner that is discriminatory. Age discrimination is a common issue in schemes which use age and/or length of service to calculate the payment, unless they closely follow the statutory redundancy pay model (above).

Redundancy and unfair dismissal

An employee who has sufficient qualifying service, i.e. has been employed for two years (although this time period depends on a number of factors and should by no means be taken for granted), is entitled not to be unfairly dismissed. Redundancy is a potentially fair reason for dismissal. Even if a dismissal is genuinely on grounds of redundancy, whether it is fair or unfair to dismiss for that reason normally depends on the application of the general test of fairness in section 98(4) of ERA 1996, namely whether the employer acted reasonably in dismissing the employee in all the circumstances.

A redundancy dismissal is likely to be unfair unless the employer:

  • Identifies an appropriate pool of employees for redundancy.
  • Consults with individuals in the pool.
  • Applies objective selection criteria to those in the pool.
  • Considers suitable alternative employment where appropriate, subject to a trial period.

Collective consultation (employer perspective)

Where 20 or more employees are being made redundant over a period of 90 days or less, an employer has a duty under the Trade Union and Labour Relations (Consolidation) Act 1992 to:

  • Inform and consult appropriate employee representatives. Where 100 or more redundancies are proposed, consultation must begin at least 45 days before the first dismissal takes effect. For less than 100 redundancies, the consultation period is 30 days.
  • Notify the Secretary of State (in practice a Form HR1). Notification must be received by the Secretary of State at least 45 days before the first dismissal where the employer proposes to dismiss 100 or more employees. Where less than 100 redundancies are proposed, the notification period is 30 days.

A tribunal may award up to 90 days’ pay in respect of each employee where there has been a breach of the information and consultation duty. An employer may be fined if it fails to notify the Secretary of State.

Whenever there is an obligation to consult collectively, the employer will also need to ensure that it has followed a fair procedure in relation to individuals, including consulting with them properly, so as to minimise claims for unfair dismissal.

Alternatives to dealing with redundancy

When dealing with redundancy from the outset of the procedure (and throughout the consultation process), an employer should consider whether it can avoid making compulsory redundancies or reduce the number of compulsory redundancies.

If the employer is undertaking collective consultation, this is one of the matters over which it has a statutory duty to consult the employee representatives. It should also consider this during individual consultation as part of a fair redundancy procedure.

Initial steps that the employer should consider include:

  • Suspending or restricting recruitment.
  • Reduction or removal of overtime opportunities.
  • Not renewing the contracts of contractors.
  • Ceasing or reducing the use of agency workers.

If these initial steps are unavailable or are not sufficient, the employer could consider:

  • Inviting potentially redundant employees to apply for suitable alternative vacancies.
  • Inviting employees to volunteer for redundancy.
  • Inviting employees to consider early retirement under the pension scheme.
  • Temporarily laying off employees or reducing their hours. In some cases this may itself entitle the employees to claim a redundancy payment.

Dealing with redundancy – we’re here to help

If you have any questions or need help dealing with redundancy or other employment law issues please contact any one of our employment lawyers; Rhodri ThomasHelen Monson or Imogen Finnegan or call us on 0203 637 6374.