John Evason, Monica Kurnatowska and Daniel Ellis Partners, Collective Rights Group

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1 Employment Focus on Redundancy London August 2008 Contents What is Redundancy? Individual Consultation Collective Consultation Severance Payments Project Planning In the current climate many employers are undertaking or contemplating redundancies and restructuring. This newsletter outlines some basic concepts and some of the more difficult issues. John Evason, Monica Kurnatowska and Daniel Ellis Partners, Collective Rights Group For further information on any of these topics, please contact your usual Baker & McKenzie lawyer or: Christine O Brien (christine.obrien@bakernet.com) Ellen Temperton (ellen.temperton@bakernet.com) Sarah Gregory (sarah.gregory@bakernet.com) John Evason (john.evason@bakernet.com) Monica Kurnatowska (monica.kurnatowska@bakernet.com) Daniel Ellis (daniel.ellis@bakernet.com) Nigel Moss (nigel.moss@bakernet.com) Paul Harrison (paul.harrison@bakernet.com) Baker & McKenzie LLP is a limited liability partnership registered in England and Wales with registered number OC A list of members names is open to inspection at its registered office and principal place of business, 100 New Bridge Street, London, EC4V 6JA. Baker & McKenzie LLP is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the terminology commonly used in professional service organisations, reference to a partner means a person who is a member, partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm. Baker & McKenzie LLP is regulated by the Solicitors Regulation Authority of England and Wales. Further information regarding the regulatory position is available at This may qualify as Attorney Advertising requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome Baker & McKenzie. All rights reserved. Print Exit > 1

2 What is Redundancy? Employment Rights Act 1996 identifies three types of redundancy. The first two cover situations where the employer closes a business, or closes it in a particular location. But most redundancies fall into the third category where there is a reduced requirement for employees to do work of a particular kind or do work of a particular kind at the place where the employee is employed to work. Unlike the position in several other countries, UK tribunals will not probe too deeply into the economic rationale for the business decision to make redundancies, provided there is evidence that the employer had a genuinely held reason. More difficult issues What if the volume of work has not fallen? A redundancy can still arise if the employer chooses to perform the same amount of work but with fewer employees. This is the case in many business reorganisations. What if some roles will go, and new roles are created, but the number of jobs stays the same? It may still be possible to justify dismissals in business reorganisations on the basis they are for some other substantial reason (SOSR). In practice, an employer will need to follow the same procedure as in a redundancy i.e. a fair selection process, period of consultation, compliance with the statutory procedures and proper consideration of the alternatives. The main issue here is that the employees will normally have the right to newly created jobs, unless they are not suitable, and normally tribunals expect employees to be given the opportunity, which may entail redeployment. What if the work is moving to a new location? An employer may be able to require the employees to relocate, if it has a contractual mobility clause in the contract entitling it to require staff to move. It can choose not to relocate the staff, and instead make them redundant but does not have to: the mobility clause is a factor which may be taken into account, but not necessarily a determining one. In Home Office v Evans (2007), the Court of Appeal ruled that the employer can choose whether to invoke a contractual mobility clause or follow a redundancy procedure. If it chooses to operate the clause and requires the staff to move, it must still consult, and give reasonable notice. But in principle, if the clause is sufficiently clear, the employer can operate the clause. Is bumping allowed? Bumping is the practice where one employee s job disappears and, instead of dismissing him, he is offered another employee s job, and that employee is dismissed instead i.e. bumped. This is legally permissible, provided a fair process is followed. In fact, in Lionel Leventhal v North (2004) the EAT held that an employer should always consider whether bumping is appropriate. This does not mean it has to bump, just that it should consider it. This could be particularly relevant where the redundant and retained roles are different but have some overlap or require very similar skills. < > Print Exit Intro 2

