Where a turn of events for your business or a change in the economic climate has seriously affected your bottom line, you’ll need to start planning for ways in which you can cut back in order to help your business weather the storm. It’s likely that you’ll have less work for your staff and will be thinking about how you can keep valued staff but still cut costs. There are different ways in which this can be managed before having to resort to redundancy. Below, we outline some of the options that employers might want to explore before considering redundancy, in more detail.
Restrict new offers of employment
This is a good place to start, if at all possible, as it is easy, cost effective and less likely to be controversial to stop taking on new employees than to remove those employees you already have on your payroll. If there is not one already in place, you could place a restriction on recruitment for areas of your business which might still require for roles to be filled, or a recruitment freeze if the business as a whole has less of a requirement for staff.
You could also look at withdrawing job offers already made, at any time before the role is accepted by the employee without having to make a payment for notice. However, withdrawal of a job offer could be risky, as if an unconditional job offer has been made and accepted, or if there was a conditional job offer which was accepted and the conditions have been fulfilled, the employee could have a claim for breach of contract if the termination of employment is not carried out in accordance with the contract and notice pay not paid in full, even if the employee has not yet started work (although loss is usually only calculated after the start date). In that circumstance, discussing the situation openly with the employee and explaining that their contract would need to terminate by reason of redundancy unless the contract can be deferred and the new employee’s start date changed to a later time, would be advisable.
Deferral is an easier alternative for the employer and employee than withdrawing a job offer, but as there is already a contract in place if the offer of employment has been accepted, agreement will be required by the employee to change the start date.
However, this is only going to resolve the situation if you are confident that business will pick up again and that role will still be required, just at a later date. If the employer is involved in a collective redundancy exercise, or is contemplating making such redundancies, it will have to include any individual whose job is being deferred, in the overall headcount and that individual will have to be given the right to elect representatives (where applicable) and be informed and consulted on the redundancies. Failure to do so can result in the individual making a claim for a protective award.
If you are unsure on how to handle the withdrawal or deferral of a job offer, please contact our specialist employment solicitors.
Reductions of non-permanent staff
It may also be useful to explore the option of using fewer agency, temporary and casual workers and other temporary staff, if at all possible, as this is cost effective and quick, and any gaps in work could potentially be filled by permanent staff. There may be situations where this is not practical or appropriate, but this is worth considering and discussing with the affected permanent staff if it may work for them and the business.
Before deciding to terminate any engagement, first carefully consider whether the individual in question is an employee or worker. Remember that workers are protected by some legislation, such as anti-discrimination legislation, so any decision to terminate their contracts must not be on discriminatory grounds.
Further, if there is a collective redundancy process taking place, workers are included within the overall figure and generally, as with permanent employees, they must be consulted and are entitled to a protective award.
When terminating agency arrangements, employers should ensure that they comply with their contractual obligations to the agency, to avoid potential commercial claims by the agency and to retain a good working relationship with the agency, moving forward.
If there are fixed term contracts with contractors, trainees, or other workers which are soon due to expire, it might be a good idea to see whether a policy of terminating all fixed term contracts due to expire in the short term might be feasible and whether that work could be covered by permanent staff in order to avoid redundancies.
Again, employers would need to discuss the work in question and see whether they would be prepared to carry out this work temporarily or more permanently.
Another option available might be to second your employees internally within a group, or externally to a client or supplier for a defined period of time. This might help if there are short term cash flow problems for the business and you cannot afford to pay all staff over the next 6 or 12 months, but your business would like to retain the talent it has recruited and benefit from extra training and experience which might be provided by a third party your business deals with. It is important to keep a seconded employee informed of changes in your organisation throughout their secondment, as if they were continuing to work directly for your business.
Redeployment and retraining
If redeployment is required because of the risk of redundancy, a fair and reasonable redundancy procedure should be carried out to minimise the risk of future claims. If redundancy is confirmed to be required, retraining or redeployment may be an alternative, as part of an offer for any available suitable alternative employment with a statutory trial period. If the employee rejects the offer of retraining or redeployment and the employer has no option but to make the employee redundant, this is likely to be a good defence to unfair dismissal and redundancy pay claims.
The redeployment may not be related to redundancy or reducing headcount and it may be that the employee’s employment contract has a mobility and/or redeployment clause, which allows employers to move employees around the organisation. This type of mobility clause is usually narrow and must be specific to be enforceable. If there is not a specific contractual mobility clause the employee’s written consent to the change will usually be required to redeploy and retrain them. Any offer to redeploy or retrain must of course be made on non-discriminatory grounds.
