What is redundancy?
Under section 139(1) Employment Rights Act 1996, ‘redundancy’ is defined as follows:
…an employee who is dismissed shall be taken to be dismissed by reason of redundancy if the dismissal is wholly or mainly attributable to—
- the fact that his employer has ceased or intends to cease—
- to carry on the business for the purposes of which the employee was employed by him, or
- to carry on that business in the place where the employee was so employed, or
- the fact that the requirements of that business—
- for employees to carry out work of a particular kind, or
- for employees to carry out work of a particular kind in the place where the employee was employed by the employer,
have ceased or diminished or are expected to cease or diminish.
This means that the dismissal must be caused by the employer’s need to reduce its workforce. Redundancy may happen because a workplace is closing down, or because fewer employees are (or are expected to be) needed for work of a particular kind. Normally the employee’s job must have disappeared; it is not redundancy if the employer immediately takes on a direct replacement (although a redundancy situation may also exist in a ‘bumping’ situation).
Typically, employers should:
Step 1: Establish that there is a genuine redundancy situation, take adequate steps to consider alternatives to redundancy, warn and consult with affected staff.
Step 2: Consider the ‘pool’ from which redundancies will be made, and the selection criteria to be applied; list any alternative vacancies within the company or group.
Step 3: Meet with all of the employees who might be made redundant and explain the reasons for the potential redundancies. Consider asking for volunteers.
Step 4: Score each potentially redundant employee using the selection criteria and scoring guidelines.
Step 5: Write to those employees that have been provisionally selected for redundancy, inviting them to a meeting to discuss their provisional selection.
Step 6: Consult with each employee individually about their scores, the proposal to select them for redundancy and the terms of the redundancy. Discuss details of any available alternative roles within the group.
Step 7: After the meeting, follow up any suggestions made to avoid the redundancies and consider any representations made.
Step 8: Where a decision has been made to make an employee redundant, invite that employee to a further meeting and confirm that the employee has been selected for redundancy. Go through the redundancy package.
Step 9: Write to the employee confirming the decision and specify the termination date. Confirm that the employee has the right of appeal. Explain how to appeal and the relevant time limit.
Step 10: If employee appeals, invite them to attend a further meeting to hear the appeal which should if possible be held by someone senior to the person who held the previous meetings.
Step 11: Write to the employee confirming the outcome of the appeal and that this is a final decision.
If an employer is proposing to dismiss 20 or more employees at one establishment within 90 days, it must consult appropriate representatives of the employees concerned. If the employees are members of a recognized trade union, the appropriate representatives are representatives of the trade union. Otherwise, the employer should consult with elected or appointed employee representatives. A failure to consult with the appropriate representatives may render the employer liable to pay each redundant employee a protective award of up to 90 days’ pay.
If an employee who is made redundant has more than one year’s continuous employment, they may bring a claim in the employment tribunal for unfair dismissal. To defend a claim for unfair dismissal, the employer would have to show that it had a fair reason for dismissal (which are prescribed in the legislation). The dismissal will also be unfair if the employer did not act reasonably in treating redundancy as a sufficient reason for the dismissal. In certain circumstances, the one year requirement is disapplied, for example if the dismissal was on the grounds of sex, race, pregnancy etc.
Payments and notice period
If an employee is dismissed by reason of redundancy, he or she will be entitled to receive their contractual notice period (or damages for failure to give notice). If the contract of employment contains a provision allowing the employer to make a payment in lieu of notice, it may elect to do so. Employees (with at least a month’s continuous employment) are entitled by law to a minimum statutory period of notice of one week for each year of continuous employment (subject to a maximum statutory notice period of 12 weeks).
In addition, employees who are made redundant may be entitled to statutory (and/or contractual) redundancy pay and to be paid for any outstanding holiday.
Statutory Redundancy Pay
When is statutory redundancy pay due?
Employees are entitled to statutory redundancy pay if:
- they are made redundant;
- they have at least two years’ continuous service; and
- they meet certain other conditions (see below).
They may also be entitled to other non-statutory payments if this has been agreed in their contract of employment.
Who can qualify for statutory redundancy pay?
Employees will receive payment only if they are working under a contract of employment. Self-employed people and members of a partnership do not qualify under the Employment Rights Act 1996 although they may have separate contractual agreements.
Directors and other office holders may be employees if they work under a contract of employment. They will not qualify if they do not work under a contract of employment.
Contracts of employment may be spoken or written and last for any length of time or be fixed. In law, employees generally have a contract as soon as they start work and by doing so prove that they accept the conditions offered by the employer.
A few groups of employees do not qualify for a statutory redundancy payment, for example members of the armed forces.
