Essential guide to redundancy

Redundancies can be a fact of life in the smaller business, where carrying surplus staff is a shortcut to disaster. A shift in the economic or business climate, a merger or a move to a new location can all make redundancies inevitable.

Redundancy is a complex issue, full of pitfalls. To avoid falling foul of employment tribunals, it is essential to follow demonstrably fair procedures.

Genuinely redundant

The redundancy process

Avoiding redundancies

Choosing the people

Voluntary redundancy

Statutory payments

Normal payment practice

Employees' rights

Keeping up morale

1. Genuinely redundant?

It is the job, not the person, that is redundant. People unfairly dismissed under the pretence of redundancy can ask an employment tribunal to order a compensation award or reinstatement.

Genuine redundancy only arises for particular reasons

The employee must be dismissed wholly (or mainly) for one or more of these reasons:

• the business stops doing what the person was employed to do (eg it closes down);
• the business stops doing it where the employee was employed to do it;
• there is a reduced need for people in the employee's category doing that kind of work in that place.

Most employees who are made redundant are entitled not to be dismissed unfairly

• Part-time and fixed-term workers enjoy the same protection as full-time employees.
• Employees with less than two years' service do not have this right, unless they were chosen for redundancy for an automatically unfair reason (see Choosing the people).
• Employees with two years' service or more usually qualify for redundancy pay (see Statutory payments).
• Employees who adopt 'employee owner' or 'employee shareholder' status give up some of their employment rights in return for shares. This includes giving up the rights to ordinary unfair dismissal protection.

Employees cannot usually sign away their rights to statutory redundancy payments

• Employees who adopt 'employee owner' or 'employee shareholder' status give up the right to redundancy pay.

2. The redundancy process

In redundancy situations, it is essential to stick to the correct process and timing.

Plan well in advance and put everything in writing

• It may be useful to have a written redundancy procedure, but this may limit your actions.
• Log every stage. If there are problems, tribunals like to see a clear paper trail.

Consult and notify in time

• There is no statutory fixed consultation period if fewer than 20 employees are involved. However, your employment contracts may specify a consultation period.
• For 20 or more people, you must begin consultations with employees or their representatives and notify the Redundancy Payments Service at least 30 days before the dismissals take effect.
• If there are more than 100 people involved, you must begin consultations at least 45 days before the dismissals take effect.
• Failure to consult properly is potentially costly, as any individual can then ask a tribunal for a 'protective award', giving up to 90 days' full pay to every employee involved.

You must also be able to show that you have consulted each employee individually

• The first meeting is usually to describe the process and timescales, discuss possible alternative work and explain redundancy pay calculations.
• Further meetings may be needed to give feedback and ultimately to give notice and explain the appeals procedure.

Decide how people will be selected for redundancy

• Define the pool from which employees will be chosen for redundancy, decide what criteria you want to use and select fairly from the pool.
• Selection criteria, but not individual scorings, should be disclosed to employees as part of the consultation.

Give redundant employees notice, in line with the terms of their contracts

• Employees must be given at least the statutory minimum notice period.

Implement the dismissals

3. Avoiding redundancies

You are legally obliged to take reasonable steps to avoid compulsory redundancies

• The possibilities include short-time working, overtime bans, shedding temporary or contract labour, lay-offs, transfers, redeployments, early retirements, or calls for volunteers.
• These should usually all be considered and rejected as impractical before there are any compulsory redundancies.
• Over time, natural wastage or a freeze on recruitment might achieve the same result.

For 20 or more redundancies, consult with employees' representatives or trade union

• Employee representatives can be existing representatives, information and consultation representatives or new ones specially elected for the purpose.
• The process must include consultation on how to avoid dismissals, how to reduce the numbers dismissed and how to minimise the consequences.
• Discussions must be genuine. There is a legal duty on the employer to consult 'with a view to reaching agreement'.

4. Choosing the people

You have wide scope to choose whatever selection criteria suits your business needs. Your choice will not be challenged by an employment tribunal unless it is unreasonable or discriminatory. But you must be able to show the criteria were applied fairly and consistently.

One common, traditional approach is LIFO (last in, first out)

• If no other criteria are published, LIFO will usually apply.

Selection could be based on skill levels, experience or attendance records

Selection could be based on performance

• This can only be done if objective measures exist (perhaps through an existing appraisal system).