3 Individual Consultation Individual consultation how long is reasonable? Employers should consult individually with employees before reaching any firm decision regarding dismissal, otherwise the dismissal is likely to be unfair. Unless the employer has also consulted collectively under S188 (see below), this process must also meet the requirements of the statutory dismissal procedure. In Rogers v Slimma Plc (2007) the EAT confirmed that a consultation period of seven days was the bare minimum, but we would regard this as too short, and normally recommend at least two and preferably three weeks. Consultation should cover the reasons for the redundancy and whether there are any alternatives. Two other key issues for individual consultation are: How the employee was selected not normally entitled to see other employees scores, the employer should indicate cut-off points so the employee can measure his scores against them. Possible alternative vacancies The employer should look for suitable alternative work within the business or any associated business and discuss these possibilities with the employee. Tribunals expect employers to take proactive steps to assist employees in identifying opportunities and should not assume the employee will not be interested in a more junior role. If the employee accepts an alternative job before the old one ends or within four weeks of it ending, no redundancy payment will normally be due. An employee who unreasonably refuses an offer of suitable alternative employment loses his right to a redundancy payment. The less suitable the alternative employment, the more reasonable an employee s refusal will be (Commission for Healthcare Audit & Inspection v Ward (2008)). Maternity Leave The employer should consult particularly carefully, and early on, with any employee who is on maternity leave. If a woman s job becomes redundant during her maternity leave, any suitable alternative vacancy within the business or any associated business must be offered to her before it is offered to anyone else. The alternative job must be suitable and appropriate for her to do in the circumstances and the job, location and all other terms and conditions must not be substantially less favourable than her previous job. The employer should discuss the selection pool and the application of the redundancy selection criteria to the individual employee, who should be given the opportunity to explain any factors which may influence the decision to select him for redundancy, and to see and comment on his own assessment scores against the criteria. While the employee is Print Exit < > Intro 3

4 Collective Consultation If an employer proposes to dismiss as redundant 20 or more employees at one establishment within a period of 90 days or less, it must also collectively consult with trade unions or elected employee representatives under S188 Trade Union and Labour Relations (Consolidation) Act 1982 (TULRCA). (There is also a legal requirement to notify the Department for Business, Enterprise & Regulatory Reform of a proposal to dismiss 20 or more employees, as redundant at one establishment within a period of 90 days or less.) When is the obligation to consult triggered? Under S188, a redundancy is a dismissal not connected with the individual worker concerned. It covers not only normal redundancies but also many relocation exercises, changes to terms and conditions through termination and re-engagement, and voluntary redundancy programmes. How long should consultation last? Where 20 to 99 redundancies are proposed within the 90 day period, the consultation must begin at least 30 days before the first dismissal is due to take effect. This increases to 90 days where more than 100 redundancies are proposed. The dismissals should not take effect until the end of the 30/90 day period, and ideally the employer should not give notice during that period. In practice if the employee representatives agree that the consultation is complete, or to reduce the period (normally in return for extra payments), the risk of claims is relatively low. However, a severance agreement will not validly waive liability for failure to consult and advice should be sought on the best way to structure such an agreement. What should the consultation cover? The employer should provide written information about the reasons for the proposals, the types of employees affected, the selection and consultation process, and redundancy payments. Consultation should include ways of: avoiding the dismissals; reducing the number of employees to be dismissed; and mitigating the consequences of the dismissals. Should the consultation cover the business decision? In UK Coal Mining Ltd v National Union of Mineworkers (2007) it was held that where an underlying business decision (in that case a closure) makes redundancies almost inevitable, the employer must consult about that business decision, as well as the decision to make redundancies. This is most likely to affect offshorings, closures of businesses, and relocations, and means that the employer should not take irrevocable steps to implement the decision (e.g. terminating a lease) until consultation is complete. What is the liability for failure to consult collectively? The tribunal may make a protective award in favour of the employee(s) of up to 90 days gross pay per employee. Awards are punitive and the starting point is 90 days irrespective of the length of the statutory consultation period. Print Exit < > Intro 4

5 Severance Payments - particular problems All employees are entitled to notice of termination, or, alternatively, to receive either a payment in lieu of notice ( PILON ), or damages for loss of notice. Employees with two or more years service are also entitled to a statutory redundancy payment. In practice, many employers choose to pay more. Is the redundancy payment scheme discriminatory on grounds of age? In most redundancy schemes, levels of payment increase in line with employees age and/or length of service. Both the age and length of service criteria are potentially discriminatory on grounds of age. However, UK legislation expressly permits some payments which might otherwise be discriminatory. The Statutory Redundancy Payments (SRP) scheme is based on employees age and length of service, but is nevertheless allowed. Under the SRP scheme, redundant employees receive half a week s pay for each year of service during which they were under 22, one week s pay for each year of service between the ages of 22 and 40, and one and a half weeks pay for each year of service over the age of 41. A week s pay is capped (until February 2009, at 330). The Age Regulations 2006 provide also that enhanced redundancy schemes which are based on the SRP scheme and differ from it only in one or more of the ways described in the Regulations will not be discriminatory or unlawful. To come within this exemption, the employer must make the initial calculation as under the SRP scheme, but may then disapply the cap (or apply a higher cap), and/or use a higher multiplier (than one) for each year of employment. And, whether or not the employer makes one or both of these adjustments, the employer can multiply the total compensation figure calculated by a number greater than one. Many existing enhanced redundancy schemes do not fall within this exception. But an employer may still be able to justify using such a scheme where it can show there are legitimate (that is, non-discriminatory) aims for the scheme and the methods applied are proportionate to those aims. To test for proportionality, the tribunal must weigh the adverse effect suffered by the claimant employee against the reasonable needs of the employer s business. In the first EAT decision on enhanced redundancy schemes and age discrimination, (McCullough v ICI PLC (2008)), a 36 year old employee complained of direct and indirect discrimination under a scheme in which redundancy payments increased with length of service (up to ten years) and also age. The EAT found that the employer had legitimate aims for the scheme. These included encouraging staff turnover, facilitating planning, encouraging and rewarding loyalty and reflecting the difficulties that older employees face in the job market. But it thought that respecting the expectations of the existing work force by honouring contractual promises was not a legitimate aim. We don t yet know whether the difference between the claimant s entitlement (55% of gross salary) and that of a comparator aged over 50 and with ten years service, (who would receive 175%) will mean that the scheme fails the proportionality test as the matter has been sent back to the tribunal for further consideration but on the face of it this is a significant disparity. Print Exit < > Intro 5

