Employment & Immigration Legal Updates 21/1/2009

Focus on Redundancy - Alternative Ways to Beat the Crunch

For many employers the start to this New Year may not have been a very happy one. With further redundancies across all sectors, it is clear that reducing staff costs will for many businesses be critical to ensuring survival during this challenging climate. In this article we discuss redundancy and the alternatives.

Following news of national retail giants going in to administration before Christmas, along with many others making job cuts, the first few weeks of the New Year have suggested this is set to be a continuing trend for 2009. For how much of 2009, appears to be anybody's guess. While economists debate the effectiveness of the Government's radical attempts to minimise the impact of the recession, Steeles Law provides businesses with more practical advice on the other much feared 'R' word dominating the headlines: Redundancies.

The knee jerk reaction of many employers in the midst of a recession is to make head count reductions through redundancies. If an employer genuinely finds that it has a reduced requirement for employees, either because there is less work to be done, or because the employer needs fewer employees to do the work, then redundancy is likely to be the most appropriate course of action. An obvious advantage to redundancies is that they ensure a reduction in the pay roll, which for most businesses is the biggest overhead. However, there are a number of disadvantages to making redundancies, including negative publicity, large one off payments which can affect cash flow and loss to the business of its most valuable asset - the workforce, which many employers invest significant sums in training and developing. So what are the alternatives to redundancy for employers in need of reducing staff costs? We consider some of these below.

Lay off and Short Time Working

Under the Employment Rights Act 1996 (ERA) a week of lay off is defined as a week when the employee is not entitled to any remuneration under the contract because the employer does not provide the employee with any work. The definition of short-time working under the ERA is when by reason of a reduction in the work, an employee's pay for a week is less than half a week's pay. Therefore short term working will only be available to an employer if it proposes a reduction of more than 50% of an employee's contractual hours. If an employer is proposing a reduction of 50% or less in the employee's hours, this will need to be dealt with as a change to terms and conditions (see below).

Employers must either have an express contractual right, or have obtained the employee's agreement before laying off or placing an employee on short-time working. There are only very limited circumstances in which a Tribunal will imply a lay off/short time working clause into a contract of employment. If an employer were to impose either of these measures without a contractual right or the employee's agreement this would amount to a fundamental breach of contract, entitling the employee to claim constructive dismissal.

Lay off and short-time working are appropriate for use in circumstances where there is a temporary reduction in work, as is often the case with seasonal work. However, it is not recommended that employers rely on lay off or short time working when it is envisaged that the arrangement will last for a continuous period of four weeks or for six weeks in a 13 week period. In such circumstances, the employee will have recourse to the statutory scheme set out in the ERA for claiming a statutory redundancy pay. The scheme is complex, but essentially requires that the employee serve the employer with notice of intention to claim a statutory redundancy payment, following which the employer has a limited time and limited grounds on which to dispute liability.

Changing Terms and Conditions

Employers may consider changing some of the terms of their employees' contracts such as pay and hours in an attempt to reduce staffing costs. As stated above, this will be the correct approach in circumstances where employers are proposing a reduction of 50% or less in the employee's working hours, or where there is no contractual right for lay off/short-time working.

Some employment contracts will contain clauses allowing the employer to vary the terms, often referred to as 'flexibility clauses'. However, employers should take a cautious approach when seeking to rely on flexibility clauses as any ambiguity will be construed against the employer and any specific flexibility clauses will be given a restrictive interpretation by the courts. Also, there is an obligation on employers to act reasonably when seeking to rely on flexibility clauses. In the absence of any express contractual right to vary the terms of an employee's contract, essentially there are three ways in which to make the variation: by agreement; unilaterally imposing the change; or by dismissal and re-engagement on new terms. In the first instance employers should always seek the employee's agreement to the change. Failing agreement it would not be advisable for the employer to unilaterally impose the change as this would undoubtedly expose the employer to a claim of constructive dismissal and an unlawful deduction from wages claim, if the change results in decrease in pay. A safer approach for employers, in the event that agreement is not forthcoming, is to consult with the employees about the proposed changes.

As part of the consultation process, employers must explain to the employees their business reasons for needing to implement the changes, and discuss and explore alternative ways of achieving their objectives. Once a thorough consultation has taken place the employer will need to ensure that the Statutory Dismissal Procedure is followed and the correct notice is given before terminating the employment of those employees who are not in agreement to the change. The employer should then offer re-engagement on the varied terms. There is a risk in these circumstances of a claim of unfair dismissal. The ability of the employer to successfully defend such a claim will depend largely on whether it had a sound business reason for changing the terms and conditions and whether a fair process of consultation and dismissal was followed.

If an employer cannot reach agreement with its employees about the proposed changes to their terms and conditions and as a result the employer proposes to dismiss 20 or more employees, at one establishment, within a period of 90 days or less, then the statutory collective consultation obligations will be triggered. Failure to comply with the obligations (which include a requirement to consult with appropriate representatives of the employees and also to notify the Department for Business Enterprise and Regulatory Reform) could result in a claim of 90 days' pay per affected employee. Consultation must commence in good time. Where an employer proposes to dismiss 100 or more employees, consultation must begin 90 days before the first dismissal takes effect. For less than 100 employees, consultation must begin 30 days before the first dismissal takes effect.

