If a turn of events or a change in the economic climate has seriously affected your bottom line, you’ll need to start planning for ways to cut back to help your business weather the storm.
It’s likely 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 to manage this before having to resort to redundancy.
Here, we outline some of the options that employers might want to explore before considering redundancy, in more detail.
Contents:
Restrict new offers of employment
This is a good place to start, as it’s 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 isn’t one already in place, you could place a restriction on recruitment in areas of your business that might still require roles filling, or a recruitment freeze if the whole business has less of a need for staff.
You could also look at withdrawing job offers you’ve already made, at any time before the employee accepts the role, without having to make a payment for notice. However, withdrawing a job offer could be risky.
If you’ve made an unconditional job offer and it’s been accepted, or you’ve made a conditional job offer that was accepted and whose conditions were fulfilled, the employee could claim for breach of contract if you don’t terminate their employment in line with the contract and pay their notice pay in full, even if they haven’t yet started work (although loss is usually only calculated after the start date).
In that case, you should discuss the situation with the employee and explain that you’d need to terminate their contract by reason of redundancy unless you can defer their contract and delay their start date.
Deferring a contract is easier than withdrawing a job offer, but as there’s already a contract in place if the employee has accepted your offer of employment, they’ll need to agree to the change of start date.
Yet this is only going to resolve the situation if you’re confident that business will pick up again and you’ll still need that role later.
If you’re involved in a collective redundancy exercise, or contemplating making such redundancies, you must:
- include in the overall headcount any individual whose job you’re deferring
- give that person the right to elect representatives (where this applies)
- inform and consult them on the redundancies
If you fail to do this, that person could make a claim for a protective award.
If you’re not sure how to handle the withdrawal or deferral of a job offer, 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. This is cost-effective and quick, and permanent staff could fill any gaps in work.
There may be situations where this isn’t practical or appropriate, but it’s worth considering and discussing with the permanent staff affected if this would work for them and the business.
Before you terminate any engagement, first carefully consider whether the person in question is an employee or worker. Remember that workers are protected by some legislation (such as anti-discrimination law), so any decision to terminate their contracts must not be on discriminatory grounds.
Further, if there is a collective redundancy process taking place, non-permanent workers are included in the overall figure and generally, as with permanent employees, they must be consulted and are entitled to a protective award.
When ending agency workers’ employment, you must keep to your contractual obligations to the agency, to help avoid any potential commercial claims and to retain a good working relationship with the agency moving forward.
If you have fixed-term contracts with contractors, trainees or other workers that are soon to expire, you might consider terminating all fixed-term contracts that will expire in the short term and decide whether permanent staff could cover that work.
Again, you would need to discuss the work in question and see whether you’d be prepared to carry out this work temporarily or more permanently.
Secondment
Another option might be to second your employees internally within a group, or externally to a client or supplier for a defined period.
This might help if the business has short-term cash flow problems and you can’t afford to pay all staff over the next six or 12 months, but you want to retain the talent you’ve recruited and benefit from extra training and experience which a third party your business deals with might provide.
It’s important to keep seconded employees informed of changes in your organisation while they’re on secondment, as if they were continuing to work directly for your business.
Redeployment and retraining
If you need to redeploy people because of the risk of redundancy, you must run a fair and reasonable redundancy procedure to lessen the risk of employees making claims in the future.
If you must make some redundancies, retraining or redeploying staff may be an alternative, as part of an offer for any available suitable alternative employment with a statutory trial period.
If an employee rejects an offer of retraining or redeployment and you have no option but to make them redundant, this is likely to be a good defence against any unfair dismissal or redundancy pay claims.
It might be that an employee’s employment contract has a mobility and/or redeployment clause that allows you to move them around the organisation. This type of mobility clause is usually narrow and must be specific to be enforceable.
If the contract doesn’t have a specific mobility clause, you’ll need the employee’s written consent to the change before you can redeploy and retrain them. Of course, any offer to redeploy or retrain must made on non-discriminatory grounds.
