Making a position redundant

Never a pleasant experience, find out how to handle redundancies while minimising disruption and legal issues for your small business

No one likes to think about making redundancies, but if you’re running a small business, you might find that you can’t afford not to. So, what are the essentials you need to know?

Redundancy checklist for employers

This checklist should help ensure you cover all of the essentials when downsizing your business.

Each point contains a link to more detailed information below.


What does redundancy mean?

While it’s common to consider ‘how to make someone redundant’ when looking at staffing issues, actually the most important thing to remember is this; a person is not made redundant, their position is.

Redundancies occur when you no longer need anyone to do a specific job (rather than a performance-based or personal issue with an employee), or if the level of work in a particular role has decreased significantly.

  • This could be the case for a number of reasons:
  • Your small business may be pivoting or changing what it does
  • You could be operating in a different way – that changes your staffing needs
  • You might be moving to a new location
  • Your business could be undertaking a merger or closing down entirely

Expert insight

Adam Schallamach, small business growth advisor at Business Doctors, explains: “The statutory definition of redundancy is set out in s139 of the Employment Rights Act 1996 which, in summary, says that employees are made redundant if the business stops or the requirements of the business for employees to carry out work of a particular kind have stopped or decreased. In other words, business owners need to show that they need fewer employees to carry out the work.”


What can I do to avoid redundancies?

Major setbacks can come almost without warning – a sudden economic downturn, the loss of a primary buyer or client – and you may be forced to consider cutting down on your surplus staff in order to stay afloat.

However, even if your business gets into a difficult patch, it is important to consider the alternatives to making compulsory redundancies.

You are legally obliged to explore the alternatives to redundancies.

For instance, have you considered:

  • Overtime bans
  •  Redeployments
  •  Transfers
  •  Offering early retirement (or voluntary redundancy – more on this below)
  •  Freezing recruitment and investing in retraining existing staff
  •  Dismissals of overtime and contract labour

All of the above should be considered before resorting to compulsory redundancies.

Make sure to consult with employee representatives and trade unions. You must discuss how to avoid and limit the number of dismissals, with a view to reaching an agreement.

Remember, a union is not your enemy – they might help you devise a fairer solution.

Expert insight

Caroline Elsey, a business adviser in Essex and member of the Institute of Business Advisers, suggests: “If you discuss it with your employees as early as possible, they may find a solution for you. Two employees may be happy to job share or there may be someone who volunteers to leave, for example.”

Even if you can only reduce the number of people that have to be made redundant, it will make things easier. However, if you have exhausted every alternative and come to the conclusion that redundancies are unavoidable, you will need to set the procedure in motion.

Though making redundancies might be your only option, it is vital that you exercise utmost caution as you proceed through the process – if you’re careless you could find yourself pulled up in front of an employment tribunal, facing huge fines.

You must ensure that the procedures you follow are fair, open, and airtight.


Different types of redundancy

Once you’ve made the difficult decision to conduct redundancies, there are a couple of options to consider.

In the first instance, depending on your employee contracts, you could temporarily reduce working hours or lay off employees in quiet periods – and then revert back to “normal working hours” once trade picks up again.

Short-time working and layoffs

This is an interim step before redundancy that can alleviate the need for it altogether.

It is particularly prevalent in certain industries, such as construction. It must be agreed with staff in advance and could be done via:

  • A clause in their contract when they were hired
  • A national agreement for the industry
  • A collective agreement between a recognised trade union and you, the employer

If there is a longstanding tradition within your organisation for short-term working arrangements then you may also be entitled to lay off staff. Likewise if you can reach a mutual agreement with your employees and they agree for you to change their employment contract you may also be able to take such action.

Non-compulsory redundancy

Non-compulsory or voluntary redundancy can be another solution to cut back on staff while minimising any bad feeling within your business.

You can only offer voluntary redundancies packages in cases of genuine redundancy. When making the offer of the package, you must specify the terms of the package and who can apply for it – explain that you will only accept offers from those in the affected area of the business.
It also needs to be made clear that just because you volunteer you are not guaranteed selection.

Early retirement

You should also consider offering early retirement packages instead – these are generally preferred by most workforces, but could see you subscribing to a long and costly payment plan that far outstrips statutory redundancy pay.

Early retirement must be the employee’s choice – you cannot make this compulsory by law.

Compulsory redundancy

If you’ve exhausted all other options, you will need to make compulsory redundancies. In which case you’ll have to conduct a fair and transparent selection process.


