FREE BOOK CHAPTER: Redundancy Payments (from ‘A Practical Guide To Redundancy’ by Philip Hyland)

CHAPTER TWO
REDUNDANCY PAYMENTS

Most people go to work to earn an income. If that income is no longer going to be present because the employee’s job is redundant then the law has developed to provide compensation for that loss of job.

Losing a job through redundancy is seen as a no-fault job loss. The law provides a financial cushion to help the employee through that period. That financial cushion is known as the redundancy payment.

Individual employees are not responsible for societal technological progress that may render the employees’ job obsolete, nor are they responsible for economic contractions which may render their jobs as not financially viable.

There are two key sources of a redundancy payment:

  1. Statutory Redundancy Payments. Parliament has legislated for a minimum redundancy payment where an employee loses their job through redundancy.

  2. Contractual Redundancy Payments. Some employers, mainly larger employers or employers with recognised trade unions, have redundancy payment schemes that exceed the statutory minimum schemes. Contractual schemes provide a bigger financial cushion to soften the blow of loss of employment income. Some contractual redundancy schemes are so attractive that some employees, particularly those nearing the end of their employment careers, are only too willing to be made redundant as the redundancy lump sum provides a degree of financial security which would otherwise be unavailable.

Statutory Redundancy payments first featured in the 1965 Redundancy Payments Act. The provisions of that Act have survived, largely unaltered, and been transposed into successor legislation – The Employment Protection and Consolidation Act of 1978, which was superseded by the Employment Rights Act of 1996. This area of law has not seen many seismic changes which means this book won’t go out of date quickly.

In order to qualify for a redundancy payment an employee has to get over four hurdles:

  1. The employee has to show that he or she has been dismissed.

  2. The employee has to show that he or she has two years service at the relevant date.

  3. The employee has to show that the dismissal is solely or mainly attributable to redundancy.

  4. The employee has to show that he or she has not unreasonably refused an offer of alternative employment.


1. Dismissal

This term has, with some exceptions, exactly the same meaning as unfair dismissal law. For those interested you can find the exact definition for redundancy purposes at section 136 of the Employment Rights Act 1996 and for unfair dismissal purposes at section 95 of the Employment Rights Act 1996.

Dismissal means:

  1. Dismissal either with or without notice of termination. Where dismissal is without notice there would usually be a payment in lieu of notice. Volunteering for redundancy can amount to a dismissal. If an employee has been given notice of termination and commits an act of gross misconduct during the notice period then an employer can dismiss summarily and the dismissal will be by reason of gross misconduct and will extinguish any right to a redundancy payment.

  2. Dismissal where the employer has breached the contract fundamentally entitling the employee to leave with or without notice. A constructive dismissal by reason of redundancy is a relatively rare circumstance but could arise where an employer unilaterally tries to alter an employee’s role fundamentally, for example by taking away a manager’s reports, and the employee resigns in response to the breach. Arguably that unilateral change amounts to a dismissal and the reason for the change is in effect redundancy. In reality the statutory redundancy payment is calculated in exactly the same way as a basic award for unfair dismissal.

  3. Dismissal on expiry of a fixed term contract without such contract being renewed on the same terms.

Section 136 (5) of the Employment Rights Act 1996 also provides that some events will automatically amount to a dismissal for the purposes of a statutory redundancy payment. These include the death of an employer where an employee is employed by a sole trader. Where a school amalgamates into another school such an amalgamation may amount to a dismissal.

A dismissal will also vanish if an employee accepts a suitable offer of alternative employment at the conclusion of a trial period.

We will look at alternative employment in greater detail but accepting suitable alternative employment has the effect of making the dismissal vanish. That makes sense because a dismissal is a loss of employment. A re-instatement on the same terms or a re-engagement on different terms means continued employment.

A dismissal will also vanish if an employee is re-instated on internal appeal against redundancy selection. If there is no dismissal there is no entitlement to a statutory redundancy payment. The redundancy payment vanishes with the dismissal.

