Compulsory redundancy: employer guidance

To ensure the survival of your business you may find yourself forced to make financial cuts, including reducing your payroll liabilities. Alternatively, your organisation may have undergone a complete restructure, or you may have invested in new technology, making certain roles obsolete.

Whatever the business driver behind redundancy, employers must in all cases follow a fair and transparent procedure.

The following guide looks at the process of compulsory redundancy, as well as the rights and entitlements of employees selected for redundancy.

What is compulsory redundancy?

A redundancy situation is where you terminate an employee’s contract of employment because you no longer need anyone to do the particular job role that they perform. This could be due to a reduction in workload, a change in your working practices or nature of work, or if your business is closing down.

For a redundancy to be genuine, you must be able to show that the employee’s job no longer exists.

Redundancy can either be compulsory or non-compulsory (voluntary).

Compulsory redundancy is where the employer decides who to make redundant based on certain criteria, whereas a non-compulsory redundancy is where individuals are invited to volunteer for redundancy, although there must still be a fair and transparent selection process in place. In other words, employees will not be automatically selected just because they have applied.

Whether or not you decide on voluntary or compulsory redundancy will depend on your reasons for downsizing your workforce, and other factor such as time pressures. In particular, if your company or organisation is in financial difficulty, compulsory redundancy may be the only viable option to ensure your business remains operational.

However, in circumstances where there is no imminent threat of liquidation, offering a voluntary redundancy package as a means of streamlining your operations can help to minimise the stress caused to any potentially affected employees, as well as the workforce as whole. Voluntary redundancy can be made attractive by offering an enhanced redundancy pay package as an incentive to accept.

In particular, by showing that you are attempting to deal with the situation as fairly as possible, this will help to maintain the morale of staff who are staying on and, in turn, improve the prospects of a successful overall outcome.

If, however, there are insufficient volunteers for non-compulsory redundancy, you may still have to proceed with making compulsory redundancies, although in most cases voluntary redundancy will be an effective way of reducing your payroll liabilities.

Alternatives to compulsory redundancy

Offering voluntary redundancy, or even early retirement, is just one way of avoiding a compulsory redundancy situation. However, it is incumbent on you as an employer to take all possible steps to avoid dismissing any member of staff.

This could be done in any one of the following ways:

• Exploring options for staff to work flexibly, for example, working part-time, compressed hours, homeworking or job shares
• Reducing or banning overtime for the foreseeable future
• Restricting any new recruitment for the foreseeable future
• Laying off any self-employed contractors or freelancers
• Short-time working or temporary lay-offs, where the contract(s) of employment allow for this or agreement can be reached, although this must be a short-term solution and not a permanent change

One of the most effective ways of avoiding compulsory redundancy is filling vacancies elsewhere in the business with existing employees. Even if you have selected someone for compulsory redundancy, it remains open to you to offer that individual suitable alternative employment within your company or organisation for that person to consider.

However, for an offer to be valid it must satisfy the following conditions:

• It should be unconditional and in writing
• It must be an actual offer, not where the employee has to apply
• It must be made before the end of the employee’s existing employment contract
• It should state how the new role is different to the previous job
• The new role must start within four weeks of the end of the previous job.

Further, an employee who accepts an offer of an alternative role should be given a 4-week trial period, or longer if agreed in writing, to assess the suitability of their new role. The trial period should start after the employee has worked their notice period for their previous job and the contract for that job has ended.

Following this trial period, if both you and the employee decide that the job is unsuitable for them, s/he will still be entitled to claim redundancy pay (see below for how this is calculated). If, on the other hand, the employee refuses to accept a suitable alternative role without good reason, they may lose their entitlement to any statutory or contractual redundancy pay.

Fair selection criteria for compulsory redundancies

Having considered all alternative options to redundancy, if you have reached the conclusion that compulsory redundancies are unavoidable, you will need to decide the criteria by which employees will be selected for potential redundancy.

When identifying a pool for selection and whom to make redundant, you must ensure you approach this fairly, without discriminating against certain individuals or groups. That said, a fair basis on which to select people for redundancy could be based on various different criteria, including:

• An employee’s skills, qualifications and/or aptitude
• An employee’s standard of work and/or performance
• An employee’s attendance record, although you should not include absence relating to maternity or disability
• An employee’s disciplinary record

It is also possible to select someone based on their length of service, ie; last in, first out, but only where you can justify this approach. Given that this approach could indirectly discriminate against an individual based on their age, which is a protected characteristic under the Equality Act 2010, it is always best to use an additional basis on which to select an employee to make the process fair.

You should also bear in mind that all nine protected characteristics under the 2010 Act would be classed as an automatically unfair reason to select someone for compulsory redundancy, namely: age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion and belief, sex, or sexual orientation.

Other selection criteria in a compulsory redundancy situation that would be classed as automatically unfair include any reason relating to:

• Parental, paternity or adoption leave, or an employee taking time off to care for a dependant
• An employee acting as a colleague’s representative, such as in a disciplinary hearing
• An employee being, or not being, a member of a trade union
• Being a part-time or fixed-term employee
• A reason relating to pay and/or working hours, such as an employee requesting the national minimum wage, refusing to opt out of the maximum weekly working hours or taking annual leave.

