January 28, 2009
As a result of the current market conditions companies of all sizes and in all sectors are looking at ways of controlling costs. Cost cutting plans will inevitably include ways of reducing employee costs and headcount. In our first Quarterly Executive Summary of 2009, we focus on the challenges faced by employers when implementing a Reduction in Force in the UK.
Handled correctly, the costs associated with a Reduction in Force are manageable – Employees will receive a statutory redundancy payment of up to £10,500 (calculated by reference to age, a capped final salary and length of service) together with contractual severance (although contractual severance may be avoided if the employee works through their notice). However, handled incorrectly, a Reduction in Force may result in claims for unfair dismissal (an unfairly dismissed employee may recover up to £66,200), for failure to engage in collective consultation (each employee made redundant may receive an award of 90 days’ pay) and even unlawful discrimination (to the extent that the redundancy process is tainted with discrimination).
We set out below 10 "Golden Rules" for employers contemplating redundancies or reductions in force in the UK. Different rules may apply in other jurisdictions.
10 Golden Rules for Making Reductions in Force in the UK:
1. Consider alternatives
In the current climate, many employees are willing to agree to reduce their pay, benefits or working hours. Employees may also agree to take their holiday early or to a temporary lay-off or unpaid sabbatical. If redundancies are nevertheless necessary, volunteers should usually be sought before compulsory redundancies are made.
2. Ensure that any compulsory government notifications are made
Where a Reduction in Force is likely to result in 20 or more redundancies over a 90 days period, an employer will usually be required to notify the UK Department of Business, Enterprise and Regulatory Reform (BERR) on form HR1 at least 30 days before the first dismissal takes effect (90 days prior notification is required where 100 or more employees face redundancy).
3. Formulate a timetable as early as possible in the process
Under UK law, an employer may be required to engage in both collective and individual consultation (of which more below) before making redundancies. Collective consultation must commence at least 30 days before the first redundancy is made or 90 days where 100 or more redundancies are proposed. Where collective consultation is required, an employer should allow time for (i) the election of employee representatives (unless appropriate representatives are already in place – e.g. Trade Union representatives); and (ii) a minimum of two consultation meetings with employee representatives concerning its redundancy proposal.
Under UK law, a Reduction in Force may require prior consultation on two levels. An employer who proposes to make 20 or more redundancies over a period of less than 90 days will usually be required to engage in consultation with a recognised trade union or, where no union is recognised in the business, with duly elected employee representatives. Consultation must encompass the reasons behind the proposed redundancies, ways of avoiding dismissals and the financial implications for employees. An employer who fails to engage in required collective consultation may be ordered to pay a protective award (up to 90 days’ pay) to every redundant employee who should have been consulted.
In addition, an employer who fails to engage in appropriate prior individual consultation with employees facing redundancy is likely to face claims of unfair dismissal from those employees who are subsequently made redundant. Individual consultation should touch upon the reasons why redundancies are necessary, the timing of and process for selecting redundant employees and the redundancy packages on offer to those who are made redundant. Unfair dismissal awards are generally capped at £66,200 (as at February 1st 2009).
5. Ensure that you pool employees correctly
In the UK, no matter how strong the business rationale for a reduction in force, an employer may be exposed to unfair dismissal claims if employees who are made redundant are not selected fairly. Establishing the pool of employees facing redundancy is the foundation of a fair selection process. In many cases it will be easy to establish the correct redundancy pool. For example, where an employer seeks to close down its UK operation, its UK based employees will form the pool of employees facing redundancy. However, establishing the correct redundancy pool can prove more difficult where reducing headcount, particularly, where employees in the business have interchangeable skills and/or roles. Whilst employees who are on leave of absence (including maternity/paternity leave or long-term ill-health absence) can, and often should, be included in the redundancy pool, care must be taken to ensure that such employees do not suffer unlawful discrimination in the selection process (see below). When establishing the pool of employees facing redundancy, an employer will need to demonstrate a clear logical rationale for its decision.