There will be no dismissal where an employee is warned of pending redundancies but decides to leave by resigning.

Provided that the employee is not under an employer notice of termination that employee will be taken to have jumped and not been pushed by the employer.

This is a problem for employees as many employers, consistent with both good practice and legal obligations, will inform employees of a department closure or a site closure many months before the closure takes place.

Some employees will seek to gain a head start in the job marketplace by looking for alternative employment. If they are successful in obtaining another job and give notice to their employer they will not establish any right to a redundancy payment as they will not have been dismissed.

In larger scale redundancy exercises with long lead times employers may wish to make clear to employees that leaving too early may disqualify them from a statutory redundancy payment.


2. Service

An employee needs at least two years service to qualify for a redundancy payment. The practitioner needs to establish the employee’s start date. That should be relatively straight forward as the start date should be in the employee’s section one statement of terms and conditions.

The service needs to be computed to the relevant date. The relevant date is:

  • Where notice has been served the expiry date of that notice. So, if one month’s notice was given on 1 May that notice would expire on 31 May. 31 May would be the relevant date and the effective date of termination.

  • Where no notice has been served but the employee has been dismissed immediately, or where less than statutory notice has been served and the employee has been paid in lieu of notice, then the relevant date is the date statutory notice would have expired had it been given. Statutory notice is one week’s notice per year of service capped at 12 weeks. If an employee is entitled to longer contractual notice, that is immaterial, the relevant date is calculated to the date statutory notice would have expired had it been given.

  • That employee would have been entitled to 2 weeks statutory notice. His service is therefore calculated up to 14 May.

The relevant date only becomes relevant where there is an employment anniversary or, in some cases, the employee’s birthday falls between the effective date of termination and the relevant date.

Service needs to be continuous. Where an employee works for associated employers, for example, different companies within a group of companies, service is aggregated from the start date of employment.

Special rules apply to calculating service in local government, some schools and the NHS, where service can be aggregated between different employers.

Some service is discounted. In summary discounted service is:

  • Any day that the employee has been on strike. Strike days come off the total service.

  • Any service for which the employee has already received a redundancy payment.

  • Any week where there has been no contract of employment breaks continuity of service. There are saving provisions that save broken continuity. Those saving provisions are notoriously fact sensitive so if there is a query about broken service which may be continuous take legal advice.


3.
By reason of redundancy

Redundancy has a particular definition for redundancy payments and unfair dismissal purposes – the primary definition.

For collective consultation purposes there is a broader definition that captures more circumstances than the primary definition – the wider definition.

Starting with the primary definition, the wording of this definition has remained undisturbed since 1965.

It is worth setting out section 139 of the Employment Rights Act 1996 in full:

(1) For the purposes of this Act an employee who is dismissed shall be taken to be dismissed by reason of redundancy if the dismissal is wholly or mainly attributable to—

(a) the fact that his employer has ceased or intends to cease—

(i) to carry on the business for the purposes of which the employee was employed by him, or

(ii) to carry on that business in the place where the employee was so employed, or

(b) the fact that the requirements of that business—

(i) for employees to carry out work of a particular kind, or

(ii) 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.

So, in summary, in order to qualify for a statutory redundancy payment an employee has to be dismissed wholly or mainly by reason of redundancy. Redundancy means:

  1. The employer has ceased or intends to cease business (the business is shutting).

  2. The employer has ceased or intends to cease business at the employee’s place of work (the workplace is shutting).

  3. The employer has no requirement or a reduced requirement for a particular job (the job is going).

The business closing entitles the employee to a redundancy payment, if the employee is subsequently dismissed. A business may close for a number of reasons:

  1. An insolvency event: An insolvency event is defined as bankruptcy in the case of a sole trader employer, or administration and liquidation in the case of a limited company employer. If the employer is insolvent, appointed licensed insolvency practitioners and has no funds to make a redundancy payment, the employee can claim a redundancy payment from the Redundancy Payments Office (RPO). The claim can be made online and will usually take between 4 to 8 weeks to process.

