Avoiding redundancies: finding alternative solutions

As employers struggle to avoid job cuts, this article examines the alternatives to redundancy.
Julie Quinn, Tracey Marsden and Michal Stein, Nabarro LLP

In the past few months, not a day went by without redundancies, sometimes in their thousands, being reported in the press. Although employers often see redundancies as a quick fix for the economic difficulties they face, many employers try hard to avoid job losses and preserve skills and expertise. This article examines the alternative measures to redundancy (see Glossary) which can offer employers greater short-term and long-term prospects of survival and success (see boxes "Practical considerations" and "Avoiding redundancies: the commercial reality").

These measures include:

  • Reducing employee headcount.

  • Work stoppages.

  • Reduction in work and output.

  • Pay reductions.

An employer adopting any such arrangements will need to consider carefully the legal and commercial implications of such steps; for example, some measures may:

  • Contravene contractual arrangements and require employees’ consent.

  • Give rise to collective information and consultation arrangements.

  • Have a detrimental impact on morale, motivation and the public image of the organisation.

 

Reducing headcount

In many organisations, employee costs are the highest single item of expenditure. In difficult economic times, the temptation to cut headcount as a quick fix to spiralling expenditure and falling orders may be hard to resist. However, such short-term measures may affect the long-term prosperity of the organisation:

  • Once lost, a talented, experienced employee is hard to replace when business improves.

  • The company may suffer reputational and motivational damage.

There are other measures which may prove more advantageous, as described below.

Restrict recruitment

A hiring freeze is an easy, cost-effective mechanism to reduce organisational costs and expenses. Combined with natural attrition, this is often the first step employers take in an economic downturn. A stand-alone recruitment freeze will not usually have employment law implications.

Where, however, an employer takes the commercial decision to retain flexibility and, within a hiring ban, recruit an exceptional candidate for a critical and/or key role, legal issues may come to the fore, particularly if, at the same time as hiring during a recruitment freeze, there are individual or collective redundancies. For example, the employer:

  • Must ensure that the decision to dismiss existing staff for redundancy and hire a new employee is not tainted (or seen to be tainted) by discrimination.

  • May either have to offer employees at risk of redundancy the opportunity to retrain or re-skill before making a job offer to an external candidate, or be able to justify the decision to make some employees redundant while recruiting another.

  • Will probably have to consult on the issue of a likely new recruit in any collective redundancy consultations with employees or employee representatives.

Failure to take any of these steps may lead to claims for unfair dismissal and/or a protective award.

Withdraw job offers

Withdrawing employment offers before new employees join is also an attractive way to reduce employee headcount. An employer may withdraw an offer of employment at any point before it is accepted, without having to give notice or make a payment in lieu of notice.

Once an offer has been accepted, and any preconditions attached to it met (for example, receipt of references satisfactory to the employer and confirmation of professional qualifications) an employment contract is in place, even if the employee has not yet started work. The employer is unable at this stage to withdraw the employment offer and, instead, has to terminate the contact. This will be done by giving the contractual notice or making a payment in lieu.

Failure to give the requisite notice or, where contractually permissible, pay in lieu, will give rise to a breach of contract claim, which may be pursued in the employment tribunal (Sarker v South Tees Acute Hospitals NHS Trust [1997] IRLR 328 (EAT)) or civil courts. Normally, however, an employee’s loss will only begin to accrue after the employment start date. As a result, if an employer terminates the contract one week before work is due to start, and the employee has a four-week notice period, damages will normally be limited to three weeks’ earnings.

If an employee’s notice period varies depending, for example, on whether or not the employee has completed a probationary period, damages are likely to be limited to the shortest notice period the employer would have had to give (Cscape Strategic Internet Services Ltd v Toon [2008] UKEAT 0087_08_1305 (www.practicallaw.com/9-382-2251)).

The employee will normally be unable to bring an unfair dismissal claim because he will not have completed the one-year service which is a pre-condition to bringing an unfair dismissal claim. However, there are some exceptions to the one-year rule, and employers must also be careful not to terminate the contract for a discriminatory reason.

