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February 4, 2009

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Redundancy: the potential pitfalls

It’s quite possible that, in today’s climate, you may need to make redundancies within your security team. As a practising manager, no doubt you’ll be aware of the importance of a fair, non-discriminatory and properly documented redundancy procedure, and the collective consultation requirements if 20 or more employees are being made redundant at the same time.

Voluntary redundancies: the pros and cons

Seeking volunteers for redundancy can be an attractive option in order to reduce compulsory redundancies or even eliminate them altogether. The fewer compulsory redundancies are made, the lower the number of potential legal claims (and the less unsettling the process is for the employees who are left behind).

The disadvantage is that the employees most likely to volunteer for redundancy are often those the employer would least wish to lose, namely the good performers who are able to find a new job pretty easily. Employers can circumvent this by inviting applications for voluntary redundancy, but making it clear they will not necessarily be accepted, and then refuse applications from employees they wish to keep.

However, this ideas isn’t without risk. Employees who are later compulsorily made redundant may complain that their jobs could have been saved if the voluntary redundancy applications had been granted and, therefore, their dismissals are unfair. Employers would need to have clear reasons – supported by records such as appraisals – for keeping employees whose voluntary applications were refused.

Also, on a practical level, an employee whose application for voluntary redundancy is refused may become demotivated, which will not help morale at all in these difficult times.

Employees who are approaching retirement age may be keen to take voluntary redundancy on the basis that they’ll shortly be able to take their pension. However, employers should be wary of targeting such employees for voluntary redundancy as this could amount to age discrimination.

Retirement instead of redundancy?

Where an employee who is at risk of redundancy is also aged 65 or above (or the employer’s normal retirement age if later), the employer may choose to retire the employee instead of making them redundant. If the retirement procedure is properly followed, the employee will not be able to claim unfair dismissal or age discrimination.

From a purely legal angle, the retirement route is less open to challenge than redundancy. That said, from an employee relations point of view, employers may feel it’s fairer to include such employees in the redundancy selection pool instead, particularly if it’s clear they do not yet wish to retire. In this way, they will not feel that they have been singled out for dismissal ahead of other employees.

Also, the retirement procedure (more of which anon) is likely to take longer than the redundancy selection process, so it will not be an attractive option for employers who have to make cost savings pretty quickly.

Employers who do decide on retirement rather than redundancy must ensure that the statutory retirement procedure is followed. This means notifying the employee in writing six to 12 months in advance of their retirement, and telling them that they can ask to work for longer.

Exactly who is ‘at risk’?

Should employers put the whole selection pool at risk from the outset and consult them on the proposed selection criteria before making the redundancy selection? Or can they make a provisional selection against their chosen criteria, then initially place only the provisionally selected employees at risk?

The former is the better scenario from a legal perspective because it would be harder for employees to argue that the selection was predetermined and the criteria designed to manufacture the result the employer wanted.

Even though redundancies will not necessarily be unfair just because a provisional selection was made without putting the whole pool at risk first, there is probably a greater perception of fairness if this route is followed.

The best approach will depend on the circumstances. Employers should balance the desire for a perception of fairness and openness against the likely effect on employees of putting the whole pool at risk. For example, putting all of the pool at risk when only a small proportion will be made redundant will probably be unsettling for them and could have a detrimental impact on productivity, which could be particularly problematic when costs savings are a priority.

Selection criteria: what to use

As well as being fair and non-discriminatory, redundancy selection criteria should be capable of objective measurement and verification. Commonly used – and usually fair – selection criteria include skills, experience, performance, disciplinary records and attendance (provided adjustments are made to account for pregnancy related illness, family leave and disability-related absence).

Using length of service as a selection criterion (such as ‘last in, first out’) is potentially fair, but has two significant disadvantages. It may result in the loss of good employees, as it takes no account of skills. Also, it’s likely to amount to indirect age discrimination and would, therefore, need to be justified. Justification requires employers to show that the selection criterion achieves a legitimate aim (for example, to reward loyalty or retain business specific experience), and there is no less discriminatory way of achieving that aim.

Length of service is usually more likely to be justified when used as one of a number of criteria, or even as a ‘tie-breaker’.

Some employers use salary as one of the selection criteria, in order to lose higher rather than lower paid employees and therefore save costs. A policy of choosing employees based on their cost to the business is also potentially age discriminatory, on the basis that longer serving employees are more likely to be paid more.