Selecting employees for redundancy

If you are simply closing down a section of your business so that all the employees within that section will be made redundant, then you will not need to go through a selection process. You should still consult with the employees involved though.

Otherwise you will need to decide how you will select the employees that are to be made redundant.

Expert insight

Philip Millington, of commercial law firm Osborne Clarke, explains why it’s important not to rush any aspect of the redundancy process.

“It is not unusual for employers faced with a downsizing exercise to say to themselves, “I don’t like so and so” and send them a letter saying they’ve been made redundant, without any objective selection or consultation.

“An Employment Tribunal will expect an employer to look at a situation and say to themselves, “I need to cut the workforce of ten down to eight.” It may be from anywhere in the company, or from a particular area. The employer should then apply objective judgement to decide who should go, and consult with those who are affected.”

“They can find it embarrassing to have to make someone redundant, especially in a small business where everyone knows each other. They want to make it as painless as possible so they quickly select someone to make redundant, without going through the correct procedure.”

So what is the correct procedure? Lydia Harrison of law firm, Berg & Co, explains.

“The selection criteria have to be objective, based on factors that can be measured and proved. The criteria should also be designed so that you end up with the best workforce at the end of the day, since if you’re making redundancies to cope with an economic downturn, you’ll need to retain the staff that will give you the best chance of keeping the company going.”


Steps to selection

  1. Identify the job category and the number of redundancies necessary ie. three serving staff, two sales executives
  2. Identify all the employees who fall within that category – this is called the pool
  3. Select clear and objective criteria in order to determine which employees are to be made redundant from the pool.

Criteria can include:

  • Length of service (last in, first out)
  • Ability, skills or qualifications
  • Conduct or attendance (taking into account any reasons for poor records)
  • Performance records
  • Automatically unfair reasons for dismissal include:
  • Race, sex, age, religion or disability
  • Pregnancy, or any reasons relating to maternity
  • Because an employee is or is not a member of a trade union

Businesses are tending to move away from simply selecting the newest employees for redundancy, explains Harrison. “Historically, ‘Last in, first out’ has been used but these days it is generally only one of a raft of criteria to ensure the staff remaining have the right skills.”


Redundancies in a business takeover

Redundancies are common in takeovers – the chance to strip out surplus being a big motivating factor in many changes of management. But there are potential pitfalls that you can fall into, and steps you should take to avoid them.

Be aware of your responsibilities. Under TUPE – the Transfer of Undertakings (Protection of Employment) Regulations – all employment contracts transfer to you, and you are responsible for all the terms and conditions they entail.

Ensure you make redundancies based on an ‘ETO’ test. This is to establish that there are sound ‘economic, technical or organisational reasons’ to make changes to the workforce.

And above all else make sure all redundancies are fair and legal. Employees with over two years service made redundant solely as a result of a takeover is regarded as unfair dismissal – you must follow the correct procedures outlined above.

Redundancy and dismissing employees is never easy, but as stated before it is sometimes essential to the business’ survival – and therefore other employees’ jobs. However it’s vital to follow legal procedures correctly, and try to keep relations as good as possible as well as keeping your remaining workforce up-to-date and focused.


Redundancy consultations

If you haven’t already, you should inform the employees what is going on. You should outline why the redundancies are necessary, in which category they will fall and the procedure that will be followed to select them. You should specify the time period for the process as well.

It can be difficult to decide whether to tell all your employees or simply those affected.

Expert insight

Lynda Harrison of law firm Berg & Co. suggests, “The nature of businesses is such that the whole workforce will get to know anyway, whatever you do. So generally speaking, it’s better to make a general announcement and then set up meetings with those affected. This will ensure the process is transparent.”


Making the selection

Once the pool has been informed you can make the selection. Apply the criteria consistently to each member of staff in the pool, documenting how you arrive at your final selection.

The next thing to think about is whether you can offer the people selected a position anywhere else in your business. If a vacancy is likely to appear in the future, consider delaying the redundancy until that time.

If you offer an alternative position, the job should be similar in skills, pay, benefits and working conditions. “Even then, the employee may have a good reason to turn it down, for example if it is located in a different town,” explains Phillip Millington of Osborne Clarke. “However, if the employee unreasonably rejects the job you have offered, they may lose their right to redundancy payment.”

During consultations, explain to each employee:

  • Why the job is being made redundant
  • The selection criteria that was used
  • The timing of the redundancies
  • The likely amount of redundancy payment
  • Any alternative positions that might be available

Make it clear that the final decision has not yet been made. You should then give the employees at least couple of days and preferably longer to think about what they have been told. The employees will then return and have an opportunity to challenge their selection or propose alternatives to redundancy.