Where the withdrawal of an employment offer is, effectively, due to redundancy then, in order to avoid complaints of unfair dismissal, it is normally necessary to consult with the individual employee. Most employers will not carry out such an exercise where the risk of a claim for statutory redundancy pay and/or unfair dismissal is low (usually, because the individual will not have the minimum qualifying periods necessary to bring these claims). If, however, the employer is involved in a collective redundancies exercise, or is contemplating making such redundancies, it will have to include the individual in the overall headcount. This means that the individual will have to be given the right to elect representatives (where applicable) and be informed and consulted on the redundancies. Failure to do so may result in the individual making a claim for a protective award.

Defer new joiners

A softer alternative to withdrawal of job offers is to ask soon-to-be new joiners, for example, graduate recruits or apprentices, to defer their starting date by a period of time. As long as a new joiner has already accepted the offer of employment, then there is a contract in place and a change to start date will require their agreement (see "Withdraw job offers"). For this reason (and to maintain goodwill and a positive public image), some employers offer compensation alongside the offer to defer a start date.

Reduce non-permanent staff

Reducing the number of agency, temporary and casual staff employed by an organisation is often a swift and cost-effective strategy. To the extent that such staff are not employees or workers of the organisation, it is often legally simpler (and cheaper) to terminate their engagements than dismissing permanent employees or workers. However, before a decision is taken to terminate any engagement, it is necessary to consider carefully whether the individual in question is an employee or worker of the organisation.

Most agency arrangements involve a contract between the agency and the employing organisation (the client) and a contract between the agency and the individual. There is rarely a contract between the individual and the client. The two contracts often stipulate that the individual is neither an employee of the client nor of the agency. However, broadly speaking, whether the individual is an employee of either party will usually depend on how the arrangements are executed in practice. Staff who are found not to be employees of the client have no right to:

  • Complain and seek compensation for unfair dismissal.

  • Claim statutory (or contractual) redundancy pay.

  • Claim statutory notice.

  • Benefit from the terms of most collective agreements.

  • Be consulted, or receive a protective award, under the collective redundancies regime (sections 188-192, Trade Unions and Labour Relations (Consolidation) Act 1992) (TULRCA).

Such individuals are, however, protected by UK anti-discrimination legislation, so any decision to terminate their contracts must not be on discriminatory grounds prohibited by the legislation.

Casual staff who are employees of the organisation must be counted for the purposes of the statutory collective redundancies regime and generally, with a couple of exceptions, they must be consulted and are entitled to a protective award, in the same way as permanent employees.

In 2008, the EU adopted the Temporary Workers Directive (2008/104/EC), which is designed to secure equality of treatment for agency staff when compared with permanent staff. Once implemented in the UK, the Directive will give agency staff who have worked with the employer for at least 12 weeks similar rights to those of permanent staff. The UK government has just issued a consultation paper on implementing the Directive (see "Temporary agency workers: consultation (www.practicallaw.com/9-385-9536)", Employment Bulletin, this issue).

From a commercial point of view, it is desirable to ensure that termination of agency arrangements complies with the employer’s contractual obligations to the agency (for example, as to length of notice). This will avoid potential commercial claims by the agency and will help to preserve a good working relationship for the future.

Companies should bear in mind that, where temporary and agency staff form a large part of the organisation’s workforce, termination of their contract may lead to staff unrest and poor motivation.

Secondment

Another headcount reduction option is to second an employee, either internally within a group or externally to a client that needs additional resources or expertise (for example, because it has had to make redundancies).

Although some employment contracts contain an express provision allowing an employer to second an employee, it is best (and common practice) to obtain an employee’s advance consent to the secondment.

In most instances, it is customary and advisable to enter into a tripartite secondment agreement between the original employer (the seconder), the organisation to which the employee is seconded (the host) and the employee (the secondee) (see box "Drafting a secondment agreement").

Where a seconded employee remains employed by the seconder, he must be kept informed of changes in the seconder’s organisation and, where relevant, be informed and consulted on potential collective redundancies and/or a TUPE transfer, as if he has not been seconded.