There may perhaps be scope for justifying this – where the employer can show it’s the difference between one job loss or two – but this will depend on the individual circumstances. It’s important, as part of consultation, to ascertain whether the employee would accept a lower salary if this would mean that redundancy could be avoided.

Ideally, employers should document their reasons for using the chosen selection criteria, their assessment on any potentially discriminatory impact, consideration of possible alternatives and any reasons for rejecting them.

Scoring: should you disclose all?

Employees are entitled to see their own scores against the selection criteria, but they often ask to see the scores of their colleagues. Although there is no positive obligation on employers to disclose these, a failure to disclose (anonymously) could convert the redundancy into an unfair dismissal.

To reduce this risk, the employee could be given a copy of the scoring matrix with all names blanked out apart from his or her own if possible.

A duty to bump?

Bumping occurs where an employee who is at risk moves into another role which is not redundant and the employee in that role is dismissed instead.

Although a bumped redundancy can be fair, an ordinary redundancy will not necessarily be unfair just because bumping was not considered. The key for employers is to ensure that the appropriate employees are in the selection pool and that other employees in similar roles have not been inadvertently overlooked.

Which roles are appropriate to pool together will usually depend on how similar they are, how closely employees work together, the extent to which the roles overlap and whether the roles are (or could be) interchangeable.

Alternative work: searching far and wide

While alternative vacancies may be few and far between in the current climate, employers still have the same obligation to look for suitable alternative employment when making redundancies. A failure to do so could lead to unfair dismissal claims.

This search should extend beyond the organisation to group companies, including group companies elsewhere in the UK and abroad if the employee might be prepared to work in these locations. It’s essential for employers to consult with the employee. If in doubt as to whether a vacancy may be suitable, it should be shown to the employee.

Maternity leave: the impact on timing

Employees who are on maternity leave can nevertheless be made redundant, provided that they are not selected for any reason to do with their absence on maternity leave or future childcare responsibilities. They must be offered any suitable alternative vacancies.

Employers should continue to look for suitable alternative vacancies throughout maternity leave, and the redundancy should not take effect until the end of that leave.

Selection and consultation can be carried out as normal, possibly holding meetings in homes, and the redundancy can be confirmed subject to any suitable alternative vacancies arising during the remainder of maternity leave. If there are no suitable alternative vacancies which the employee wishes to take, the redundancy can then take effect at the end of the maternity leave period.

Enhanced redundancy payments: are they contractual?

Many employers make enhanced redundancy payments on top of the basic statutory entitlement. Sometimes this is expressed to be a contractual entitlement, in which case the employer is obliged to make the payment, but more commonly the enhanced redundancy payment scheme is contained in a policy which is not intended to be contractual.

However, there’s a risk that the scheme could become contractual if the payments are made consistently in relation to a number of different redundancy processes, and are communicated to employees in such a way that indicates both sides regard the payments as a legal entitlement.

Employers can seek to avoid this by stating clearly in the policy that the payments are non-contractual, and that the policy can be changed or withdrawn at any time. Another option which will help to avoid an enhanced redundancy scheme becoming contractual is to vary the formula used to calculate the payment for each separate round of redundancies.

Using age and length of service

Many enhanced redundancy policies use length of service, and sometimes age as well, in the formula for calculating the payment. This is potentially discriminatory on the grounds of age unless the scheme falls within a specific age discrimination exemption which allows for enhanced payments that mirror the statutory redundancy scheme, but increase it in certain specified ways (for example, treating a week’s pay as uncapped) or the scheme is objectively justified.

Employers using age and/or length of service in a redundancy scheme must consider the reasons for doing this. A recent case has confirmed that rewarding loyalty could potentially justify using length of service in a redundancy scheme, and that encouraging turnover to facilitate career progression and protecting older workers (who are likely to find it more difficult to get a new job) could potentially justify using age to increase payments.

Careful notes of the aims behind the scheme will be important. Employers should also consider the impact on younger and more junior employees and whether there is any alternative, less discriminatory way of achieving its aims, and document this thought process. If the scheme is designed in consultation with employees or the Trade Unions, evidence of this will be helpful in defending claims.

Collective consultation procedures and process

Finally, if 20 or more employees are made redundant in a 90-day period, employers are obliged to consult elected employee representatives or trade union representatives.

Anna West and Adam Rice are specialists in employment law at City-based solicitor Travers Smith

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