Selection must not be based on any discriminatory basis (eg gender, age or race)

• Proceed with caution if you are considering making someone who is pregnant or on statutory leave redundant. You must be able to prove the redundancy is not connected to the pregnancy or leave as that would be 'automatically unfair'.
• Involve the employee in the consultations. You have a legal obligation to offer any available alternative work to those on maternity leave.

It is illegal to single a person out for redundancy because of being an employee representative

For example:

• an information and consultation representative;
• a safety representative or safety committee member;
• a trustee of a pension scheme;
• a union representative (or an employee-elected representative in redundancy consultations).

No one can be penalised for trying to assert any of their statutory employment rights

5. Voluntary redundancy

Voluntary redundancy programmes can only be launched in genuine redundancy situations.

Set out the terms of the package

Specify who can apply for voluntary redundancy payments

• For example, people at a certain level.

State that you may be unable to accept all volunteers for redundancy

Consider offering early retirement, if your pension scheme allows it

• This is usually more acceptable to the workforce than compulsory redundancies.
• Unlike enhanced lump-sum payoffs, it can create costly long-term commitments.

6. Statutory payments

Statutory redundancy payments are calculated according to the number of years' service, and the employee's weekly earnings.

Most employees have a statutory right to redundancy payments

The exceptions are:

• people with less than two years' service;
• people who unreasonably refuse an offer of suitable alternative employment;
• employees who have adopted 'employee owner' or 'employee shareholder' status.

Service is counted up to a maximum of 20 years

• Each year of service from age 41 onwards entitles a person to 1.5 weeks' pay.
• Service between ages 22 and 41 entitles a person to one week's pay per year.
• Service aged under 22 entitles a person to half a week's pay per year of service.

A 'week's pay' is based on actual income (or average weekly earnings)

• This is capped at £700 a week (2024/25).
• Maximum statutory redundancy pay is therefore 20 x 1.5 x £700 = £20,000.

Calculate redundancy pay

• You can calculate your employee's redundancy pay using HMRC tool on the GOV.UK website.

7. Normal payment practice

In practice, some employers pay more - sometimes a lot more - than the minimum.

You may pay more for several reasons

• To encourage people to volunteer for redundancy.
• Out of goodwill, to maintain good relations with ex-employees and those who remain.
• Because of provisions written into your employees' contracts, or because of custom and practice in your industry.
• If you always pay more than the minimum, this can become established as an implied right for your employees.

Redundancy pay of up to £30,000 is usually free of tax

• Employer's National Insurance Contributions is payable on payoffs where tax is also due.
• Check your redundancy payment plans in advance with HM Revenue & Customs.

8. Employees' rights

Employees under notice of redundancy have rights, apart from any redundancy payments.

The right to be offered 'suitable alternative employment', if possible

• This can be offered by the existing employer or by an associated employer.
• If an offer is unreasonably refused, the employee loses the right to redundancy pay (eg if the differences between the old and new job are insignificant). It is up to the employer to prove that alternative employment is suitable and refusal is unreasonable.
• 'Reasonable' refusal might be based on a major change in working hours, a cut in pay or the need to travel or move house.
• An employee can try out the new job for four weeks - or longer, by agreement. If it proves unsuitable, he or she may leave and still get full statutory redundancy pay.

The right to reasonable time off during the notice period for job-hunting

• This includes time off to arrange training to help you find another job.
• This usually means two days paid time-off in total.

9. Keeping up morale

Demonstrate that you are handling all redundancies fairly and with sensitivity

• Making generous provision to soften the blow (eg outplacement support) may defuse tensions.

Take action on internal morale among employees who remain

Take action to counter negative publicity

• Inform suppliers and customers. Explain the reasons and the long-term benefits.

People under notice of redundancy are hard to manage

• The quality of the work they produce may drop.
• Consider inviting non-essential people to leave before their notice is up, with pay in lieu. Legal problems may arise if you let them go before the consultation period is over.
• People under notice should not be made responsible for key customers, essential machinery or confidential databases.

Note

Employment law is complex and is changing rapidly. This factsheet reflects our understanding of the basic legal position as known at the last update. Obtain legal advice on your own specific circumstances and check whether any relevant rules have changed.