Lastly, you should consider whether the redeployment is something you’ll need temporarily or more permanently and, in both cases, what the implications are for the business. Think about how this might affect employees’ morale and their long-term prospects.
Early retirement
You should only offer early retirement 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.
So, this is worth asking if you have some employees who aren’t critical to the business and close to retirement. As with all voluntary redundancies, it’s important to use your discretion over whether to accept an application.
If you have employees who volunteer for early retirement, it’s recommended that you tell them to seek independent advice on their future pension entitlements.
Shadow redundancies
You might offer early retirement in return for a pay package (often called ‘shadow redundancy’). But to avoid this becoming a dismissal, the employee must genuinely choose to leave, and you should not offer a shadow redundancy on discriminatory grounds.
The less genuine the choice an employee has over whether they leave, the more likely it is for that employee to be included in the headcount if there’s a collective redundancy exercise.
Temporary stoppages
Instead of beginning a redundancy exercise, you might want to consider one of the temporary stoppages explained below:
Direct when employees are to take annual leave
If business is quiet, you can direct employees to take contractual or statutory annual leave as long you give enough notice.
This may only have a small short-term effect in avoiding the need for employees to take more prolonged unpaid leave. But it does mean that employees will be available to work when business picks up during a busier period in the future.
Offer unpaid or part-paid leave or sabbaticals
If it’s important to retain trained and skilled staff, but you have cash flow issues and don’t expect trade to return quickly to its previous levels, this might be an option for you.
Whether this measure will be effective will depend on several factors, such as whether:
- an upturn in trade is likely in the relatively short term
- job losses are still likely anyway
- this action puts employees’ job security at risk
Employees may not be keen to agree to unpaid or part-paid leave or a sabbatical if they’re concerned about their future position within the business or need to earn a full-time wage.
However, they may agree to it if they have caring responsibilities or are happy to have a little longer out of work.
A period of unpaid leave is likely to be shorter than a sabbatical, but otherwise it works in a similar way. You need the employee’s consent unless their employment contract expressly allows you to place them on unpaid leave.
Sabbaticals are usually voluntary, and you should advise employees that you'll consider applications and have the right to decline requests (for example, if someone is crucial to the business).
If you agree a sabbatical, you must set out its terms in writing and sign the document (the employee must sign too), before the sabbatical begins.
Lay-offs
If the business needs to make an immediate, significant saving, lay-offs may be useful if the employees’ contracts state that you have a right to make them, and employees won’t receive their normal salary while laid off.
If you only need to lay off some staff, you might need to run a reasonable and objective, non-discriminatory selection process, like the process used with redundancies.
A provision of this kind is subject to the implied term of trust and confidence, so to avoid being in breach of contract, you should consult employees first and give reasonable notice.
If an employment contract doesn’t give you the right to lay off, you’ll need to agree any lay-offs with the employee in writing beforehand. Otherwise, you could face:
- a potential claim for repudiatory breach of contract
- a possible claim for constructive dismissal
- where you provide no pay during the lay-off period, a claim for an unlawful deduction from wages
You must not lay off employees for longer than you 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.
Reducing hours
Another way to retain trained employees and avoid the short-term costs of redundancy is to reduce working hours permanently or temporarily.
As this is a fundamental change to an employee’s terms and conditions of employment, you’ll need to get their agreement in writing before making this change.
It will help if you explain why the measures are needed (for example, by saying how many jobs you might save if staff accept cuts to their working hours), and if management can lead by example by taking some type of cut themselves.
If staff members agree to these changes before you’ve considered you may have to dismiss 20 or more employees, you won’t need to run a collective consultation. However, if the proposal is a formal alternative to redundancy, or forcing the change by dismissing and re-engaging, for example, that collective consultation will be required.
An employee can’t claim guarantee payments if they agree a permanent change to their working hours.
The short-time working arrangements should make clear that the change in working hours is temporary and the employee should return to their previous hours when you need them to.
Part-time and flexible working
Since 6 April 2024, employees have had the statutory right to request flexible working from their first day of employment. They can make up to two requests within any 12-month period, although only one request can be live at a time.
