Guidance for employers on the redundancy process

The impact of the pandemic on the economy is still being felt and understood. Despite positive recent signs in the UK employment market, there remains high levels of pessimism and uncertainty over jobs. An estimated one million workers remained on furlough at the end of the Government’s furlough scheme on 30th September 2021, whilst a recent report by Renovo suggested that seven in ten employers expect to make redundancies in the next year.

This is the first article in a three-part series in which we will guide employers through the potential minefield that is a redundancy process. This article focuses on the first stage in this process by going back to basics and exploring the legal meaning of “redundancy”, and considering when redundancy situations might arise in practice.

What is a redundancy situation?

A redundancy situation can arise in three situations:

1. A business is ceasing trading altogether 

For example, a restaurant is struggling financially, and so the owners close the business permanently. Alternatively, the business closure could be temporary and still cause redundancies, such as if the restaurant was closed for a few months for major refurbishment.

2. A business is closing or moving a workplace 

For example, a chain of sandwich shops might identify that one of its shops is suffering from reduced footfall and decide to close that particular branch. Redundancies could be caused by the chain deciding to permanently close the shop or relocating the shop to a further away location. 

3. A business has a reduced need for employees carrying out work of a particular kind

For example, a company with branches nationwide must cut costs and reduce the number of employees across the board and reorganise the entire business structure to be more efficient. Alternatively, it may stop or lessen efforts selling a specific product that is performing poorly, meaning that the six-strong sales team for that product (or it could even be just a single salesperson) is no longer needed, or perhaps only a smaller team of three is needed.

Redundancy situations such as these can arise for a variety of reasons, including:

• Recession or other economic pressures making business closure or reduction in staff numbers necessary.
• Changes to the products or services sold.
• Internal reorganisation to make more efficient use of staff.
• Technological developments resulting in change to some or all job functions.
• Relocation of business.

How to determine if there is a genuine redundancy dismissal

A three-stage test has been established through case law, which involves an Employment Tribunal looking at the statutory definition above and asking itself:

• When was the employee dismissed?
• Had the requirements for employees to carry out work of a particular kind diminished, or did one of the other types of redundancy situation exist?
• Was the dismissal caused by that diminished requirement or state of affairs?

If the answer to all three of the above stages is “yes”, then there will be a genuine redundancy dismissal.

Here are some examples of when it can be difficult to determine whether there is a genuine redundancy situation:

• Where an employer identifies a diminished requirement for work of a particular kind, a redundancy situation may be obvious where there are reduced workloads, e.g. because a company loses a big supply contract and needs to scale back its manufacturing operations. Conversely, it may be tricky to identify a redundancy situation where the same amount of work is required, but fewer employees are needed to complete it e.g. Because a more efficient business structure is proposed or new ways of working are identified involving new technologies.
• Where an employer determines that the work done by a particular employee needs to be done at a more sophisticated level requiring greater experience, or conversely that the output can be achieved by a less experienced and less well-paid employee, it may be difficult to show that the requirement for work of a particular kind has ceased or diminished because the changes are subtle. These types of cases are often challenged by employees in the Employment Tribunal.
• When a business has a change of owner, its employees may be protected under TUPE regulations. Therefore, where a business closes and then re-opens under new ownership, it may not qualify as a redundancy situation at all, as the employees may have transferred under the protection of TUPE to the new employer.
• In the scenario of a workplace closure, where a company with multiple branches decides to close one, understanding the scope of the redundancy situation will depend on where the employees’ place of work is. This involves looking at the practical realities of the employees’ roles to determine their place of work, rather than relying solely on what the employment contract says.

Why is it important for an employer to understand the redundancy situation?

An employee may bring a legal claim, usually for unfair dismissal, if they feel there was an unlawful reason for their dismissal. Redundancy is a fair reason for dismissal, but claimants regularly argue that the redundancy situation is not genuine but a sham to cover up an unlawful dismissal. It is surprisingly common for employers to have a perfectly genuine redundancy situation on their hands but to fall down by rushing into the consultation process without fully understanding or documenting the redundancy situation. This can lead to employers being unable to properly communicate the situation to at-risk employees, which can generate suspicion of foul play and leave employers exposed in any Employment Tribunal proceedings because they cannot prove that there was a genuine redundancy reason for the dismissal.

Misunderstanding and miscommunication are often the driving forces behind such claims. Therefore, the first step in any redundancy process, and arguably the most important one, is for an employer to carefully consider the cause of the redundancy situation, document this, and plan how they will explain this to their employee(s).

In the absence of an obvious sham, an Employment Tribunal will not delve into the reasons behind a redundancy situation. Claimants may criticise the logic of their redundancy, but the Employment Tribunal is not concerned with whether a brilliant commercial decision was made. It is concerned with whether the statutory definition of redundancy is proven. Where there is a paper trail explaining and analysing a redundancy situation, a Judge is more likely to accept on face value that one had arisen. This will be particularly important where a Claimant is arguing that they were dismissed for another reason, such as misconduct, whistleblowing or discrimination, where a Judge may investigate the facts of the dismissal in detail. Therefore, it is always helpful for an employer to have thought through the nature of the redundancy situation in detail before beginning the consultation process so that this can be properly documented, conveyed and recorded.

Key learning points

• Carefully consider whether there is a genuine redundancy situation by checking the statutory definition for redundancy.
• Prepare a business case justifying the redundancy situation or document the reasons for the redundancy situation in board minutes.
• Identify any “problem areas” which at-risk employees may query or complain about. Anticipate these questions, prepare your responses in advance and deal with them in your business case.
• Ensure that documents, communications and correspondence are clear and consistent,
• If you are unsure of anything, seek legal advice at the earliest stage possible.

In part two of this series, we will explore how employers can make a strong start to their redundancy process by ensuring that employees are correctly pooled and fairly selected for redundancy.