External secondments are often valuable commercial arrangements which allow the seconder to reduce headcount, enhance employees’ expertise and keep clients happy at the same time. However, they are only a temporary solution and, at the end of the secondment, the employer may be back to square one, having to make a decision about potential redundancies. In addition, in the event of an upsurge in work or demands, the secondee may not be available for the seconder.

Redeployment and retraining

The job an employee does is, by and large, an essential term of their employment contract, which may only be varied with the employee’s consent or under an express term of the contract. Where an employer considers making an employee redundant, it has a legal obligation to offer the employee any available suitable alternative employment.

Where an employer considers redeployment or retraining because it believes that an employee is at risk of redundancy, it should first begin a redundancy procedure. This will allow the employer to identify the correct pool for redundancy, decide on selection criteria, identify all possible alternative jobs, and consider how it may avoid redundancies. By complying with the redundancy procedure first, the employer will minimise the risk of a future claims (for example, it will be harder to claim that the employer made up its mind in advance).

If the need for redundancy is established, the employer can make the offer to retrain or redeploy as part of its obligation to offer any available suitable alternative employment. If a selected employee accepts the offer, the statutory trial period (and the statutory provisions on early termination of the trial period) will apply. If the employee rejects the offer of retraining or redeployment and the employer has no option but to make the employee redundant, it is likely to have a good defence for any unfair dismissal and redundancy pay claims.

Where the decision to retrain or redeploy pre-empts a redundancy exercise, for example, because the employer needs to move employees from a quiet unit to cover a busy department but there is no need to reduce headcount, it is advisable to look into the terms of the employment contract. Many contracts contain a mobility and/or redeployment clause which allows employers to move employees around the organisation. By and large, contractual clauses of this nature must be very clear and will be interpreted narrowly. In any event, an employer will have to exercise its powers reasonably, for example, matching the employee’s skills to the new role or offering re-training.

In the absence of a suitable contractual provision, an employer will usually have to obtain an employee’s consent to the change. If an employer undertakes a large-scale redeployment exercise, it may need to conduct a collective consultation with all affected employees, in addition to individual negotiations.

Before putting in place redeployment or retraining arrangements, an employer is advised to consider:

  • The short- and long-term implications of the arrangements on the business, in relation to the benefits they are expected to produce.

  • Whether the arrangements are intended or expected to be temporary or permanent.

  • The effect of the arrangements on employees’ long-term employment, training and promotion prospects.

  • The need to make redeployment or retraining offers on non-discriminatory grounds.

Early retirement

It is an established practice for employers to offer early retirement to volunteers. It is important to ensure that retirement is indeed voluntary, or it could amount to dismissal giving rise to potential claims. Employers are advised to retain discretion as to whether or not they accept volunteers' decisions to retire early, in order to ensure they do not lose valued and experienced staff members.

The employer often wishes to waive the requirement for a retiring employee to give notice to terminate the contract.

On seeking volunteers for early retirement, it is essential to consider the effect of early retirement on employees’ pension entitlements and to advise employees to obtain independent advice on this issue. Matters to be considered include whether the pension scheme allows for early payments on early retirement, and the financial impact of early retirement (especially in final salary schemes).

Shadow redundancies

Where early retirement is offered in return for a pay package, this is often known as a "shadow redundancy". In order to ensure that the termination does not amount to dismissal, it is important to give the employee genuine choice to decide whether or not to leave. It is also essential to ensure that employees are not identified for shadow redundancies on discriminatory grounds.

Shadow redundancies are not entirely different to "normal" redundancies and employees considered for shadow redundancies may have to be included in the total count for the purpose of determining whether the statutory obligation to inform and consult on collective redundancies is engaged. The less genuine choice an employee has, the more likely he is to be included in the headcount.

 

Temporary stoppages

As economic conditions deteriorate, organisations may have to cut down on the work they do (for example, many car manufacturers have had to cut down production). In these circumstances, employers may try to adopt temporary stoppage arrangements, instead of implementing redundancies.