Compulsory redundancy process

Having identified the selection criteria for compulsory redundancy, you should always consult any affected employees about your proposals, otherwise run the risk of any dismissal by reason of redundancy being classed as unfair.

In particular, if you are making 20 or more employees redundant within any 90-day period in a single establishment you must follow the collective consultation rules.

If there are fewer than 20 planned redundancies there are no set rules to follow, although it is still good practice to fully consult with employees and their representatives to show that you have embarked on a fair and transparent process with a view to exploring ways of avoiding or reducing any redundancies.

The collective redundancy process involves notifying the Redundancy Payments Service (RPS) before a consultation starts using form HR1. You can be fined if you do not notify the RPS. Thereafter, you must discuss your redundancy proposals with both elected representatives and individual employees, and provide written details of:

• The reasons for redundancies
• The numbers of employees involved and which jobs are at risk
• How you plan to select employees for redundancy
• How you plan to carry out the redundancies, including timeframes
• How you will calculate redundancy payments

You must give employees, and their representatives, sufficient time to consider your proposals, and respond to any requests for further information. You must also consider and respond to any suggestions made, and although you can reject any ideas you do not think are reasonable, you should explain why.

Broadly speaking, you will need to show that the consultation was genuine and that you aimed to reach agreement. As such, it’s important to document all discussions and the reasons for your decisions.

The minimum consultation period will depend on the number of proposed redundancies, but typically will need to be a minimum of either 30 days before making the first redundancy (for 20 to 99 redundancies) or 45 days (for more than 100 redundancies). The redundancy period may last longer than the required minimum period if it’s a large or complex redundancy situation.

You can only make an employee redundant once the consultation process is complete. You should inform an employee of your decision to make them redundant both face-to-face and in writing. The letter should set out their notice period, the date on which their contract comes to an end and how they can appeal. By setting up an appeals process for employees who feel they have been unfairly selected, this can reduce the possibility of any claim for unfair dismissal.

Compulsory redundancy pay & entitlements

If you make an employee redundant, they may be entitled to redundancy pay in accordance with a basic minimum rate set by the government. This is known as a “statutory redundancy payment”. To be eligible for a statutory redundancy payment, an individual must satisfy the following conditions:

• Be classed as an employee working under a contract of employment, including part-time employees
• Have at least 2 years’ continuous service with you
• Have been dismissed, laid off or put on short-time working, where there was a genuine need to make redundancies

The statutory redundancy pay rates are based on an employee’s age and length of employment with you, counted back from the date of the dismissal, where a qualifying employee will be entitled to the following:

• Aged 18-22: half a week’s pay for each full year of employment
• Aged 22-40: one week’s pay for each full year of employment
• Aged 41 or older: 1.5 weeks’ pay for each full year of employment

The length of service is capped at 20 years, with weekly pay capped at £525. As such, the maximum amount of statutory redundancy pay is £15,750. That said, it is open to you to provide extra redundancy pay over and above the statutory minimum, or even to make a redundancy payment to employees who have not yet accrued the 2-year qualifying period, although you are not legally obliged to offer contractual redundancy pay unless otherwise agreed.

Having dismissed an employee, you must provide him or her with a written statement setting out the amount of statutory redundancy payment and how you reached that figure. This can be included within their redundancy decision letter.

In the event of any disagreement over your calculation, or you fail to make the payment due no later than an employee’s final pay date, or an agreed date soon after, s/he will be able to make a claim for payment to an employment tribunal.

When you make an employee redundant, in addition to receiving a statutory redundancy payment, they will also have certain other entitlements.

In particular, all employees under notice of redundancy have the right to:

• A statutory or contractual notice period
• Reasonable time off work to look for a new job, albeit subject to a qualifying period of continuous service.

Compulsary redundancy notice periods

Having completed the redundancy consultation, as a matter of law, you must provide any staff selected for redundancy with at least the minimum statutory notice period. This will be based on the length of time they have worked for you, namely:

• 1 month up to 2 years: at least a week’s notice
• Between 2 and 12 years: a week’s notice for every year employed
• 12 or more years: 12 weeks’ notice.

The employee’s contract of employment may allow for a longer period of notice. Further, you can also allow staff to leave earlier than the planned leaving date, by offering payment in lieu of notice. In other words, you can make a payment to cover the notice period they would have worked.

Reasonable time off work

Where an employee has been continuously employed by you for 2 years by the date their notice period ends, they are entitled to a reasonable amount of time off work, either to look for another job or to arrange training to help them find another job.

However, the length of time an employee can take will depend on their circumstances. Further, regardless of how much time is taken, the most you have to pay the employee is 40% of one week’s pay. This is the total amount and not the amount per week. By way of example, if an employee gets paid £500 a week for a 5 day working week, the most you would have to pay them for their time off is £200 (40% of their weekly pay).

Compulsory redundancy FAQs

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Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.