  2. Business decision to close: then unless there is no buyer the employee will be entitled to a redundancy payment.

The second type of redundancy situation is the workplace closing.

A workplace closing can be for a number of reasons. These include:

  1. An employer has a large factory and needs to downsize to a smaller factory in the same city. On the face of it this amounts to a redundancy situation as the workplace is closing. However, an employee may not be entitled to a redundancy payment if:

    1. The employer offers the employee his job in the new location on the same financial terms. Whether this amounts to a suitable offer will depend on the employee’s own situation. If the new location is closer to the employee’s home address then the offer is likely to be suitable. If the new location is further away from the employee’s home address then the offer may either be unsuitable or it may be unreasonable for the employee to refuse the offer. Much will depend on the employee’s individual circumstances. The more the employer does to assist employees to get to work at the new location the harder it will be for the employee to argue he is entitled to a redundancy payment. For example, if the employer either offers transport to the new location or a travel allowance then it will be difficult for the employee to argue that they are entitled to a redundancy payment.

    2. The employee has a mobility clause in the employee’s contract. If the employee has specifically agreed in his contract that he will work either at location A or any other location within 5 miles of A, then if the new location is within 5 miles of A the employer could rely on that mobility clause to move the employee to the new place of work. If the mobility clause in the contract is less specific and says that the employer can require the employee to work at any of the employer’s locations in the UK, it is harder for the employer to rely on that clause to require the employee to move to a different site. A mobility clause cannot easily defeat an entitlement to a redundancy payment (see Bass Leisure v Thomas.)

So, the employer closing for business or closing a site is relatively straightforward. The employees affected will be entitled to a redundancy payment unless there is a TUPE situation in the case of the employer closing or the employer has another site where employees can be transferred in the case of a workplace closing.

The third scenario is the one that causes the most debate and has generated the most caselaw.

In order to meet the definition there has to be (or there is expected to be) fewer employees carrying out work of a particular kind.

The first step is to identify what the employee whose role you are considering making redundant actually does. The case law was unclear for a number of years but is now settled. In order to determine the work of a particular kind an employee does the test is a factual one, what does the employee do, rather than a contractual one, what is he or she contracted to do or could be contracted to do. Contracts are drafted to allow for an employee to do anything that could be reasonably expected of him or her.

The general trend in employment law is to recognise that employers draft the contracts and the contracts may not reflect the actualitē.

Therefore, factual tests are used to look at what the employee actually does in the workplace rather than what the employee could be required to do under the contract.

That makes sense. An employment relationship is dynamic. An employee may join, have a contract, and then over the years of service be given additional duties and responsibilities, or even a different job title and the contract may not be updated or -reissued to reflect those changes.

Let’s look at some scenarios of “work of a particular kind” to flesh this out.

An employer that re-furbishes office equipment may employ two typewriter repairers. As very few offices now have typewriters to repair and the demand for refurbished typewriters no longer exists at a sufficiently high enough rate, then an employer might declare those two posts redundant. The employer has no requirement for typewriter repairers and that job no longer is required within the business. Straightforward redundancy, no issues.

If, however the two typewriter repairers spend 25% of their time mending typewriters and 75% of their time re-furbishing computer keyboards but there is only enough work for one employee then again it is straightforward to reduce the numbers by one.

If, however, the employer employs 10 Office Peripheral Repair Operatives to repair and refurbish a whole range of office equipment including typewriters then work of a particular kind is wider. If the overall repair work is decreasing the employer will need fewer operatives and can reduce the numbers and meet the definition for redundancy.

A more common but difficult scenario is where the employee is re-organising its work processes and decides that they need different sorts of employees with different or slightly different job descriptions and responsibilities.

