Making an employee redundant: an overview for SMEs

Employment Partner at W Legal Limited, Catherine Wilson provides an overview on making an employee redundant, how the selection and consultancy process works, and the legal factors to consider in order to avoid unfairness or discrimination.

Redundancies were (unfortunately) not invented in 2020! But the coronavirus pandemic has forced many businesses and organisations to make employees redundant due to a reduction in the workforce required. Many employers may rarely, if ever, have had to go through the process of making an employee redundant before.

Redundancy is a potentially fair reason for dismissal; however, employers are required to carry out a fair consultation and, if necessary, selection process. It is therefore important to understand the practicalities involved in making an employee redundant. This article focuses on smaller redundancies where less than 20 employees are potentially affected. For completeness, employers should be aware that different rules apply where 20 or more staff are affected.

What does “redundancy” mean in legal terms?

To be entitled to a redundancy payment, the employee must be dismissed by reason of redundancy (Section 163 (2) of the Employment Rights Act 1996). Redundancy in this context has a clear legal meaning. An employee is dismissed by reason of redundancy if their dismissal is “wholly or mainly attributable to” the employer:

• Ceasing or intending to cease to carry on the business for the purposes of which the employee was employed by it (business closure)
• Ceasing or intending to cease to carry on that business in the place where the employee was employed (workplace closure)
• Having a reduced requirement for employees to carry out work of a particular kind or to do so at the place where the employee was employed to work (reduced requirement for employees)

Do redundancies always involve a selection process?

Often a situation arises where only one employee is affected. This is known as a pool of one. Even where this is the case, the employer must still demonstrate that a fair procedure has been followed. This would include justifying why no other roles are being made redundant, discussing the situation with the employee, and analysing possible alternative employment within the organisation.

Equally, sometimes several employees may be affected and therefore the employer must create a selection pool from which to choose candidates for redundancy. Selection criteria must be fair and include a mixture of subjective and objective criteria. This selection criteria may include some or all the following:

• Attendance and punctuality
• Disciplinary record
• Skills or experience
• Work standard
• Length of service

The process can also include the use of competency based interviews and aptitude tests but, wherever possible, reference should be made to “hard evidence”, such as disciplinaries, sickness absences, performance records, and appraisals (all recordable via a document management system). Not all criteria may be judged of equal importance, so employers may wish to introduce a weighting system split between different criteria.

What are the elements of a fair individual redundancy consultation?

Irrespective of the number of potential redundancies, the employer must always conduct a fair individual consultation process with all potentially affected staff. As a minimum, this formal process will include:

• Inviting the employee to one or more redundancy meetings, where it is recommended that they be offered the right to be accompanied to by a trade union representative or colleague.
• Giving them notice of the termination of their employment in writing.
• Ensuring they are given the appropriate notice of termination or payment in lieu of notice.
• Ensuring they receive the appropriate redundancy payment following the correct method of calculation.
• Informing the employee of their right to appeal against the decision to make them redundant.

Employees must be made aware of the reason for the redundancies and given the opportunity to consider and comment on the decisions of the employer. They must be allowed to make representations relating to their selection as well as alternative roles within the organisation that they feel they may be able to perform. By way of practical guidance, the individual redundancy procedure also usually involves at least three meetings with each at risk individual, which normally takes place over at least a two week period excluding any appeal.

What financial payments are redundant employees entitled to receive?

All employees, irrespective of their length of service, are entitled to receive the greater of the notice of termination specified in their contract or statutory notice. The statutory notice period is one week where an employee has been employed between one month and 2 years and thereafter one week for every year of the employee has been at the company between 2 and 12 years subject to a maximum of 12 weeks thereafter. Notice payment is taxable. This includes payments in lieu of notice.

Statutory redundancy payments

Employees employed by the business for over 2 years are entitled to statutory redundancy payments. Statutory redundancy payments are tax free and based upon an employee’s age, length of continuous employment, and gross average wage. The gross average wage is subject to a statutory cap announced in April of each year. Length of service is similarly capped at a maximum of 20 years.

In addition, employees are entitled to receive payments for accrued but untaken holiday as at the date of termination. Employees may also receive additional enhanced redundancy payments where this have been agreed by the employer. Statutory redundancy entitlement can be calculated using the employers’ redundancy calculator on the government website.

Can you make employees on maternity leave redundant?

This is a sensitive area. An employee on maternity leave can be made redundant; however, care is required. An employee cannot be selected for redundancy because they are on maternity leave. This would be discriminatory and constitute an “automatic unfair dismissal” and discrimination. The redundancy must be genuine and must not be related to pregnancy or maternity leave.

Furthermore, there is additional protection for employees on maternity leave, as an employer must offer alternative employment if it is available, giving them priority over other employees. Finally on a related topic, pregnant employees may still be entitled to maternity pay, notwithstanding their redundancy, if they are employed for at least 26 weeks ending with the week immediately preceding the 14th week before the archaically described “Expected week of confinement”.

Does sick leave prevent an employee from being made redundant?

Again, employees on sick leave can be made redundant. Sickness records can be considered when considering redundancies, but need to be handled with caution, especially where the sickness is linked to a disability.

Any disability related absence must be treated differently. However, employees with a disability can be made redundant if the employer can show their selection was justified when considering the business needs and not related to their disability. Similarly good practice is to exclude sickness absences linked to health and safety incidents in the workplace from use in selection.

Learn more: The Bradford Factor and disability: absence procedure flexibility

How long before you can replace a previously redundant post?

The legislation, and by extension, Employment Tribunals recognise that situations change. There is therefore no “quarantine period” before a post can be replaced. Employers must however take care when appointing or even advertising for a role that has recently been made redundant. If the advertisement comes within 3 months of the redundancy, then there is the risk that the dismissed employee can still make a claim for unfair dismissal.

If a change in circumstance means an employer needs to reinstate a role that has previously been may redundant, it may be prudent to notify the original employee and ask them if they wish to be considered for the role.

Read more from the myhrtoolkit blog

Voluntary redundancy guide for employers

How to perform the redundancy process remotely

Documenting employee discipline: how to document misconduct and employee issues