It is important to consider whether the redeployment is just something that will be required short term or more permanently and the implications for the business in both cases. It is also important to look at how this might affect morale of employees and their long-term prospects.
This should only be offered as a voluntary option. Otherwise you may well face claims for age discrimination as well as potentially unfair dismissal or constructive dismissal. Employers often offer early retirement under the pension scheme to those who volunteer for redundancies, which might be attractive to some employees and so this is worth asking if you have some employees who are not critical to the business and close to retirement. As with all voluntary redundancies, it is important that employers have discretion over whether to accept an application or not.
It should be recommended to employees who volunteer for early retirement, to obtain independent advice on their future pension entitlements.
Early retirement might be offered in return for a pay package (often called ‘shadow redundancy’) but in order that this is not a dismissal, the employee must genuinely choose to leave and should not be offered a shadow redundancy on discriminatory grounds. The less genuine the choice an employee has on whether they leave, the more likely it is that employee should be included in the headcount if there is a collective redundancy exercise.
Instead of commencing a redundancy exercise you might want to consider one of the below temporary stoppages:
Direct when annual leave is to be taken: So long as sufficient notice is provided, employers are able and may find it beneficial to direct employees to take contractual or statutory annual leave at a quiet time for the business. This may only have a small effect in the short term in avoiding the requirement for more prolonged unpaid leave to be taken by employees, but will mean that employees are available to work when business picks up during a busier period in the future.
Offer unpaid or part-paid leave or sabbaticals: If retention of trained and skilled staff is important, but cash flow is a problem and trade is not expected to return to previous levels quickly, similarly to secondments, this might be an option for the employer to explore. Whether this will actually be an effective measure for an employer to take will depend on a number of factors, such as whether an upturn in trade is likely in the relatively short term, whether job losses are still likely anyway and whether this action risks job security of the employee. Employees may not be keen to agree to unpaid or part paid leave or a sabbatical if they are concerned about their future position within the business or need to earn a full-time wage, but may wish to agree to this if they have caring responsibilities or are happy to have a little longer out of work.
An unpaid leave period is likely to be shorter than a sabbatical, but otherwise, similar factors are relevant. Employees' consent is required unless the employment contract expressly allows an employer to place employees on unpaid leave. Sabbaticals are usually voluntary, and the employer should advise employees that it will consider applications and has the right to decline requests (for example, if someone is crucial to the business). If a sabbatical is agreed, its terms should be in writing and signed by the employer and employee before the sabbatical begins.
These agreements should be detailed and specific and so please contact one of our specialist employment solicitors should you require assistance with drafting a sabbatical agreement.
Lay-offs: If an immediate, significant saving is required by the business, lay offs may be a useful option where an employer has a contractual right to lay off, and the contract makes clear that employees will not receive their normal salary whilst laid off. If only some staff are required to be laid off, a reasonable and objective, non-discriminatory selection process, similar to the process used in a redundancy exercise, may be needed. A provision of this kind is subject to the implied term of trust and confidence, so the employer should consult with employees first and give reasonable notice to avoid being in breach of contract.
If the contract does not give the employer the right to lay off, this will need to be agreed with the employee in writing before laying them off to avoid potential claims for repudiatory breach of contract and subsequently a possible claim for constructive dismissal and where no pay is provided during the lay-off period, an unlawful deduction from wages.
Employers must not keep employees laid off for longer than they need to, as the statutory lay-off provisions entitle employees who have been kept on short time for four or more consecutive weeks or six weeks in any 13-week period to resign and claim a statutory redundancy payment in certain circumstances.
Another option to retain trained employees and avoid the short-term costs of redundancy, is to reduce working hours permanently or temporarily. As reducing hours is a fundamental change to an employee’s terms and conditions of employment you will require employee agreement in writing before making this change. If you explain why the measures are required (for example by stating how many jobs might be saved if cuts in hours are accepted) and if management can lead by example by taking some type of cut, that can assist.
If an agreement to these changes is sought before an employer has considered it may have to dismiss 20 or more employees, there will not be a requirement for collective consultation. However, if the proposal is a formal alternative to redundancy, or forcing the change by dismissing and re-engaging, for example, means that collective consultation will be required.
Guarantee payments cannot be claimed if employees agree a permanent change to their working hours. The short time working arrangements should make clear that the change in working hours are temporary and the employee should return to their previous hours when the employer requires them to. If there is to be a permanent reduction in hours see part-time and flexible working, below.
Part-time and flexible working
If you do agree that an employee can work part-time, you must not treat a part-time worker less favourably than full-time worker or discriminate against them because they work part-time.
