Since the downturn in the market in 2022, many companies, both early-stage and established businesses, are looking at their options to raise more finance, cut their costs, or both.

Finding investment has become harder. The volume and size of investments have decreased significantly since the highs of 2021. Also, the terms on which equity or debt funding is available are often less advantageous and many companies have seen their valuations cut during down rounds. This has led to companies looking at cost-saving measures to extend their runway or preserve capital for future growth.

One of the most common cost-cutting measures is reducing employee headcount by making redundancies. While this can be very effective in reducing overhead, there are legal risks involved.

In this insight briefing, we highlight the key issues companies should consider when navigating the legally complex and emotionally charged topic of redundancy.

1.The importance of planning

Going through a redundancy process can be daunting for an employer and emotionally fraught for both the employees affected and those who remain with the business. As an employer, you want to minimise disruption to the business and try to preserve employee morale as much as possible.

Employees in the UK have rights when it comes to redundancy, and there can be serious consequences if you get the process wrong. So, it is critically important to have a proper plan in place.

Your redundancy plan will document your decision-making and provide evidence that you have followed the correct steps. Your plan will include details such as:

• why this is a redundancy situation and the options you have considered before deciding on redundancies (as you are legally obliged to actively look at ways to avoid redundancies);
• the number of redundancies you are considering (as there are stricter rules if you are making more than 20 people redundant);
• how you intend to keep staff informed about the possible redundancy situation (there are mandatory requirements and best practices for the consultation process that you should follow);
• whether you will ask for volunteers for redundancy;
• the proposed redundancy package for affected employees; and
• how you will handle communicating news of the redundancies to the public and other stakeholders (such as investors and customers) so that it does not negatively impact the business.

As you can see, redundancies are not a quick fix and need to be carefully managed. Both to protect the company against unfair dismissal or discrimination claims from employees and so that you can keep the business operating well throughout the process.

2.Is it a genuine redundancy?

Companies sometimes try to use redundancy as a means of terminating employees for reasons that are not genuine redundancy reasons (such as poor performance). This puts the company at risk of potential unfair dismissal claims.

If you are considering making redundancies, then the first thing you must do is establish why this is a genuine redundancy situation. Employment tribunals take a dim view of what they see as ‘sham’ redundancies. So you must articulate the rationale for the redundancies and support this with evidence or information.

For a redundancy to be genuine, you must demonstrate that the employee’s job will no longer exist. Some examples:

• your entire organisation or part of the organisation is closing (for example, a particular division of the company is being shut down).
• new systems make the job unnecessary (for example, if you are replacing some workers’ jobs with technology).
• you are changing the types or number of roles needed to do certain work (for example, you have decided that you will no longer sell your products in the UK, so you do not need a UK sales team).

If you are not sure whether what you are proposing is a genuine redundancy situation, you should get legal advice as soon as possible.

3.Is the redundancy fair?

It is not enough to show that there is a genuine redundancy situation. You also have to make sure that the redundancy selection process is fair. This can be tricky to do when you only make some roles redundant or reduce headcount within teams while keeping some employees.

We often see companies make costly mistakes in this part of the process. Perhaps they target individual employees for redundancy (instead of identifying roles which will be redundant). Or they leave themselves open to discrimination claims by selecting senior roles (which are often held by older employees) or junior roles (held by younger employees) – both potential age discrimination grounds – or by failing to properly consult with employees on parental leave.

4.Which roles are at risk of redundancy?

One of the hardest parts of the redundancy process is working out which roles within the company are at risk of redundancy and, therefore, which employees are ‘at risk.’ You will need to go through a careful evaluation and selection process:

• Establishing selection pools: assuming you are not closing an entire site, you (with consultation with at-risk employees) will need to decide the group or ‘pool’ of employees from which the redundancies will be made.
• Who is in the pool?: working out which employees fall into the selection pools can be tricky. You must consider what kind of work is being stopped, which employees perform that kind of work, and whether there are other roles that involve skills that might be interchangeable with those that have been identified. Employees who meet these criteria should be included in the pool. Pools can comprise just one employee, or it may be that the pool is the same size as the number of roles being removed from the organisation.
• Don’t forget absent employees: staff who are away from work (whether due to sick leave, maternity/paternity/family leave, secondment, etc.) must also be considered for inclusion in the pool.
• How do you select which employees in the pool will be made redundant? Once you have your pool, you then need an objective set of criteria for selecting which employees within the pool will be made redundant. Typically, we work with clients to create a scorecard matrix with the relevant criteria (which can include things like skills, standard of work, attendance, and disciplinary record).