6 Severance Payments - particular problems Redundancy payments custom and practice? If an employer consistently makes redundancy payments at the same level or using the same formula there is a risk this will become contractual by reason of custom and practice. The legal test is whether the practice is reasonable, notorious (i.e. known to the workforce) and certain (i.e. unambiguous). If it has become contractual, employees are entitled to the payments, and the employer cannot make them conditional on a waiver of claims. A court will consider factors including whether: the policy has been drawn to the attention of the employees; it has been followed consistently for some time; payments are made automatically; communications with employees imply an intention to be contractually bound; the policy has been agreed with employees and/or their representatives and meets employee expectations. A key issue is how long the policy has been followed without a change in practice. Cases always depend on their facts, but it has been held, for example, that following a practice three times was not enough, whereas six times was enough to give rise to a contractual right (Albion Automotive Ltd v Walker (2001)). To reduce this risk we recommend that employers do not publish a formal policy and try to change the practice regularly. It is also helpful to make clear in any collective consultation that a formula/amount is being offered for this occasion, without any future guarantee. Taxation and NIC issues The first 30,000 of redundancy payments can normally be paid tax free and the whole payment is usually free of National Insurance Contributions (NICs). This is so even if they are contractual. However, payments in lieu of notice can present more difficulty: Contractual PILONs: if the employer has a right to make a PILON, it is taxable in full and liable to NICs. The only exception is if the employer breaches the PILON clause and pays damages instead (see below). To convince HMRC (the UK tax authority) that the payment is genuinely damages generally involves showing that less than the full amount is being paid, to reflect mitigation; Damages for breach of notice: if there is no contractual PILON clause, any payment in lieu of notice should amount to damages, and qualify for the 30,000 exemption (when aggregated with other termination payments). Note however, that an employer that breaches the notice period by not letting the employee work his notice or paying under a PILON clause, cannot then enforce any restrictive covenants in the contracts (unless the employee agrees as part of the deal); Auto PILONs: these are taxable in full and liable for NICs. An auto PILON arises where an employer consistently makes PILONs so much so that it has become an invariable practice, followed without any real decisionmaking process. This can be the case whether or not the employees generally know of this practice. There is some anecdotal evidence that HMRC is taking a more active stance where employees appear to have a consistent policy. This outcome might be avoided if on every occasion it can be shown that a reasoned decision was made on the facts, rather than the payment being made without thought. Other types of contractual payments such as golden handshakes, and payments under change in control agreements will normally be taxable in full. Print Exit < > Intro 6

7 Project Planning The following are some of the main points to consider when planning a UK downsizing What is the appropriate pool for selection? Is there a redundancy situation within the meaning of the Employment Rights Act 1996? If not, will the reorganisation still qualify as a fair reason for dismissal? What selection criteria will be used? Briefing managers in approach to selection and consultation. Will the company seek volunteers? Is collective consultation triggered? Is any alternative employment available? How will this be drawn to employees attention? Do employee representatives need to be identified/elected for this purpose? Is there an existing redundancy procedure? Must the Department for Business, Enterprise and Regulatory Reform be notified? Have all employees potentially affected by the proposed redundancies been considered, e.g. those on long term sick or maternity leave? Standard letters for each stage of the process, including invitations to meetings, dismissal and appeal documentation. Will an enhanced package be offered? Does it comply with the Age Regulations provisions? Will compromise agreements be obtained? The message to be given to the workforce. Specific individuals and areas of risk. Print Exit < > Intro 7