Job Cuts in the UK—Avoiding the Pitfalls

The UK furlough scheme, which at its height helped pay the wages of 11.6 million employees, ended on 30 September. Approximately 1 million employees were registered on the scheme at that date. Employers will now be looking carefully at their businesses to see if they can absorb those previously furloughed employees, or whether job cuts are needed. Other employers, who may not have used the furlough scheme at all, may also seize the opportunity to see whether they are properly manned in the right areas, or whether their workforce needs to be trimmed.

In this Advisory we will examine the steps employers need to take when embarking on a program of job eliminations, known in the US as a “reduction in force” and in the UK as “redundancies.” This Advisory is written from the perspective of a US company making redundancies in the UK and looks at ways of carrying out those job cuts in a way that is considered fair and reduces the risk of litigation. However, the principles apply equally to any employer. Remember that there is no employment at will in the UK, and that reductions in force operate according to very different rules from those that apply in the US. Getting the process wrong, can land US companies with very expensive claims.

Are There Alternatives to Redundancy?

Most companies will consider at an early stage whether there are alternatives to eliminating jobs. These might include cutting, or at least freezing salaries, or employer pension contributions; enforced vacations at times when the UK business is traditionally quiet; reducing working hours; closing down the UK office and having UK staff work from home— something many employees are now used to in the midst of the COVID pandemic; or allowing staff to take unpaid sabbaticals.

Unless the company has appropriate flexibility clauses built into its employment contracts, in most of these situations, the employer will need to secure employee consent to the variations. Simply announcing changes, such as pay cuts, without further ado, would allow employees to resign and treat themselves as having been constructively dismissed. That in turn would expose the company to claims for notice pay and unfair dismissal compensation. To add insult to injury, as the employer would have violated their employment contracts in a very serious way, those employees would, by law, also be in a position to walk free from any non-competes or non-solicitation clauses to which they were previously subject. Alternatively, disgruntled employees could adopt the tactic of staying in post and reclaiming any pay cuts as unlawful deductions from pay.

In these situations, the UK approach is to consult first. This means presenting the cost-cutting measures as “proposals” about which the employer wishes to obtain the employees’ feedback. If agreement can be obtained, it should be properly documented. If a minority of staff refuse to go along with the proposed changes, it may be necessary for the employer to threaten to terminate their employment and to offer to re-engage them on the changed terms. However this is a strategy of last resort and any termination should only be carried out after going through a fair dismissal process.

What About Outsourcing?

It may also be possible to avoid redundancies by outsourcing certain functions within your UK business. If you go down this route, you are likely to trigger local regulations designed to give effect to the EU Acquired Rights Directive. The relevant legislation in the UK, The Transfer of Undertakings (Protection of Employment) Regulations 2006, known as “TUPE,” is designed to protect jobs. Whilst a detailed analysis of TUPE falls outside the scope of this advisory, bear in mind that adopting the US approach of simply terminating unwanted employees, is probably the most dangerous and potentially costly step you can take!

In most cases, your employees who are assigned to the services being taken over by the external vendor, will transfer automatically to the vendor on their current terms of employment. If the vendor does not need so many employees, it is usually simpler for the vendor to carry out the required reduction in force, agreeing with you how the severance costs should be split between you in those circumstances. An alternative approach is to incentivize your employees to object to transferring to the vendor and then entering into Settlement Agreements with them, whereby their employment ends at the point the vendor takes over the services. Ideally, the vendor would be a party to any such Settlement Agreement.

The vendor will need certain information from you about the employees whom it is inheriting under TUPE. Here you need to be mindful of UK data protection rules, particularly if you are transferring employee data to a vendor located outside the UK.

The TUPE Regulations will also require you to inform and, in many cases, to consult with the employees, (or if there are more than nine of them, with their elected representatives), about the planned outsourcing and its consequences for the employees involved. This requirement applies even if you do not recognise a union in the UK. Heavy penalties can be imposed for a failure to comply.

Redundancies—the Communication Strategy

Assuming that alternatives to redundancy have not worked, or are simply insufficient to address the economic situation, employers will generally consider conducting a reduction in force.

As consultation is absolutely critical to the UK process, you need to be very careful about what you say to your US employees if they are likewise impacted. Whilst you may have no legal requirement to consult in the US, if you make statements that suggest that all key decisions as regards UK employees have already been taken, this could rebound badly. UK employees could seize on those statements to demonstrate that any UK consultations are a “sham” and that the resulting dismissals are unfair. Therefore it pays off to finesse the wording of any US, or company-wide announcement, with your UK legal team.

Unique Roles

If your proposals involve the termination of individuals in unique roles, for example, the one UK based VP of Marketing, then the UK termination process is pretty straightforward. Indeed, if the employee has been employed by you for less than one year and 51 weeks by the time he or she leaves, no particular procedure is normally required at all.