Sabbaticals

Many public sector organisations have sabbatical policies in place and some provide employees with a contractual right to take a sabbatical every few years. Such policies and contractual provisions are less common in the private sectors but can easily be adopted at times of financial decline (see box "Drafting a sabbatical agreement").

Whether a sabbatical will assist an employer to cut human resource costs depends on a number of factors, including the economic climate, the level of risk of job losses, employees’ personal and financial circumstances and the overall effect of the sabbatical on job security and future job prospects.

Unpaid leave

Arranging for employees to take periods of unpaid leave is another way of stopping or reducing work temporarily. An unpaid leave period is likely to be shorter than a sabbatical, but many of the same factors are relevant (see "Sabbaticals").

Employees’ consent is required unless the employment contract (or collective agreement) contains a clause allowing the employer to place employees on unpaid leave. Where an employer has an unpaid leave policy which contains certain restrictions or preconditions, for example, as to length of service or the number of unpaid leaves an employee may take per year, it may decide to waive or ignore these, to encourage take-up of leave.

As an alternative to unpaid leave, an employer could require employees to take their contractual or statutory annual holiday allowance at quiet times (provided it gives employees adequate advance notice under the Working Time Regulations 1998 (regulation 15)). Although employees are entitled to their normal remuneration during the leave period, by forward planning holiday allowance, the employer may "write off" quiet times and ensure employees’ availability once business picks up.

Lay-offs

It has become fairly common, in the current economic climate, to lay off all or some employees during a short-term and temporary slow down in work. Employees remain employed throughout the lay-off period. This makes the lay-off solution very popular: it provides immediate saving of labour costs, coupled with the flexibility to restore the workforce when trade starts to pick up.

However, employers do not have the automatic right to lay their staff off just because trade is poor. An employer must have a contractual right to lay off, and the contract should make clear that employees will not receive their normal salary during the lay-off period. Otherwise, any enforced lay-off will amount to one of the following:

  • A fundamental breach of contract which would entitle the employees to resign and claim constructive dismissal.

  • Where no pay is provided during the lay-off period (as is likely to be the case), an unlawful deduction of wages.

If the contract does not give the employer the right to lay off, then any proposal to lay off will need to be the subject of consultation with employees, and will require employees’ agreement.

Complications may arise where an employer only needs to lay off some staff, as it needs to keep the business going but cannot afford to do so in the short term with its full complement of staff. It may be necessary to go through a selection process to determine which employees are to be laid off. Any selection should be reasonable and based on similar criteria to those used in a redundancy exercise. The criteria should be as objective as possible to avoid disputes and grievances. It is also advisable to try to agree the criteria with the employees when consulting with them about a lay-off.

When seeking agreement to lay an employee off, it is advisable to explain the financial implications for the employee and to record the agreement and any payment terms in writing, as the statutory maximum payments, known as guarantee payments, are very low (sections 28−35, Employment Rights Act 1996 (ERA)).

Employers must not keep employees laid off for longer than they need to, as otherwise the employees may treat themselves as redundant and be eligible for a redundancy payment (sections 147-152, ERA)

An employee’s holiday continues to accrue during a lay-off period. If an employee resigns during a lay-off period or he is dismissed, he is generally entitled to be paid his normal salary during the notice period (sections 87-91, ERA).

 

Reducing hours

Employees’ working hours are usually viewed as a fundamental term of the employment arrangements which may only be changed with an employee’s agreement. In the past, employees may have objected to any reduction in working hours sought by the employer, and the consequential reduction of pay and benefits, but the tide has changed in recent months as employees are convinced of the need to adopt, for example, a four-day week, to secure the job stability of the workforce as a whole.

Hours may be reduced as a temporary measure or by way of a permanent change to terms and conditions of employment.

When seeking to adopt shorter working hours, it is advisable to explain to employees the financial impact of such cuts, both on them individually (in terms of salary and benefits reduction) and on the organisation as a whole (for example, how many jobs may be saved if the measures are adopted). It may also be advisable for management to lead by example and voluntarily take pay cuts or waive bonuses.

