Redundancies—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 one 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 staffed in the right areas, or whether their workforce needs to be trimmed.

In this Advisory we will first look at some of the steps employers can take to reduce overheads without cutting jobs. If those steps do not provide the solution and redundancies are still needed, we will then consider some of the key issues employers need to bear in mind when running a redundancy program. Getting the process wrong can land employers 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; enforcing vacations at times when the UK business is traditionally quiet; reducing working hours; closing 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 (at least in the case of employees with two years’ service) 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 able 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. A side letter setting out the agreed changes to the employees’ terms and conditions of employment will suffice and the employees should be asked to countersign. 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. As part of that process, employers may wish to consider if there are any incentives they can offer the employees to sign up to the changes.

What About Outsourcing?

It may also be possible to avoid redundancies by outsourcing certain functions within your business. If you go down this route, you are likely to trigger TUPE (The Transfer of Undertakings (Protection of Employment) Regulations 2006). Whilst a detailed analysis of TUPE falls outside the scope of this Advisory, bear in mind that 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 supplier will transfer automatically to the supplier on their current terms of employment. That may be fine if the supplier is short-staffed or needs the special skills those employees can offer. If the supplier does not need so many employees, however, it is usually simpler for the supplier to carry out the required redundancies after the staff transfer, agreeing with you, as the former employer, how the severance costs should be split between the parties in those circumstances. An alternative approach, which is becoming ever more popular, is for the outgoing employer to incentivize its employees to object to transferring to the supplier. The employment of the unwanted employees would then terminate at the moment that the supplier takes over the services and the employees enter into a tri-partite Settlement Agreement to which both the outgoing employer and the supplier are parties. Again, the old employer and the supplier would negotiate how the severance payable should be apportioned between them.

The supplier 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 supplier located outside the UK.

The TUPE Regulations will also require you to inform and, in many cases, to consult with the transferring 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

If alternatives to redundancy have not worked or are simply insufficient to address the economic situation, employers will generally consider conducting redundancies.

As consultation is absolutely critical to the UK process, employers with overseas parent companies that may also be cutting jobs need to be involved in the messaging to those non-UK employees who are likewise impacted. Whilst the overseas employer may have no legal requirement to consult its employees about any planned job cuts, if it makes statements suggesting that all key decisions regarding 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 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 in unique roles 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. There is no requirement to allow employees at risk of redundancy to be accompanied by colleagues at redundancy consultation meetings, but some employers offer this nonetheless.

Settlements

In all the scenarios discussed in this Advisory, 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.

It is a key condition of any UK Settlement Agreement 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 redundancy programs. The ACAS route has the advantage that the employee is not required to obtain independent legal advice and ACAS officers tend not to push for improved offers from the employer if the employee is broadly happy with the financial proposal put to them).

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 doing similar types of work 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 measurable. An employer proposing redundancies may have several 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, downgrading a female employee for their alleged poor attendance, if their absences are due to taking maternity leave. You may also need to modify the criteria or scoring system as part of offering reasonable adjustments to disabled employees.

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

The UK consultation process may appear something of a charade to many companies, 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 midway 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 several key consequences:

• You will be required to provide mandatory information to, and 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 that sets 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 redundancy process may appear overly convoluted, 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 settlements can often be secured to cut short the process and remove the risk of litigation. The companies that end up in litigation tend to be those that try and achieve a quick fix, disregarding these processes. Our employment team, based in our London office, has extensive experience helping both UK and overseas companies navigate the processes required 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.