So, for example a manufacturing employer may have a factory employing 10 shift supervisors. The employer may re-organise their processes and decide that rather than 10 shift supervisors they need 10 team leaders.

The employer could declare the 10 shift supervisor roles as potentially redundant and place the employees doing those jobs at risk of redundancy.

The employer would or could invite all 10 at risk employees to apply for the new team leader role.

If 8 out of the 10 at-risk shift supervisors were successful at interview and appointed then the two unsuccessful at-risk employees would be entitled to a redundancy payment as on the face of it the requirement for employee to do work of a particular kind, shift supervisor, has ceased or diminished.

If the employee then claimed unfair dismissal based on the new job being no different to the old job and the selection process being unfair for the new roles, then the employer would argue that there was a genuine redundancy situation and a fair selection process, and in the alternative that if redundancy is not established as a reason for dismissal then in the alternative the reason for dismissal is some other substantial reason, in this case re-organisation.

If the Employment Tribunal found that there was not a redundancy but a re-organisation because the particular work of a team leader is very similar to a shift supervisor, then the practical impact on the employer is that the employer would not be able to offset the redundancy payment paid to the employees against any basic award for unfair dismissal.

In effect by wrongly labelling the dismissal as redundancy rather than re-organisation, the employer deprives himself of the right to offset any redundancy payment against the basic award [see Boorman v Allmakes Limited [1995] IRLR 553].

If an employer wants to change the hours of an employee and the change amounts to a reduction then the employee can reuse the request and say that such a change amounts to a redundancy situation. The case of Mr Ron Packman t/a Packman Lucas Associates and Ms P Fauchon established that a reduction in hours amounts to a redundancy situation entitling the employee to a redundancy payment.


Timing

The wording of the statute is predicated on the facts known to the employer at the point notice is given.

It is not that uncommon for an employer to make redundancies because of a shortfall in orders and then shortly after the expiry of the notice period of those employees made redundant the employer receives orders and then has a requirement for employees.

The fact that unexpected orders arrived after the date that notice of termination expired does not make a difference to the fairness or otherwise of the redundancy dismissal.

Therefore, an employer might make a post redundant based on reasons x, y and z. After two months the employer might realise they have made a mistake and then advertise for a person to fill the position.

Provided there is a supervening set of facts which changes the employer’s thinking, unknown to the employer at the point of dismissal but occurring after dismissal, then an employer is free to recruit into a role that they have made redundant.

There is no safe period after which an employer can recruit. The key issue is: has something happened after a redundancy dismissal to change the employer’s mind about the redundancy. If something has happened then an employer can recruit for the role.


Unreasonable refusal of a suitable alternative employment

As discussed above many employers will offer employees whose posts are redundant alternative employment.

An employee if he or she decides they would like to accept an offer of alternative employment would usually be offered a trial period of 4 weeks.

Trial periods can be longer than 4 weeks by agreement if longer there is usually provision for the employee to default back to a redundancy payment if the trial is successful. 4 weeks is the statutory minimum.

So, if a warehouse operative is being made redundant from a factory as the employer needed fewer warehouse operatives the employer may offer a job within the factory as a factory operative.

Provided the financial terms and other terms were either similar to or identical with the factory operative role then this offer is likely to be a suitable offer, an employee would need to have a reasonable reason to turn it down.

An unreasonable rejection of a suitable offer may disqualify an employee from a redundancy payment.

Many employers would still nonetheless make the redundancy payment, notwithstanding the fact that an employee has turned down an offer of continued employment, albeit in a different job.

Similarly where an employer closes a site but re-opens a bigger (or smaller) site in the same town or city and offers every employee a job in the new location, then subject to all financial terms and hours being the same, an employee could only reasonably turn down such an offer if the new location meant a longer commute to and from work each day.

