Redundancy

What is Redundancy?

Redundancy situations arise where:

	an employer ceases (or intends to cease) to carry on business for the purposes for which the employee was employed, or in the place where the employee was employed; or
	the requirements of the business for employees to carry out work of a particular kind (whether or not it is where the employee is employed) has ceased or diminished.

In such situations the employer is entitled to make employees redundant.

Sometimes circumstances arise which do not create redundancies in the strict sense, for example where the employer restructures the business to reduce overheads, when the requirements of the business for employees to carry out work for a particular kind has not actually diminished. In these sorts of cases, dismissal of "surplus" staff after restructuring may amount to a fair reason to dismiss someone on the grounds of an "economic, technical or organisational" ("ETO") reason. In practical terms, there is usually a large amount of overlap between ETO dismissals and redundancies, and similar legal principles apply to both. For the purposes of this article, only redundancies in the strict sense have been considered.

Employee Rights

Employees have the following rights:

	If there are more than 20 redundancies in a 90-day period, specific rights as to consultation and notice of impending redundancies;
	In all cases where the employee has more than one year of continuous service, a right not be unfairly selected; and
	If the employee has been employed for more than two years, he or she may have a right to a redundancy payment.

If an employee is unfairly selected due to any reason connected with sex, race, disability, religion, sexual orientation etc, he or she may have a discrimination claim.

Unfair selection for redundancy may mean that an employee may be able to claim unfair dismissal in an Employment Tribunal, where there is an index linked limit for compensation which exceeds £60,000. Discrimination claims, however, have no limit to compensation.

What is a Fair Redundancy?

The employer usually has to overcome two hurdles in order to safeguard against an unfair redundancy dismissal. Firstly, the employer must show that there is a true redundancy situation and that the reason for dismissing the employee is as a result of that situation. Where there is (or there is anticipated) a sustained downturn in turnover, it is usually easy to prove that there is a true redundancy situation.

Secondly, the selection of the actual employee must also be fair. This requires the employer to implement consultation and assessment procedures, and to judge all employees at risk of redundancy on objective grounds. Most employers who are successfully sued by dismissed employees fail at this second hurdle.

It is essential that the employer follows the correct procedure; even more so since Statutory Dismissal procedures came into force on 1st October 2004.

Employers must remember that it is the job, not the employee, that is redundant.

Steps to Ensure a Fair Selection

No two companies are the same, so it is difficult to provide a generic checklist as to what an employer must do. However, for guidance purposes, the employer should bear the following in mind:

	Has the employer considered alternatives to making redundancies to reach the desired objectives?
	Has the employer created an appropriate "pool" of employees for selection of those at risk?
	Have the employees within the "pool" been adequately consulted?
	Has there been a fair and objective assessment of those within the "pool"?
	If there are 20 or more redundancies within a 90-day period, has the employer complied with its specific duties of consultation, and notification to the DTI?
	Are there any employees whose selection may amount to an automatic unfair dismissal?

Automatic Unfair Dismissal

When selecting individuals for redundancy, employers must be careful not to select them for a reason connected with a prescribed list of reasons, which makes the dismissal automatically unfair. Examples of reasons which are automatically unfair are if the employee is selected for being on maternity leave, or it is union related, or health and safety related.

Payments made to Redundant Employees

All employees are entitled to at least one week's statutory notice after a month of continuous notice, which increases in line with their period of service. Alternatively, the contract of employment may provide for a longer period of notice. In either case, the employee is entitled to receive such notice, or payment in lieu of notice if made redundant without notice.

Furthermore, employees with more than two years' service are entitled to statutory redundancy pay, which is calculated by multiplying a maximum amount of statutory gross pay per week by a figure established through assessing the length of service and age at the date of the dismissal. There are some exceptions to the rule. If you are unsure about your rights you should seek specific advice.

Ex gratia Payments and Compromise Agreements

Many employers pay ex gratia sums over and above the statutory minimum to employees who have been made redundant, or have a contractual redundancy scheme that applies. Special rules on tax apply to such payments, and it is possible to have them paid tax-free. From the employee's perspective, it provides much needed security at a time when he or she is looking for an alternative job.

Employers may use these payments to reward good service, or just to ensure good employee relations. However, ex gratia payments, without the force of a compromise agreement, do not protect employers from a claim in the Employment Tribunal. Ironically, the payment may end up being the "fighting fund" allowing the employee to fund legal costs in bringing a claim.

The only way to ensure that this does not happen is to enter into a valid "compromise agreement" with the employee. This must be in writing and needs to satisfy special conditions (e.g. the employee must receive independent legal advice before signing). However the benefits of a compromise agreement far outweigh the formalities of the way it must be entered into. With a compromise agreement, the employer and employee can agree that, upon the payment of the ex gratia amount, the employee agrees not to bring proceedings in the Employment Tribunal for a list of claims such as unfair dismissal and discrimination.

Conclusions

Redundancy situations always give rise to a period of uncertainty and stress for both the employer and the workforce, even to those that survive the exercise. For the employee, mishandling by the employer may give rise to claims in the Employment Tribunal for unfair dismissal and/or discrimination. For the employer, mishandling may mean not only having to defend a claim, but also upsetting employer-employee relations with staff that remain. As a result, it is in both sides' interests that it is handled thoughtfully, cautiously, and with proper consideration of the rights of employees concerned.

If you need further advice, whether you are an employee who has been dismissed, or an employer embarking on a redundancy exercise, please feel free to contact our employment law specialist Nigel Emery.

Article first published June 2003
Last Reviewed April 2007