Sabbaticals

Sabbaticals are increasingly being used by employers, particularly in relation to senior employees. A sabbatical is an arrangement whereby an employee takes an agreed period of unpaid leave, during which time continuity of employment is preserved. Advantages to this arrangement are that it brings immediate costs savings, without the long term loss of employees who may be valuable to the business. However the downside is that the employer will lose the revenue that might be generated by the employee during the period of the sabbatical.

It is advisable that employers clarify key areas before the employee commences their sabbatical, including the employee's status during the sabbatical period. For example, an employer may only wish for continuity of employment to be preserved for a limited period. Also, it should be made clear to the employee that a return to the same job cannot be guaranteed. There should also be some discussion around what will happen if conditions worsen and no return to work is possible.

Pay, Overtime and Discretionary Benefits

Before implementing a freeze on pay rises or a ban on overtime working, employers need to be mindful that they do not fall foul of any contractual rights the employees may have to pay increases or guaranteed overtime working. It is relatively unusual for employees to have a contractual right to demand a pay rise or to work overtime and so implementing such measures should be fairly unproblematic.

Withdrawal of discretionary benefits such as bonuses, incentives, share options and allowances is often a popular method of saving costs. However, caution should be taken when considering whether such benefits are in fact discretionary or whether in reality they are contractual. Contracts of employment often define benefits as discretionary, however, apparently discretionary terms can be implied into employment contracts through custom and practice, provided the terms are reasonable, notorious and certain. Even where benefits are truly discretionary, employers cannot exercise their discretion unreasonably or in a discriminatory manner. Therefore, if employers attempt to withdraw discretionary bonus or benefit schemes which are not transparent in terms of how the bonus is assessed they run a real risk of claims for breach of contract from disgruntled employees.

Retirement

Compulsory retirement of employees over the age of 65 (or other Normal Retirement Age applicable to a particular business) may be a more palatable option for employers than compulsory redundancies. Retirement does of course carry the risk of a claim for both automatic unfair dismissal and age discrimination, should the employer fail to follow the statutory retirement procedure. Under the procedure the employer is required to give the employee at least 6 months and no more than 12 months notice of retirement and the employer has a duty to consider the employee's request to continue working beyond the intended retirement date. A certain amount of forward planning will therefore be required as dismissals and resulting cost reductions will take at least 6 months to effect under the retirement procedure. However, provided the employer follows the statutory procedure, retirement should be a more cost effective method of dismissal than redundancy as it will avoid the need to make a statutory redundancy payment to the employee.

Employers who have occupational pension schemes may also consider inviting volunteers for early retirement as an alternative to redundancy. However, employers should be wary of adopting a compulsory early retirement policy, as this could be discrimination on grounds of age if only older workers are eligible and possible indirect sex discrimination against women and part timers who tend to have less pensionable service.

For many businesses restructuring and management of the workforce over the coming months could prove critical to ensuring their survival during this challenging climate. Steeles Law's Employment Team provides HR practitioners and managers dealing with these issues with in-house training on redundancy and alternative ways of reducing staff costs.

For further information about our in-house training sessions or for general guidance on any of the issues raised in this article, please contact the Employment Team at: noremp@steeleslaw.co.uk.

Employment and Immigration Law Breakfast Briefing February 2009

Norwich - Wednesday 11 February 2009, Norwich City Football Club - 7.45am for 8.00am to 10.00am

Steeles Law runs regular seminars on employment and immigration law developments, providing an excellent opportunity for employers to keep up to date with the fast-moving changes in these areas. The next of these seminars is being held on Wednesday 11 February in Norwich and will focus on the top developments of 2008 as well as some predictions of forthcoming developments to ensure you start 2009 in the best shape to protect your business.

The emphasis of this seminar is very much based on the practical implications of all the changes and what they mean for you and your business. The seminar will be delivered by qualified and experienced lawyers who specialise exclusively in employment and immigration law and who advise employers on a daily basis on the practical implications of legal changes.

During the session we will review recent developments in the following areas:

• Statutory Dispute Resolution
• Family Friendly Rights
• Redundancy
• Working Time & Holiday
• Corporate Manslaughter Act
• Immigration
• Disability Discrimination
• Age Discrimination
• Agency workers

The seminar is aimed at HR managers and those with responsibility for personnel issues in the workplace.

The cost of the seminar is £65 + VAT, including breakfast (English and Continental), which will be served before the briefing.

The briefing will run from 7.45am for an 8.00am start.

You can book your place online [here], or you can complete the booking form [here], and send it with a cheque to Amy Starkings, Steeles Law LLP, 3 the Norwich Business Park, Whiting Road, Norwich, NR4 6DJ.

This article copyright © 2009 Steeles Law llp. All rights reserved.