The key points on suitable alternative employment are:

  1. Is the new job objectively suitable? That involves looking at the terms and conditions, in particular the financial terms. If the salary or hourly rate is lower the offer is likely to be unsuitable.

  2. How reasonable is it for the employee to refuse the offer? Reasonableness is a subjective test and will depend on the employee’s own circumstances and aspirations.

Most employers will pay a statutory redundancy payment even though the employee may have refused an offer of alternative employment, suitable or otherwise.


Enhanced Redundancy Payment

Larger employers may have a contractual redundancy payment scheme. Contractual redundancy payment schemes are most often found where the employer has a recognition agreement with a Trade Union and in the public sector.

The most common types of enhancement are:

  1. To remove the cap of weekly pay and make the redundancy payment based on actual pay – for example if the employee’s actual gross weekly pay is £750.00, it is that amount that is used rather than the current cap of £508.00.

  2. To increase the number of weeks pay for each year of service. Some employers in the banking sector pay out a month’s pay for each year of service but then put a cap on the number of months in total for example a month for every year of service capped at 24 months.

Enhanced redundancy terms become contractual in a number of ways:

  1. There is a collective agreement on enhanced redundancy pay and that collective agreement applies to those job roles in a bargaining unit. That collective agreement becomes incorporated into the individual’s contract of employment. Some professions or job types had agreed redundancy terms for example printers or journalists. The National Union of Journalists had agreed with many employers in publishing that journalists, if they were made redundant, would receive a month’s pay for every year of service.

  2. The enhanced terms are set out in a handbook, redundancy policy or redundancy procedure and the handbook or policy and procedure is incorporated into the contract of employment. See Keeley v Fosroc International Ltd 2006 IRLR 96.

  3. By the implied term of custom and practice, in order for an enhanced redundancy payment to become implied into the contract it has to meet the test set out in
    the case of Quinn and Ors v Calder Industrial Materials Ltd 1996 IRLR 126. In that case a policy to pay an enhanced redundancy payment had not become contractual. In order to become contractual a policy had to be:

(a) Followed without exception over many years.

(b) Communicated to employees.

(c) Intended to be contractual.

It is quite difficult for an employee to establish an implied term of custom and practice of an enhanced redundancy payment as it is in the employer’s gift to break the custom. A few examples where an employer has used a different calculation methodology will break the custom.


Lay off and Short Time Working

Employers who have a sporadic order book or work volumes that fluctuate can give themselves the right in the contract of employment to put employees on lay off or short time.

The employer having the right to lay employees off or put them on short time working is prevalent in some industry sectors, for example the automotive industry. It enables the employer to cut its cost base to meet a shortfall in work and income, whilst retaining a skilled workforce.

Lay off is defined as no work in a particular week, short time is defined as working sufficiently less than a full contracted week for pay to drop to less than half a week’s pay.

However, once an employee has been on 4 consecutive weeks of lay off or short time working or 6 non-consecutive weeks of lay off or short time in a 13 week period, the employee has the right to request from the employer a statutory redundancy payment.

The rules on an employee requesting a redundancy payment are highly prescriptive and technical involving the employee giving written notice within 7 days of the end of the qualifying period. The qualifying period are 4 weeks for consecutive lay off or short time or 13 weeks in the case of non-consecutive lay off or short time working.

The employer has the right to reject a written request for a statutory redundancy payment. The employer’s right to reject is similarly prescriptive. The employer must use a written counter-notice. The reason for the rejection has to be that the employer will be able to resume full time working within 6 weeks of the end of the qualifying period.

Additionally, the employee has the right to a guarantee payment for the first 5 days of lay off or short time in a 3-month period. A guarantee payment is uprated each year and in 2018 is £28 per day or your daily rate whichever is lower.

We have seen in this chapter that an employee has an entitlement to a statutory redundancy payment or an enhanced redundancy payment if certain conditions are met. In the next chapter we will look at implementing a redundancy plan to reduce the numbers of employees employed.

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