Guide to Redundancy

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What is redundancy? A redundancy arises when an employer has to reduce her/his workforce.

The situations in which redundancies are most likely to arise are: an organisation closes down; part of an organisation closes down; the requirement for particular work reduces or disappears.

What is voluntary redundancy?

This occurs where an employer informs its employees that redundancies need to be made and invites them to volunteer to be considered for redundancy. The employer then selects from those who have volunteered, based on the need for particular skills or expertise.

Fair and unfair dismissals (compulsory redundancy)

The Employment Rights Act 1996 lists potentially fair reasons for dismissing an employee; redundancy is one of those reasons. Redundancy dismissals can be found to be unfair if:

  • proper consultation and selection procedures are not followed;
  • inadequate warning of redundancy is given;
  • if the employer fails to consider alternative employment for the employee.

Fair selection

In order to fairly select employees for redundancy, the employer must use clear, objective selection criteria. Once the criteria have been adopted they must be consistently applied. The employer must be able to show that an employee was fairly selected and that when selecting a particular employee they used the agreed selection criteria, and where a number of employees are possibly affected by the redundancy, they have all been compared in relation to the criteria.

Any redundancy selection criteria that discriminate, either directly on grounds of sex (including pregnancy), race, sexual orientation, religion or belief, disability, fixed-term or part-time status, or which indirectly have that effect, will generally result in a finding of unfairness (in addition to a finding of unlawful discrimination). Selection on the basis of age alone will be unlawful discrimination and it is unlikely that it would be possible to objectively justify selection on that basis.

fair selection
consultation

Consultation

Employers have a statutory duty to consult ‘in good time’ where more than 20 employees are to be made redundant. If the redundancies are to be made within a period of 90 days, consultation by law must begin at least 30 days before the first dismissal takes effect. If 100 or more employees are affected than consultation must begin at least 45 days before the first of the dismissals takes effect.

Employers who recognise independent trade unions must consult with representatives of that union, even if the affected employees are not members of the union. Where there is no recognised union, the employer must consult with employee representatives. A failure to consult can lead to an Employment Tribunal awarding compensation called a “protective award”.

If 20 or more employees are to be made redundant, the employer must also give the Insolvency Service Redundancy Payments Service (RPS) written notification of the redundancies at least 30 days before the first dismissal takes place and give copies of the notice to the representatives. Failure to notify is a criminal offence.

Individual consultation

In addition to collective redundancy consultation, employees have a right to be consulted individually. Even if an organisation only has one employee, they are under a legal obligation to consult with the individual. Employment tribunals have stated that 2 meetings with an individual with at least a 2-week gap between them provide a fair individual consultation process.

individual consultation
alternative employment

Alternative employment

As part of the consultation process, employers should consider whether employees likely to be affected by redundancy can be offered suitable alternative work. It is the employer’s responsibility to show that an offer of alternative employment has been made and therefore any offer should be put in writing. The offer should show how the new employment terms differ from the old terms. By law, it must also be made before the termination of the job from which the employee is being made redundant. The new contract must take effect within 4 weeks from the old contract ending.

It is up to the employee to decide whether the alternative work is suitable. Decisions should be influenced by a number of factors involving pay, status, location, working environment and hours of work. Employees who unreasonably refuse an offer of suitable alternative employment may lose any entitlement to redundancy pay. Unreasonable refusal may arise where the differences between the new and old jobs are negligible.

There is also a statutory trial period of 4 weeks for the employee to “test” the new employment. If the job proves unsatisfactory for the employee he or she can leave and does not lose the right to a redundancy payment provided, of course, that the job was not, in fact, suitable for him or her and provided that his or her action in refusing the job was not unreasonable.

Redundancy payments

Employers are required to make a minimum lump sum compensation payment to an employee who has been dismissed because of redundancy and who has been continuously employed by them for at least two years. Statutory redundancy pay is not subject to tax or national insurance.

Statutory redundancy payments are based on:

  • The employee’s age;
  • The employee’s period of continuous service up to a maximum of 20 years;
  • The employee’s weekly pay. However, the maximum amount of a week’s pay that may be taken into account is currently capped at £450.

Employers may have more generous contractual or discretionary redundancy schemes in place. Ex‑gratia payments are payments that employers are under no obligation to make and employees do not expect to receive. If the contract of employment does not allow for redundancy payments over and above the statutory minimum, employers can still give ex‑gratia redundancy payments to staff.

fixed term contracts

Fixed Term Contracts

If employees on fixed-term contracts have been continuously employed for two years, they will be entitled to statutory redundancy payments. Furthermore, if their contract is not renewed or extended, then this is considered to be a dismissal and the employer must show that the dismissal was for a fair reason – such as redundancy – and that the process of dismissal was fair.

Related Pages

employment law
Employment Law

> READ MORE
guide to unfair dismissals
Guide to unfair dismissals

> READ MORE
settlement agreements
Settlement Agreements

> READ MORE

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