What ‘dismissal’ means
In general, to be due statutory redundancy pay, the employee must have been dismissed by the employer and the reason for dismissal must have been redundancy. ‘Dismissal’ includes constructive dismissal.
If an employee is laid off (that is, receives no wages) or put on short time (that is, receives less than half a week’s pay) for four weeks in a row or six weeks out of 13 weeks, they may also claim a redundancy payment without waiting to be dismissed for redundancy. They must make a claim in writing to the employer, who may refuse to pay if it believes normal working is likely to return within four weeks.
If an employee is on a fixed-term contract and it ends without being renewed, this counts as a dismissal and the employee may be due a redundancy payment.
If the employer says that redundancies will be needed and asks for volunteers, employees will qualify for a payment if they volunteer, as long as the employer actually dismisses them.
General rules on length of service
Employees must generally have at least two years’ continuous service to qualify for statutory redundancy pay.
Offer of a new job
An employee may well not be entitled to a payment if offered a new job with the same employer, an associated employer or an employer who takes over the business. But if the new job is with the same or an associated employer the employee will only lose the redundancy payment only if the new job is offered before the old employment contract expires, and starts within four weeks.
An employee who is offered a new job in this way can put off the decision whether or not to accept it for a four-week trial period. Or if they need retraining, the trial period may be extended beyond four weeks by written agreement between the employee and employer. If at the end of the trial period the employee is still in the job, they will be considered to have accepted it.
If the new job is not a suitable alternative to the old one (because of differences in capacity, location or terms and conditions of the contract of employment) and the employee turns it down before the end of the trial period, they will be considered to have been redundant from the date your original employment ended. But if they refuse an offer of a job that is a suitable alternative without a good reason, they will not be entitled to a redundancy payment.
What are the payments?
The amount of the statutory redundancy payment depends on:
- length of continuous service;
- how the years of continuous service relate to a particular age band; and
- weekly pay, up to a legal limit.
The amount of redundancy pay will be calculated as:
- 0.5 week’s pay for each full year of service where age during the year is less than 22
- 1.0 week’s pay for each full year of service where age during the year is 22 or above, but less than 41
- 1.5 weeks’ pay for each full year of service where age during the year is over 41.
With effect from 6 April 2017, the weekly limit for a week’s pay for the purposes of calculating statutory redundancy pay is £489.
The maximum number of years continuous service that can be counted for statutory redundancy payments purposes is 20. Length of continuous service is counted backwards from the ‘relevant date’. This is generally the date on which the notice given to the employee ends. But if the employer gives less than the legal minimum notice, the extra notice which should have been given is added on.
Certain absences – for example, caused by sickness, pregnancy or temporary shortage of work – can count towards continuous service even if the contract of employment was suspended.
What if the employer is insolvent?
If the employer is insolvent or cannot pay, the employee can apply to the Department for Business Enterprises and Regulatory Reform (BERR) for a direct payment from the National Insurance Fund. A copy of the form can be found on the BERR website at www.berr.gov.uk.
Time off work
Time off for job hunting or to arrange training when facing redundancy
An employee who is given notice of dismissal because of redundancy is entitled to reasonable time off with pay during working hours to look for another job or make arrangements for training for future employment. The time off must be allowed during the period of notice.
Employees are entitled to time off in this way only if they have had two years’ continuous employment with their employer on the date their notice expires or the date when the statutory minimum period of notice due under the legislation expires, whichever is the later.
Amount of time off
An employer should allow the employee reasonable time off. The legislation does not specify what is reasonable since this will vary with the differing circumstances of employers and employees. Some employees may need only to attend one interview or make one visit. Others may have to make a number of visits, some of which may involve travelling some distance.
Payment for time off
Employees should be paid the appropriate hourly rate for the period of absence from work but an employer does not have to pay more than two-fifths of a week’s pay, regardless of the length of time off allowed. This is arrived at by dividing the amount of a week’s pay by the number of normal working hours in the week. The method of calculation is similar to that used for computing redundancy payments. The week’s pay is calculated by reference to a date known as ‘the calculation date’. In computing pay for time off to look for work or arrange training, this date is the one on which notice was given by the employer.
An employer does not have to pay more than once for the same period. Any payment already made under an employee’s contract of employment for a period of time off to look for work will be offset against the employer’s liability under the provisions. If payment has been made by an employer for time off to look for work under the provisions, this will reduce any liability under the contract of employment.
Applying to an employment tribunal
If an employee wishes to file a claim in the employment tribunal for unfair dismissal, a protective award, statutory redundancy pay, notice monies, holiday pay or other sums owed, strict time limits apply. For an unfair dismissal claim, the limitation period is generally three months from the effective date of termination.