Flexible working arrangements can provide an alternative to redundancy, particularly where you need to bring staffing costs down or temporarily adjust working patterns. Options might include reduced working hours, job sharing or an agreed move to part-time work.
Where you agree changes, you should record the new arrangements in writing, including working hours, pay, duration and any arrangements for reviewing or ending the changes.
You should distinguish between temporary arrangements and permanent contractual changes. Where a reduction in hours is intended to be temporary, you and the employee should agree how and when the original working arrangements will resume. Permanent changes generally require further agreement before they can be reversed.
As an employer, you should also consider your obligations under the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000 and make sure that any arrangements do not result in unlawful discrimination.
Overtime bans
If employees aren’t contractually entitled to overtime, you can stop offering it. But if contracts say they are entitled, you must get the employees’ consent before you stop offering it.
You should investigate whether the changes affect some employees more than others and whether any obligations arise around information and consultation. Further, as with any changes to terms, you should retain the right to reverse an overtime ban.
Reducing remuneration
If you need the same level of staffing because trading is likely to return to normal soon, but don’t have enough cash flow to pay all employees in full in the short term, this option might be useful.
As reducing someone’s pay is a change to their employment terms and conditions, you must get them to agree to the change in writing.
Ideally, you should make any reduction in pay or benefits temporary and explain it clearly to employees, so they fully understand why you’re taking the measures. There are several options when reducing remuneration – it doesn’t just have to mean a straightforward salary cut.
Salary sacrifice
This is when an employee gives up part of their salary in exchange for a generally tax-efficient benefit.
These salary sacrifice schemes can help employers as they’re easy and cheap to set up and administer and provide substantial savings in National Insurance contributions.
As these arrangements reduce an employee's pay, they also affect pay-based benefits such as enhanced redundancy and maternity pay.
You should explain this clearly to employees, as well as informing them how long the scheme will run, then record the change in writing and have both of you sign the document. You should retain the right to cancel the arrangements at any time.
Pay freeze
How easy this is to adopt will depend on the salary provisions in the employee’s contract of employment.
If their contract promises only a pay review, carrying out the review is enough – you aren’t obliged to increase the employee's salary. In fact, a pay freeze is advisable, and allowed, if the business is looking to lower its costs.
It’s unlikely that a policy to freeze pay will be enough on its own to avoid redundancies, but it can help as part of several cost-saving measures.
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’), you should get the employee’s written consent before you pay them less than they’re contractually entitled to or offer them fewer benefits.
This is particularly important if the employee’s contract has restrictive covenants, as failing to pay what they’re owed contractually in full can void those covenants.
If an element of an employee’s pay or benefits is discretionary and not written in their contract, you can exercise reasonable discretion and discontinue the pay or benefit. If you’re not sure whether the pay or benefit is contractual, you should seek legal advice before acting.
While it’s unlikely that employees will volunteer for a reduction in pay and benefits, they might agree to it if you can clearly communicate why it’s needed (to save jobs, for example). If possible, you could try to structure pay-cut arrangements so total packages remain the same over the long term.
If you’re looking to make unilateral changes to an employee’s remuneration, you should seek specialist legal advice first.
Change pensions
Again, you must not change pension arrangements without first consulting an employee (or their representative). Most changes must also be approved by the pension scheme trustees and be permitted under the scheme’s terms.
If you don’t consult the employee before changing their pension, you could face a breach of contract claim. On top of that, the Pensions Regulator could fine you £5,000 as an individual and £50,000 as a company.
While some employers may attempt more drastic action (such as closing final salary schemes), it might be more sensible to take a temporary pension contribution holiday.
That way, the employee could continue to contribute towards their pension, but you could make up for any missed contributions in the future, when you can afford to do so.
Bonuses
If the employee has met all the contractual conditions for receiving a bonus, you should make the payment in full, unless they’ve given consent for you not to pay it.
If a bonus is discretionary, you must make a reasonable and non-capricious judgement as to whether you should make the payment and how much it should be.
You should have made clear in the employee’s contract of employment how discretion will be used to decide bonus payments.