Short-time working

Short-time working is a reduction in the hours that employees are required to work and (normally) a corresponding reduction in pay. Like lay-off, it can be an effective way of avoiding redundancies, but unlike lay-off, it does not represent a complete cessation of work. Employees are guaranteed some work and a proportion of their pay and are more likely to accept this as an alternative to possible redundancy.

The same legal principles apply to short-time working as to lay-off, in that:

  • Employers must have a contractual right to put employees on short time, or seek express agreement to do so.

  • Employees are entitled to receive guarantee payments in respect of any day that they are normally required to work but are provided with no work at all. If an employee’s hours are reduced, but he is still required to do some work each day, he will not be eligible for guarantee payments in respect of those lost hours.

  • Employees who are on short-time for four weeks or more can claim a redundancy payment in the same circumstances as those who are laid off, provided, however, that for redundancy purposes an employee is only treated as on short-time for any week if he is paid in that week less than half of his normal remuneration.

  • If an employee gives or is given notice of termination during a period of short-time working, he may be entitled to be paid his normal salary (based on their normal, not their reduced, hours of work) during the notice period (sections 87-91, ERA).

Guarantee payments will not be available to employees who agree a permanent change to their working hours. It is therefore important that the short-time working arrangements make clear that the arrangements are intended to be temporary and that the employee should be available to return to a normal pattern of work when the employer requires him to do so. A permanent reduction in hours has different implications (see "Part-time and flexible working" below).

Part-time and flexible working

When adopting part-time and/or flexible work measures, part-time workers must not be discriminated against or be treated less favourably than full-time workers (Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000 (SI 2000/1551)). Parents with children up to the age of 16 (18 if disabled) and carers have a right to request flexible work arrangements once every 12 months (section 80F-I,ERA). In the present economic circumstances, employers may wish to offer part-time and flexible work arrangements to employees outside the statutory regime. When entering into flexible work arrangements, it is necessary to agree in advance:

  • The precise change to work conditions (such as hours, days and location).

  • How long the arrangements will stay in force (for example, indefinitely or for a pre-agreed period).

  • Whether the arrangements are subject to a probationary period.

  • How the arrangements affect employees’ pay, benefits and pension arrangements.

  • Whether the arrangements will affect future training and/or promotion prospects.

To limit the negative commercial impact such arrangements may have on staff motivation and morale, an employer may limit the arrangements for a period of time (with an option to prolong the arrangements if necessary). In any event, the employer should retain the right to terminate the arrangements by notice, to cater for increased demand once market conditions improve.

Overtime bans

Where there is no contractual entitlement to overtime work, it is easy for employers to stop offering it. Where a contractual right to overtime work is in place (for example, under a collective agreement), the employer must obtain employees’ consent to stop offering overtime.

When imposing an overtime ban, the employer must consider the effect this will have on different parts of the workforce, for example, whether more women than men are dependent on overtime work. It may also be necessary to comply with the information and consultation obligations under the Information and Consultation of Employees Regulations 2004 (SI 2004/3426), for example, if shift patterns are affected as a result of the overtime ban.

Employers should retain the right to reverse any overtime ban and reinstate old working arrangements in the future.

 

Reducing remuneration

Short of job losses, this is perhaps the most controversial and potentially problematic practice employers may adopt. No-one likes to see their pay or benefits cut, especially if they do not understand the reasons behind such a measure or if they feel that management and senior members of the organisation do not share in the pain.

Employers who need to reduce remuneration are advised to inform the workforce in advance, setting out in clear language the cost/benefit elements of such an exercise. Where possible, management should lead from the top by sharing in any cuts. Ideally, the measures should be limited in time with, perhaps, a promise for long-term improvement once market conditions change.

Salary sacrifice

Salary sacrifices occur where an employee gives up part of his salary in return for a benefit; for example, pension contributions or childcare vouchers. The arrangements are often attractive to employees because they reduce their income tax liabilities. Following the 2009 Budget, salary sacrifice arrangements are likely to increase in popularity, in particular with high earners who will wish to fall below the £150,000 threshold for a 50% income tax rate and lower rate pension reliefs.

