Redundancy can be expensive and potentially ineffective for businesses hoping to ride out the recession. As demands are made by the government and business leaders to invest in skills and talent, just what are the alternatives available to SMEs in the current climate?
No one can predict how long the current economic downturn will continue and when the country will come out of recession. What can be predicted is that those who are prepared for when the economy improves will be best placed to maximise and profit from any investment they make now.
With unemployment expected to rise from today's level of 1.92million to over 3million by 2010 it will not come as a surprise to find that redundancy is on the minds of employers and employees alike. With the high profile departure of Woolworths from the high street, reported falls in profits over the Christmas period and many more firms and retailers expected to fall by the wayside over the coming months there is no wonder that doom and gloom is spreading like norovirus this winter.
Real cost of redundancy
It has been estimated that the 'real' cost of redundancy can be more than £16,000 per employee. This hypothetical figure includes any statutory redundancy payment, payable to employees who have been employed continuously for over 2 years and calculated on a strict formula of half a week's pay for each full year of service for workers aged less than 22, 1 week for those ages 22 to 41 and one and a half weeks for those aged over 41. This payment is subject to a cap of 20 weeks and £350 for a week's pay. There is no cap on the age of those being made redundant. A statutory redundancy payment can therefore be £7,000 for those under 41 at the time of termination or up to £10,500 for those aged over 41.
It may be that some workers are employed under contracts or collective agreements which provide them with enhanced terms at times of redundancy. Especially in situations where employees have been acquired through mergers and buy-outs it is worth checking all contracts of employment for any enhanced terms. Enhanced packages can provide in excess of 4 times the minimum statutory redundancy payment together with additional bonuses that employers might not initially account for.
In addition to any statutory redundancy payment, employees being made redundant will also be entitled to contractual notice or a minimum of statutory notice. This can often be paid in lieu and may or may not be subject to PAYE and NI contributions. Making the correct payments to those who are unable to avoid redundancy is one of the key factors.
Another key factor is fair and reasonable consultation. A proper consultation procedure not only takes time (up to 3 months for those making in excess of 100 employees redundant) it can also be expensive. You must ensure this is compliant with the legislation from day one in order to avoid any potential claims for procedural unfairness.
But redundancies are not an inevitable consequence of tough economic times, despite what the media is reporting.
There are some key opportunities to conserve funds without resorting to cutting employees in the first instance, only two examples of which are lay-off and short-time working. Some other alternatives, such as limiting the use and availability of overtime and curtailing the use of temporary staff will not require any contractual changes. However, other cost-reducing measures do require contractual changes and this is a minefield of procedure which every employer must ensure they get right from the start.
Varying Terms and Conditions
There are a number of ways to vary an employees terms and conditions of employment. The starting point is that there is a written statement of terms and conditions as required by the Employment Rights Act 1996. All employees with over 6 month's service enjoy this right. Where no written contract exists, there will be an implied contract made up of statutory rights, ancillary agreements and custom and practice.
The first, and most simple, method of varying terms of employment is by agreement with the employee. Most employees will be aware of the current economic climate and if a contract variation provides for them to retain their employment it is likely they will be amenable to such change. Any variation should, of course, be recorded in writing.
If there is a trade union in place, a collective agreement may be possible whereby the union will negotiate as agent for its members. This is an attractive proposition where there is a large number of employees and the process can be dealt with by only a few representatives. However, be aware that only in certain circumstances will the variation be express or implied into each individual contract of employment.
In-built flexibility
The second method is by contractual flexibility. There may be some flexibility in certain clauses of an employee's contract of employment. Frequently there will be a mobility clause allowing the employer to change the employees place of work (within reason) or a broad definition of job function which will allow an employer sufficient flexibility in changing duties and roles. The extent of the flexibility will depend on how the clause is worded and how explicit the employer's discretion is.
Reasonableness
Third are general flexibility clauses within contracts that permit the employer to vary terms and conditions at its discretion. Significant and substantial restrictions can be made to such clauses by the courts and tribunals which will always take into account implied terms such as reasonableness and the duty of mutual trust and confidence. What will be important when drafting such clauses is the element of fairness.
Lay-off and short time working is only an option available to employers whose employees have such a term in their contracts. There must be a contractual right to only pay employees for the amount of time they are working. It may be attractive to exercise this right, even on a temporary basis, but employers should be aware that it brings with it certain risks, even where there is a contractual right. An employee who is laid off or put onto short time working may acquire a right to claim a redundancy payment for example. This is a complex area and if you have any concerns you should seek legal advice at an early stage.
Unilateral variation and inherent risk
Finally, and most risky, is the imposition of contractual changes on an employee. A unilateral variation to an employee's terms and conditions will be a technical breach of contract, for which the employee can sue or terminate his contract and claim constructive unfair dismissal. Although common, this should be avoided wherever possible. An employee, if he makes no objection to the variation, will be assumed to have accepted them after a time by continuing to attend work.
A last resort is to dismiss the employee who is refusing to accept changes and immediately re-offer the position and a new contract incorporating the revised terms. An employee may accept these terms however, there is a risk that the employee may leave and claim unfair dismissal.
At this time, whatever course of action a business takes to maintain a flexible and profitable workforce, there are likely to be longer term effects. By considering these sensibly and not reacting with a knee-jerk response to the current downturn, a business is likely to be in a much stronger position once the clouds clear. Investment in talented existing employees, skills training and continued employment at the present time can pay dividends when the inevitable turn around begins once again.
For further information please contact Mark Serby at [email protected] or on 01142666660.