6. Establish fair and appropriate selection criteria and apply them fairly
Under UK law, in cases where some, but not all, of the pool of employees facing redundancy are to be made redundant, it will be necessary to establish fair and appropriate selection criteria for determining which employees will be selected for redundancy. Such criteria should, wherever possible, be fair and objective (e.g. past performance appraisals, disciplinary record, attendance record) and should exclude criteria which are discriminatory (for example, employees on long-term sick leave should not be penalised in terms of non-attendance caused by their long-term illness). Selection criteria should be notified to and, if possible, agreed in advance with employees in the pool and should then be applied fairly and objectively. Management should be prepared to justify its decision making process if subsequently challenged.
7. Offer alternative roles wherever possible
An otherwise fair redundancy can become an unfair dismissal if an employer does not offer a potentially suitable vacancy to an employee facing redundancy. When considering whether a vacancy is "suitable", an employer should err on the side of caution, offering the redundant employee any vacancy which he or she would be able to perform even if that vacancy is less senior, less well paid, is with a different group company and/or would require the employee to relocate.
Occasionally, an employer may be required to consider dismissing an employee whose role would otherwise be safe (usually a short serving member of staff without unfair dismissal protection) in order to accommodate a member of staff who would otherwise face redundancy. This practice is known as "bumping".
8. Understand the financial implications of a reduction in force
While the long-term savings associated with a reduction in force may be considerable and compelling, it is important to understand the short-term costs associated with redundancies. Once a redundancy process has been completed, it will be necessary to serve contractual notice on those employees selected for redundancy. Contractual notice periods commonly range between one week and 12 months and are subject always to statutory minimum notice periods (broadly speaking, an employee is entitled to receive at least one week’s notice for each year’s service subject to a maximum of 12 weeks’ notice). Many employers elect to pay severance in lieu of notice to redundant employees. Before doing so, an employer should check whether it is permitted, under the contract of employment, to pay severance in lieu of notice. If not, the employer may inadvertently release the redundant employee from any non-compete and other post-employment obligations.
Redundant employees with two or more years’ service will be entitled to a statutory redundancy payment calculated by reference to age, length of service and a week’s pay (subject to a statutory cap). Under current limits (as at 1st February 2009), the maximum statutory redundancy payment is £10,500.
Occasionally, redundant employees may be entitled to enhanced contractual severance on redundancy, whether as a result of their contract of employment, a contractual redundancy policy or a trade union collective agreement. Rarely, such entitlements may arise through course of past conduct. Enhanced redundancy entitlements which vary with age or length of service are capable of breaching the UK Age Discrimination laws and care should therefore be taken when formulating or applying such severance plans.
9. Allow redundant employees time off to look for alternative employment
Under UK law, a redundant employee who is required to work out their notice period should be permitted reasonable time off to search for new employment. In large scale reductions in force, it is not uncommon for employers to provide on-site careers counselling.
10. Finally, obtain a waiver and release from redundant employees who receive an enhanced redundancy package
Employers who decide to offer enhanced terms to redundant employees should consider obtaining a waiver and release from employees. In the UK, a waiver and release cannot extend to cover statutory employment claims (such as unfair dismissal or unlawful discrimination) unless the employee signs a form of agreement known as a compromise agreement and receives independent legal advice on its terms.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details concerning cases and developments discussed in this Quarterly Executive Summary or for assistance on any UK Employment or Labour law matter, please contact the Gibson Dunn attorney with whom you work, James A. Cox (+44 (0)207 071 4250, firstname.lastname@example.org), Daniel E. Pollard (+44 (0)207 071 4257, email@example.com) or Steven F.C. Cochrane (+44 (0)207 071 4275, firstname.lastname@example.org) in the firm’s London office, or any member of Gibson Dunn’s Labor and Employment Practice Group.
© 2009 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.