EM Law | Commercial Lawyers in Central London
Employees who are dismissed by reason of redundancy may be entitled to a statutory payment and they may be able to challenge the termination of their employment as an unfair dismissal. It is therefore important for the parties to understand the process and how it should be followed.
The definition of “redundancy”
The statutory definition encompasses three types of situation: business closure, workplace closure, and reduction of workforce. The dismissal of an employee will be by reason of redundancy if it 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) (section 139(1)(a)(i), ERA 1996);
- Ceasing or intending to cease to carry on that business in the place where the employee was so employed (workplace closure) (section 139(1)(a)(ii), ERA 1996); or
- 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) (section 139(1)(b), ERA 1996).
Redundancy: Collective consultation
Where 20 or more employees are being made redundant over a period of 90 days or less, an employer has a duty under the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA) to:
- Inform and consult appropriate employee representatives.
- Notify the Secretary of State.
A tribunal may award up to 90 days’ pay in respect of each employee where there has been a breach of the information and consultation duty. An employer may be fined if it fails to notify the Secretary of State.
Whenever there is an obligation to consult collectively, the employer will also need to ensure that it has followed a fair procedure in relation to individuals, including consulting with them properly, so as to minimise claims for unfair dismissal.
Unfair dismissal and redundancy
An employee who has sufficient qualifying service is entitled not to be unfairly dismissed (section 94, ERA 1996). Redundancy is a potentially fair reason for dismissal.
Even if a dismissal is genuinely on grounds of redundancy, whether it is fair or unfair to dismiss for that reason normally depends on the application of the general test of fairness in section 98(4) of ERA 1996, namely whether the employer acted reasonably in dismissing the employee in all the circumstances.
A redundancy dismissal is likely to be unfair unless the employer:
- Identifies an appropriate pool for selection.
- Consults with individuals in the pool.
- Applies objective selection criteria to those in the pool.
- Considers suitable alternative employment where appropriate, subject to a trial period.
In certain circumstances, selection of an employee for dismissal on grounds of (genuine) redundancy will be automatically unfair, for example, selecting an employee for a reason connected to pregnancy, or because the employee has refused to sign a working time opt-out agreement.
Alternatives to redundancy
At the outset of a fair redundancy procedure (and throughout the consultation process), an employer should consider whether it can avoid making compulsory redundancies or reduce the number of compulsory redundancies. If the employer is undertaking collective consultation, this is one of the matters over which it has a statutory duty to consult the employee representatives. It should also consider this during individual consultation as part of a fair procedure.
Employees who are dismissed by reason of redundancy may be entitled to a statutory payment. Additionally, they may have an express or implied contractual right to an enhanced contractual redundancy payment. In circumstances in which an employer is liable to pay an employee a statutory payment, if the employer either fails to make the payment because it is insolvent or refuses to do so, the employee may apply to the Secretary of State for payment out of the National Insurance Fund.
Under section 135 of ERA 1996, employees with a least two years’ continuous employment at the relevant date are entitled to a statutory redundancy payment if they are dismissed by reason of redundancy.
In addition to a statutory payment, an employee may also be entitled to an enhanced contractual redundancy payment. This entitlement may be either express or implied:
- If the employee’s contract of employment expressly sets out a redundancy policy, the policy will be an express term of their employment. However, it is more common for a policy to become expressly incorporated by being set out in another document or collective agreement which is referred to in the employee’s contract of employment. Another way in which a redundancy policy can be expressly incorporated into an employee’s contract of employment is where a person with ostensible authority makes a verbal or written statement that results in a commitment by the employer to pay enhanced redundancy payments.
- The most common way in which redundancy terms may be implied into an employee’s contract of employment is where a set of terms are regularly applied in a particular trade or industry or by a particular employer. In order for employees to show implied incorporation of the enhanced redundancy terms into their contracts of employment, they must show that the custom in question is “reasonable, notorious and certain”.. This means that the policy’s terms must be fair (and not arbitrary or capricious), must be generally established and well known, and must be clear cut.