Many salary sacrifice arrangements are attractive to employers too, because they are often easy and cheap to set up and administer and provide substantial savings in National Insurance Contributions. This is not the case universally, however; each arrangement needs to be considered separately.

The adoption of a salary sacrifice will lead to a variation of contractual terms and must be documented as such. As such an arrangement reduces an employee’s remuneration, it will also affect pay-based benefits such as enhanced redundancy and maternity pay. It is vital to explain to employees in advance the effect of the change on their earnings and future entitlements. Employers should also clarify how long the arrangements will last and entry and exit conditions. Ideally, employers should retain the right to cancel the arrangements at their discretion. The arrangements should be recorded in writing and a revised contract of employment must be signed by both parties.

Freezing pay

Most employment contracts provide for salaries to be reviewed regularly, usually on a yearly basis. Less commonly, contracts give a right to an annual or periodical increase in pay. To the extent that a contract only promises a salary review, it is legally permissible for an employer to freeze pay, once it has carried out a review.

Commercially speaking, although such a step is unlikely to amount to a breach of contract, a salary freeze is often viewed by employees as, in real terms, a pay cut. It is likely to reduce motivation and morale and should be well managed: clear communication and leadership from the top are highly advisable.

A pay freeze might not be enough on its own to avoid redundancies, so many businesses might implement a pay freeze along with other measures, such as four-day weeks, sabbaticals or unpaid leave.

Reduce pay or benefits

An employee’s pay is considered a fundamental term of the employment contract. An employer who pays less than it is required may face an employee’s resignation and a claim for breach of contract and/or unlawful deduction of wages. Since 6 April 2009, employees who make a successful claim for unlawful deduction of wages may recover, in addition to the deducted wages, compensation for financial losses “attributable to the matter complained of” (section 7, Employment Act 2008). Failure to pay the contractual remuneration in full may also nullify any restrictive covenants contained in the contract. This means that to pay less than is agreed in the contract requires the genuine consent of an employee.

A few months ago it might have been inconceivable that employees would agree to any pay cut, but the current economic climate has changed employees’ attitudes. Often, a pay cut is agreed in order to save jobs. It is also possible to structure pay cut arrangements so that, over time, salary levels will recover or total packages will remain unchanged.

Any pay cut is likely to affect employees’ motivation and commitment to the organisation. Employers who explain clearly why they seek to adopt this avenue and the overall positive impact they are trying to achieve for the organisation’s employees are more likely to secure employees’ consent.

It is open for employers to cease providing discretionary, non-contractual, benefits such as Christmas functions, refreshments at internal meetings, team away days and the like. However, where benefits are contractual, either because they are expressly set out in the employment contract or collective agreement or because they are implied into it, withdrawal of the benefits will usually require the employee’s consent.

Change pension arrangements

An employer seeking to change its pension arrangements must normally consult with and obtain the consent of its employees or employee representatives. Most changes must be approved by the pension scheme trustees and be permitted under the terms of the scheme in question. Failure to consult and obtain advance consent of employees may have various legal implications, including breach of contract claims by employees and action by the Pensions Regulator for the employer’s failure to inform and consult. The latter may lead to the issue of an improvement notice and a fine of up to £5,000 against an individual and £50,000 against a company.

Changes to pension arrangements may take numerous forms. In recent years, employers have closed final salary pension arrangements (either to new entrants or altogether), reduced levels of employers’ contributions, and/or changed conditions for entrance into a scheme. As a temporary measure, an employer may take a pension contribution holiday, for example, on the basis that staff will be recompensed if business improves within a certain period of time. Such arrangements have the benefit of allowing employees to keep their pension arrangements going (employees can continue to contribute), but reduce the immediate cost to the employer.

Bonuses

Whether an employer may withdraw or cut down on bonus payments depends on whether the bonus arrangements are discretionary or contractual, whether the bonus payment is designed to reward past or future performance, and whether it depends on individual or collective performance. As with all other contractual terms, if the bonus arrangements are contractual and the preconditions for making the payment have been met, employees’ consent will be needed to any variation. If the arrangements are discretionary, judgment as to whether payment should be made and if so, at what level, must be exercised reasonably and non-capriciously.