The basic termination process for longer serving staff involves writing to the employee to advise them that you are contemplating eliminating their role, setting out the reasons behind the proposal and inviting them to a consultation meeting to discuss the position. The employee should be given a reasonable opportunity to prepare their case in advance of the meeting. No time frame is mandated for these consultations, although in practice, a couple of meetings stretching over around two weeks, is usually sufficient.

If you proceed to terminate, very recent case law has confirmed that it is good practice, though not mandatory, to allow the employee a chance to appeal your decision. Few employees usually take up this opportunity.

Releases/Settlements

In all the scenarios discussed in this overview, it is possible to negotiate settlement agreements with employees to avoid having to go through due process. However great care must be exercised in how the option of an amicable separation is communicated to the employees concerned: if you present dismissal as the only realistic path, but you are unable to reach mutually agreed departure terms, it may be very difficult to resurrect the consultation process and to terminate fairly. The employee will argue that you have shown your hand, that you are not interested in genuine consultation and that any dismissal is therefore unfair.

US release documentation will not provide a binding settlement in the UK. Instead you need to use a UK Settlement Agreement. It is a key condition of such agreements that the employee has actually received independent legal advice before they sign the agreement and it would be expected that the employer makes a modest contribution to the employee’s legal costs. (It is also possible to reach binding settlements by making use of the statutory conciliation service, known as “ACAS”—although that route is less common in larger reductions in force).

Selection Pools

Where you are wanting to reduce the number of employees who do broadly the same sort of work, you cannot simply approach those you perceive to be the poorest performers and terminate them. That would give rise to unfair dismissal claims. Instead you would be expected to place all of them in a so-called selection pool and to develop objective selection criteria to help you make a fair assessment of which of them should be dismissed. Those criteria may have regard to factors such as the employees’ scores in annual appraisals, their skills and experience, their disciplinary or attendance records, their qualifications, their sales performance etc. Ideally the criteria should be easily measured. An employer proposing redundancies may have a number of such pools for employees doing different jobs and there is no requirement to use the same selection criteria for each pool.

You would write to the employees, setting out your job elimination proposals and the reasons supporting them. You would describe the selection criteria and scoring system you are thinking of using and you would then consult the employees in each selection pool about all the elements of your proposal.

Having considered the employees’ feedback and possibly having amended your criteria and/or scoring system in response, the manager(s) responsible for each pool, would score all the employees in the pool. Care must be taken to avoid inadvertent discrimination, for example, down-grading a female employee for their alleged poor attendance, if the absence was due to taking maternity leave.

Once you have scored all the employees in the relevant pool, the lowest scorers, (corresponding to the number of employees the company wishes to make redundant), would be invited back for individual consultation, before a final decision is taken as to whether to terminate their employment.

Getting the Documentation Right

To many US companies the UK consultation process appears to be a charade, but it is important to “play the game” if you wish to successfully defend unfair dismissal claims. This includes ensuring that your documentation of the process refers to “redundancy proposals” rather than using language which indicates all key decisions have already been taken. Similarly, you should not draw up organisational charts mid-way through the process, that reveal the “final” structure of the organization. Any such charts should be headed “proposed organizational chart - subject to the outcome of consultations.” Bear in mind that these documents are likely to be disclosable in any future litigation in the UK.

The Numbers Game

If you are proposing to terminate 20 or more employees, at one establishment, within a 90 day time frame, you will trigger UK rules on collective redundancy. This has a number of key consequences:

• You will be required to consult with the representatives of the employees who are potentially impacted by your redundancy proposals. If your company does not recognise a union in the UK, employees will need to be given the opportunity to elect representatives. (In rare circumstances it may be appropriate to consult an existing body of employees, such as a staff council, elected for similar purposes).
• Employers must hold off making redundancies for a mandatory period of 30 days if between 20-99 employees are facing redundancy and 45 days if you are proposing to dismiss 100 or more employees. The idea here is to create sufficient time for meaningful consultation before employees are dismissed.
• The fact that you have consulted with the employees’ elected representatives does not eliminate the need to consult on an individual basis with any employees you wish to terminate. Such individual consultations usually occur once the collective consultation process with the elected representatives is over.
• You will be required to lodge a notification, known as an “HR1” with the government Redundancy Payments Service, setting out details of your proposals and to provide a copy of the notification to the employees’ elected representatives. It is a criminal offence to fail to lodge the notice.

Conclusion—All is Not Lost!

Although at first blush the UK system may appear overly convoluted compared with the US approach to reductions in force, in fact with a small amount of advance planning, most problems can be avoided. There are ways to move swiftly through some of the technical steps and releases can be secured to avoid a convoluted process. The US companies that end up in litigation, tend to be those that try and manage their UK reduction in force, or alternatives to redundancy, as if the law mirrored the US. Our Labor & Employment team, based in our London office, has extensive experience of helping US companies navigate the processes in both the UK and wider afield in Europe.

If we can assist you, please do not hesitate to contact the author.

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.