5.Follow the correct legal process to the letter

If you are making more than 20 people redundant within a 90-day period, then there is a strict process you must follow with a specific timetable and multiple consultation stages, including notifying the Secretary of State. There are implications in terms of the length of time before any redundancy can be confirmed and an Employment Tribunal can make a protective award of up to 90 days of gross pay per employee when there is a failure to collectively consult.

However, even if you are just making a single role redundant, there are best practices to follow so that your process is defensible and fair. Your process should include:

• An all-hands briefing to explain the proposed redundancies and process to all employees.
• A specific series of consultation meetings with employees.
• A specific series of letters are sent to employees at each step of the process, explaining the redundancy process and how it affects them.
• Holding a final meeting with those who remain selected to review and confirm the redundancy decision.

Consultations with at-risk employees should allow those employees to comment on the selection pool and criteria, challenge their selection, put forward suggestions to avoid their redundancy, consider alternative employment arrangements, as well as to provide a forum for any other matters or concerns they wish to raise. The principle is that the at-risk employee should be able to influence the decision as a result of the consultation process, and although employers are not required to agree with the points put forward by at-risk employees, they should be able to demonstrate that they genuinely considered them.

It is important to follow the correct process step by step, as employee claims for unfair dismissal often arise because a step has been skipped or because the employer has not taken the time or care to follow the process properly.

6.Getting communication right

Consistent and regular communication is key to preserving employer/employee relations with all staff, whether continuing or departing.

We recommend that companies create all of their communication templates with legal advice.

To make sure that all the necessary elements are included in the right order. The consultation process requires you to be very clear at each step, so having template letters for employees, template meeting scripts for managers, and Q&A documents are helpful to ensure consistency of messaging.

7.Where companies get it wrong

It is helpful to highlight some of the most common pitfalls that we see. Often, companies can have the best of intentions but still get it wrong. Some examples of things that can trip you up are:

Presenting redundancy as a done deal: The redundancy process is supposed to be consultative with at-risk employees. Companies often slip up by deciding which employees will be made redundant without going through the consultation process. So, they present it to employees as a ‘done deal’, without the employee having any opportunity to challenge the decision. It is very important that the early consultation letters refer to employees being ‘at-risk’ and ‘provisionally selected’ for redundancy, rather than any suggestion that the final decision has already been made.

Maternity Leave: In most cases, employees on maternity leave should be treated in the same way as other at-risk employees, including providing them with the same information and consultation as if they were at work. Pregnant staff or those on maternity leave may only be treated more favourably if this is reasonably necessary to remove the disadvantages inherent in their circumstances. However, those employees who are at risk and are on maternity/adoption/shared parental leave do get preferential treatment when it comes to alternative employment; in this case, they have an automatic right to be offered a suitable alternative vacancy before it is offered to other employees.

Redundancy pay errors: If an employee has at least 2 years of continuous employment, they will be automatically entitled to statutory redundancy pay. The amount is based on the employee’s age and length of service. Sometimes companies get this wrong and apply a single fixed redundancy amount, so it is important to calculate this properly for each affected employee.

No right of appeal: A right to appeal is not legally required but is considered to be good practice.

This can take place once the dismissal process has finished, although often it is considered preferable to allow at-risk employees to appeal earlier, usually at the point that they are scored against the selection criteria and provisionally selected for redundancy.

8.Conclusion

While a redundancy process may be a necessary part of helping a business navigate through tough economic times, it is not an easy decision. Great care must be taken so as not to jeopardise the goodwill of the business.

Garfield Smith Solicitors have extensive experience in helping clients navigate redundancies, large and small. Please feel free to contact us in confidence so we can discuss your needs.