The Employment Appeals Tribunal in Small v Boots Co plc held that a discretionary bonus was nonetheless contractual where the bonus provisions did not clarify the nature of the discretion (that is, whether it applied to the decision to pay a bonus, to the bonus amount, to the bonus calculation methods or to anything else) (UKEAT/0248/08).

Some financial institutions have recently awarded a 0% or fixed-cap bonus to employees selected for redundancy. The existance of a blanket policy flies in the face of many discretionary arrangements and is open to a challenge. It also increases the risk of an employer facing a challenge against the decision to dismiss in the first place. Employers who intend to operate such blanket policies are advised to make this expressly clear in their bonus plan terms and to specify to what extent the bonus arrangements are designed to encourage future performance.

Tighten up policies

An employer may amend non-contractual policies to meet changing commercial needs. However, even a policy that is expressed to be non-contractual (for example, enhanced redundancy or sick pay) may become contractual through regular application. Where a policy is contractual in nature, employees’ consent will need to be obtained to any amendment.

It has become common for employers to tighten up on expense and travel policies, for example, by limiting the maximum spending approved, the approved class of travel and/or introducing advance approval requirements. The combination of tough economic trading conditions and the European Court of Justice’s decision in Stringer and others v HM Revenue and Customs led to cuts in a number of employers’ enhanced sick pay policies (some have reduced levels of pay while others reduced the period of time over which enhanced pay is available) (C-520/06) .

Julie Quinn is a partner, Tracey Marsden is a senior associate and Michal Stein is a knowledge lawyer at Nabarro LLP.

 

Practical considerations

When considering alternatives to redundancy, employers may find it helpful to take the following factors into account:

  • The current economic climate is like no other: employees may agree to various options which would have been utterly unrealistic in the past, breathing a sigh of relief that their jobs remain secure (at least for the time being).

  • Redundancies are costly. The Chartered Institute of Personnel and Development has recently estimated the cost of a single employee’s redundancy to be more than £16,000. There are also detrimental long-term effects, most notably the loss of experienced and valuable staff who may not be easily replaced once the markets pick up.

  • Perhaps contrary to many employers’ experience, now is the time to be as open and honest with staff as reasonably feasible. If you offer part-time work as a way to avoid job losses, use hard and fast figures to demonstrate the likely job saving. If you propose pay freezes and pay cuts, show the real savings these will allow and, if possible, lead by example from the top.

  • Finally, the current credit crunch will end, one day. When implementing alternatives to redundancies, employers ought to retain enough flexibility to reverse arrangements on short notice, to cater for improved trading conditions.


Avoiding redundancies: the commercial reality

The latest unemployment figures, published on 12 May 2009, show UK unemployment at 2,215,000. Not a day goes by without redundancies, or alternatives to them, being reported in the press. Below are a few recent examples of employers' attempts to avoid redundancies:

  • As Airbus's plant in north-east Wales is to scale down production of the A380 superjumbo, 250 agency staff are due to lose their jobs. The union, Unite, is seeking reassurance that other workers will move off the A380 production line to other duties at the plant, such as work on Airbus’s newest jet, the A350 XWB.

  • BMW has also recently terminated the engagement of a large number of agency workers at its Mini manufacturing plant in Oxford, giving staff one hour's notice.

  • A recent TUC report suggests that one in nine people works part-time only because they cannot find a full-time job. As full-time employment figures fall, part-time employment is on the rise. Recently, BASF introduced part-time work in its German and Italian sites, having already asked one-fifth of its workforce to take holidays and work off times owed. The TUC and employers' organisations have asked the government to introduce a temporary short-time working benefits scheme, similar to those available in Germany and France.

  • KPMG has reportedly asked its staff to agree to a new programme that could see them having to take sabbatical on reduced pay or agree to part-time working. The programme is expected to run until September 2010.

  • More than half of British employers plan to freeze pay this year and one in eight expect to cut workers' pay, a British Chambers of Commerce survey. Recent official data showed pay growth had plummeted to just above zero, the lowest on record. Many law firms are known to have imposed pay freezes this year, in a bid to avoid extensive redundancies.