Discuss and give due consideration to any proposals the employee makes, but remember that consultation doesn’t have to end in agreement. At the end of the process, if you have failed to come up with an alternative solution you can confirm the decision and issue a dismissal notice.


Breaking it to the employee

Being made redundant is a traumatic experience for any employee and must be handled sensitively. Try not to be too blunt or too vague, and fully discuss every aspect. You may not be experienced in these matters, so preparation is important.

“A lot of managers have had no training of any kind,” explains Elsey. “It might be a good idea, if not to get some training, to at least read a book about it. Work out what you’re going to say beforehand and make notes of the meeting to file, just in case.”

There is much you can do to help the employee find another job, such as give time off to attend interviews, use your contacts to find vacancies and write references. Large companies often bring people in to help employees with their CV and job search – something you could do yourself if you have the skills. However much you try to help, though, it is unlikely to be an easy process.


Giving notice

Once any redundancy consultations have been conducted and a final decision has been reached you’ll need to give staff sufficient notice – and agree a leaving date.

You must adhere to at least the minimum statutory notice period (but obviously you can give staff more notice). You can also allow staff to leave sooner than the statutory period if you pay them in lieu of the notice period.

Length of service Notice you must give
1 month to 2 years At least a week
2 years to 12 years A week’s notice for every year employed
12 or more years 12 weeks


Redundancy pay

Statutory redundancy pay is calculated from the employee’s age, years of service and average weekly wage. However, weekly pay is currently limited to a maximum £508 per week, and years of service is up to 20 years.

The amount will comprise:

  • For each year of service from up to (but not inc) age 22 – half a week’s pay
  • For each year of service from age 22 up to (but not inc) age 41 – a week’s pay
  • For each year of service from age 41 upwards – 1.5 week’s pay
  • From age 64-65, the award is reduced by a twelfth each month up to age 65, when it is zero.

You can, of course, choose to pay your staff more than this.

For employees to be eligible for statutory pay they must be contracted and have worked for at least two years continuously.

Payment must be made as close to dismissal as possible.

If you are in dire financial straits to the extent where making the redundancy payment would put your business at risk, you can ask the the Insolvency Service’s Redundancy Payments Office. You’d then be expected to pay back the payment as soon as possible.

“It’s certainly a very useful scheme,” recommends Caroline Elsey of the Institute of Business Advisers. “The redundancy payment can be a horrific figure once it’s totted up – especially for a small business making a redundancy because of cashflow problems.”


Complaints procedure

If an employee feels that they have been selected unfairly for redundancy, they can complain to an employment tribunal.

Some employers try to safeguard against a claim when they make a redundancy, explains Millington. “Employers sometimes offer the employee what they are entitled to and a few pounds extra if they agree to sign a compromise agreement. This removes their right to an unfair dismissal claim, but the employee has to obtain legal advice before signing the agreement. You therefore have to be careful that offering this doesn’t alert them to the possibility of a successful claim.”

If a complaint is made, the tribunal will not look into whether it was right to make redundancies, as that is a business decision for the employer. However, it will look into the overall fairness of the selection and whether sufficient consultation has taken place with those selected.

“The maximum compensatory payment for unfair dismissal is £80,541, but in general employment tribunals will only compensate for actual loss. So if the employee has received redundancy pay and notice pay, and finds another job straight away, they won’t get much at an employment tribunal. If, however, they are subsequently out of work for a couple of years, it could cost their previous employer a lot more,” says Millington.


Rebuilding morale and focusing on the future

After the redundancies have been completed, you should pay some attention to your remaining workforce. Although they may feel relieved at first at having survived, this can soon turn to anger, guilt and a feeling of mistrust towards you.

“A lot of companies tend to forget those people [who are left behind],” explains Caroline Elsey of the Institute of Business Advisers. “They have finally got the workforce they want, but the remaining staff feel so insecure that they leave at the first opportunity as well. You need to do a pep talk, explain where the company is going and make it clear that their jobs are safe.”

You will need to rebuild morale and address any feelings of antipathy. Make it clear that the redundancy was unavoidable and conducted in the fairest way possible.

And remember, you’re doing it for the good of the business as a whole – everyone will benefit if your company is fitter and more competitive as a result.

Make sure you have a clear vision for the future – and be sure to share it with your senior management and remaining teams.