Since 30 June 2014, employees with at least 26 weeks' continuous service have been entitled to request flexible working arrangements, if these are requested, you should agree in writing, in advance the change in days and times of work, what pay will be received, how long the changes will last, whether there will be a probationary period and whether the changes will affect future training and/or promotion prospects. The employer should have the right to terminate the arrangements by notice, to cater for increased demand once trade increases for the business.
If employees are not contractually entitled to overtime, employers can stop offering it, but if there is a contractual right to overtime, consent to stop offering it must be obtained from employees. Employers should investigate as to whether some employees are impacted more than others by the changes and whether any information and consultation obligations arise. Further, as with any changes to terms employers should retain the right to reverse an overtime ban.
If the same level of staffing is required because trading is likely to return to normal soon but there is insufficient cash flow to pay all employees in full in the short term, this option might be useful. However, aside from making redundancies, this is probably the most controversial and least easy for employers to get employees to voluntarily agree to.
As reduction in pay is a change to terms and conditions, this requires agreement in writing from the relevant employee. Ideally, any reduction in pay or benefits should be temporary and explained in clear terms to employees, so they fully understand why the measures are being taken. There are several options when reducing remuneration, it does not just have to mean a straightforward salary cut.
Salary sacrifice: Part of an employee’s salary is given up in exchange for a generally tax efficient benefit. These schemes can assist employers as they are easy and cheap to set up and administer and provide substantial savings in National Insurance Contributions. As these arrangements reduce an employee's remuneration, it will also affect pay-based benefits such as enhanced redundancy and maternity pay. This should be explained clearly to employees together with the length of the scheme before the change is recorded in writing preferably signed by both parties. The employer should retain the right to cancel the arrangements.
Pay freeze: Again, it will be dependent on the provisions on salary in the employee’s contract of employment, as to how easy this option is to adopt. If a contract only promises a pay review, so long as there is a review there is no requirement to increase pay and a pay freeze is permissible and advisable if a business is looking to minimise costs. It is unlikely that a policy to freeze pay will be enough on its own to avoid redundancies, but it can help as part of a number of cost-saving measures introduced.
Reduce pay or benefits: This is possibly the most difficult measure to adopt as an employer, aside from making redundancies. To avoid a claim for breach of contract and/or unlawful reduction in wages (which if successful might also mean compensation for financial losses ‘attributable to the matter complained of’) employers should ensure they have written consent from the employee before paying them less than they are contractually entitled to or offering them fewer benefits. This is particularly important where the employee has restrictive covenants in their contracts, as failure to pay contractual remuneration in full can void the restrictive covenants. Where an element of pay or benefits are discretionary and are not contractual, the business can exercise reasonable discretion and discontinue the pay or benefit, but if you are unsure as to whether the pay or benefit is contractual, it is advisable to seek legal advice first.
Whilst it is unlikely that employees will volunteer for a reduction in pay and benefits, or feel motivated by them, with clear communication by employers as to why a pay cut is required, employees may agree in order to save jobs. If possible, you could try to structure pay cut arrangements so that over the long-term, total packages remain the same.
If you are looking to make unilateral changes to an employee’s remuneration, it is advisable to take specialist legal advice first.
Change pensions: Again, a change to pension arrangements must follow consultation with employees or employee representatives and most changes must also be approved by the pension scheme trustees and be permitted under the terms of the particular pension scheme.
If you do not consult before making changes to employee pensions you could face breach of contract claims by employees and action by the Pensions Regulator for the employer's failure to inform and consult which could mean a fine of up to £5,000 against an individual and £50,000 against a company. Whilst some employers may attempt more drastic action such as closing final salary schemes, a sensible temporary measure might be for an employer to take a pension contribution holiday. This way, the employee could continue to contribute towards their pension, but the employer could make up for any missed contributions in the future, when it can afford to do so.
Bonuses: If contractual and conditions for payments have been met, this should be paid in full, unless the employee has given consent for this not to be paid. If a bonus is discretionary, an employer must make a reasonable and non-capricious judgment as to whether a bonus payment should be made and at what level. An employer should have made clear in the employee’s contract of employment, the nature of a discretion over bonus payments, whether this is over the payment or non-payment, the amount or calculation of the bonus or all of those things. If the contract is not clear or you would like further guidance on bonus’, please contact our employment solicitors.
In conclusion, a difficult economic climate will compel employees to agree to options which they would not usually even consider, as it is less likely they would be able to secure future employment and so providing options and having an open dialogue with employees is important. When implementing alternatives to redundancies, employers should retain enough flexibility to reverse arrangements on short notice, when trading conditions improve.