  • A number of law firms are reported to have offered their 2009 and 2010 trainees to defer their start dates in return for cash incentives of £5,000-£10,000. Other firms have reportedly been able to reduce redundancy numbers through a combination of client secondments and redeployments (for example, it is no longer unusual for corporate and real estate lawyers to retrain to do restructuring work).


Drafting a secondment agreement

A secondment agreement should record the parties’ understanding as to:

  • The duration of the secondment.

  • Who is the secondee’s employer during the secondment.

  • The effect of the secondment on the employee’s continuity of employment.

  • Who pays the secondee’s wages.

  • The nature of the secondee’s duties.

  • The location of the secondee’s employment.

  • Who will manage the secondee’s day-to-day work and deal with issues such as dispute resolution.

  • The seondee’s obligations to the host (including restrictive covenants and confidentiality).

  • How the secondment will be brought to an end.

  • Consequences of terminating the secondment, including whether the secondee has a right to return to his old job or any job with the seconder.

  • What will be the secondee’s position if the seconder has no suitable employment for him at the end of the secondment.


Drafting a sabbatical agreement

If an employee is taking a sabbatical, it is advisable to enter into a written sabbatical agreement with the employee, which should cover the following issues:

  • The duration of the sabbatical.

  • Whether the sabbatical may be prolonged or shortened by either party and, if so, in what circumstances and on what notice.

  • Whether the employee will be paid during the sabbatical and, if so, at what rate.

  • Availability and accrual of non-cash benefits during the sabbatical.

  • The effect of the sabbatical on the employee’s pensions arrangements (for example, whether the employee is expected to continue to make voluntary contributions and whether the employer will continue to make any contributions).

  • The effect of the sabbatical on an employee’s continuity of employment.

  • A reminder that the employee remains subject to the contractual terms on confidentiality and restrictive covenants.

  • Whether the employee has a right to return to his old job or any job at the end of the sabbatical.

  • The salary rate on which the employee will return from a sabbatical.

  • Whether the employee is restricted from engaging in certain activities during the sabbatical and/or required to obtain the employer’s consent before taking on another employment during the sabbatical leave.


Glossary

Collective redundancy. When 20 or more employees at an establishment are made redundant in a period of 90 days or less.

Employee. As defined by the Employment Rights Act 1996 (ERA), an individual who has entered into, works or worked under the terms of a contract of employment, whether such contract is expressly agreed (in writing or orally) or is implied by the nature of the relationship. The definition of a worker includes an employee. An individual who is not an employee may be a consultant.

Protective award. An award which an employment tribunal may order an employer to pay to its employees under the Trade Unions and Labour Relations (Consolidation) Act 1992 (TULRCA) where the employer has failed to inform and consult the employees' representatives when proposing to make 20 or more redundancies.

Redundancy. Termination of employment is due to redundancy where the dismissal is attributable wholly or mainly to the fact that either:

  • The employer has ceased or intends to cease to carry on business for the purposes of which the employee is employed either generally or at the employee’s workplace.

  • The requirements of the business for employees to do work of a particular kind have ceased or diminished (or are expected to do so) either generally or at the employee’s workplace (section 139(1), ERA).

In the context of collective redundancies, redundancy is defined more widely as a dismissal which is not connected with the individual employee (section 188, TULRCA).

Sabbatical. An extended period of leave during which an individual remains employed on his contractual term but is not required to attend work and is allowed to carry out other activities.

TUPE. The Transfer of Undertakings (Protection of Employment) Regulations 2006 or, before 6 April 2006, the Transfer of Undertakings (Protection of Employment) Regulations 1981. TUPE gives effect to the Acquired Rights Directive (2001/23/EC, formerly 77/187/EC). If there is a transfer of an undertaking or part of an undertaking that is subject to TUPE, TUPE will apply to transfer to the transferee any of the transferor's employees assigned to the undertaking (or part) transferred.

Worker. An individual who has entered into or works under a contract of employment or any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual.


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