Redundancies have become a common occurrence in recent times. During an economic downturn, employers need to reduce their overheads as much as possible, and as most business owners will tell you the highest cost to a business (after rent) is usually their employees. Salaries, bonuses, commission, tax and National Insurance Contributions all add up, so it makes sense to try to cover the needs of the business with as few staff as reasonably possible.
However, reducing headcount is not a straightforward process, and many employers have faced (and, in numerous cases, ultimately lost) employment tribunal claims for getting it wrong. Here we consider the most common misconceptions in respect of the redundancy consultation process and employees’ rights with regard to redundancy.
1. "I can make an employee redundant because of poor performance"
No, redundancy is not an alternative option to dismiss someone if the true reason is performance. “Redundancy” is a statutory term and is defined by law. Redundancy situations therefore only arise in specific circumstances, and there have been numerous cases regarding whether a genuine redundancy situation exists. Poor performance may be a criterion used in determining who may be selected for redundancy, but a dismissal on grounds of poor performance should follow a fair disciplinary procedure. A simple way to consider whether redundancy may be appropriate is to consider whether it is the role that needs to disappear, rather than the person. If not, this will generally not be a redundancy.
2. “Last in, first out”
This is sometimes the case, but not always. Indeed, having length of service as the only criterion would generally be deemed unfair, and a wider range of criteria should be considered. Length of service is one factor that employees can (and often do) take into account when deciding who to select for redundancy, but there is no obligation to always bear it in mind. A fair selection should be based on a number of different criteria. Employers have a fair amount of discretion in determining their selection criteria, as long as the criteria are reasonable and objective, and preferably measurable.
3. “I am entitled to statutory redundancy payment”
Not necessarily. Employees are only entitled to a statutory redundancy payment if they have been working for their employer for at least two full years. Contractual redundancy schemes may choose not to apply the two year qualifying rule, in which case there would be a contractual rather than statutory right to redundancy pay.
Eligible employees will receive:
- half a week’s pay for each full year the employee was under 22 years old;
- 1 week’s pay for each full year they were 22 or older, but under 41;
- 1 and half week’s pay for each full year they were 41 or older.
A week’s pay for this purpose is subject to a cap, currently set at £450.
4. “My redundancy pay can be paid free from tax”
Statutory redundancy pay can be paid free from tax, but the balance over £30,000 on enhanced payments (inclusive of the statutory redundancy pay element) will be subject to tax.
Employees should bear in mind that what may be termed “redundancy pay” or “severance” may include a payment in lieu of notice, which is paid when an employee is not required to work their notice period. If there is a provision within the employee’s contract of employment entitling their employer to make a payment in lieu of notice, this element of the termination payment will usually be taxable, even if it is below £30,000.
5. “I cannot dismiss a pregnant employee or someone on maternity leave due to redundancy”
Pregnant employees and those on maternity can be made redundant, but this can only apply where there is a genuine redundancy situation. Selecting an employee for redundancy purely on the grounds of pregnancy or maternity leave is unlawful and could give rise to a discrimination claim. When consulting with staff regarding redundancy, employers will still need to include those on maternity leave as part of the process even if they are not physically at work.
Although they are not afforded protection from dismissal on grounds of redundancy, employees on maternity leave are entitled to be offered a suitable alternative vacancy (where one is available) ahead of others also at risk of redundancy. This gives women on maternity leave first refusal on any vacant roles that may be suitable.
This article was first published as part of our Employment Law Update - September 2013. You can subscribe to receive these monthly updates by email. To join our mailing list, please email email@example.com.