Redundancy: Employment Law for Employees and Employers

Managing redundancies can be daunting for both employers and employees. Employers need to ensure that they follow correct redundancy procedures and apply them fairly.

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. In certain circumstances, a redundancy will be an automatically unfair dismissal – for example, selecting an employee for a reason connected to pregnancy or for other discriminatory reasons.

Employers need to understand:

• What “redundancy” means.

• When they must collectively and/or individually consult employees about redundancy.

• How to deal fairly with individuals facing redundancy to minimise the risk of unfair dismissal claims.

• How to work out entitlements to redundancy payments.

What is a “redundancy”?

Legally the definition covers three types of situation: business closure, workplace closure at a specific location and a reduction of workforce.

A business closure must be distinguished from the situation where an employer transfers its business to a new owner. In that case the employees should transfer to the new owner of the business under TUPE.

Even if a dismissal is genuinely on grounds of redundancy, it may still be an unfair dismissal if the employer did not act reasonably in dismissing the employee.

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

• Warns and consults with the employees affected or their representatives about the proposed redundancy. Consultation with individual employees is fundamental to the fairness of any dismissal for redundancy and a failure to do so is very like to make any redundancy an unfair dismissal.

• Adopts a fair basis on which to select employees for redundancy. In many cases an employer must identify an appropriate pool from which to select potentially redundant employees and then apply proper objective criteria to those employees. Common selection criteria used are: Performance and ability, Length of service, Attendance records and Disciplinary records. “Last in first out” (LIFO) used to be a common method of redundancy selection but it is not advisable to use this on its own anymore as it is a selection criteria that may discriminate against employees and could lead to discrimination claims and unfair dismissal claims.

• Considers suitable alternative employment where appropriate.

Collective Redundancies

Where there is a proposal to dismiss as redundant 20 or more employees at one establishment within a 90-day period, the employer will have to engage in collective consultation with a trade union or (if no union is recognised) elected employee representatives. Depending upon numbers this may have to last at least 30 or 45 days. A tribunal may award up to 90 days’ pay in respect of each employee where there has been a breach of this obligation.

The law on this changed on 6 April 2013 and specific advice should be sought before starting any collective redundancy process.

There is no minimum timescales for individual consultation to take place, but the shorter the consultation, the more likely it is that it may be challenged as being unreasonable.

Redundancy Payments

Employees with at least two years’ continuous employment are entitled to a statutory redundancy payment if they are dismissed by reason of redundancy. Statutory redundancy pay is calculated according to a formula 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, current £430).

Where an employer goes insolvent and is unable to pay a statutory redundancy payment employees can apply to the Secretary of State for a redundancy payment out of the National Insurance Fund.