Hire or fire? Redundancies increase to highest number since COVID

Record high numbers of UK businesses are looking into potential redundancies, as months of crippling overheads, labour shortages, and stagnant economic growth batter SME cash forecasts.

In March 2023, an average of 76 employers distributed HR1 forms – a notification which must be completed when an employer proposes making 20+ redundancies – according to official labour figures released by the Office of National Statistics (ONS) last week.

This number is a 90% increase from the same period in 2022, when just 40 employers were found to have proposed layoffs.

The data suggests that business confidence is flattening as the delayed effects of record high inflation begin to weaken bottom lines.

Monthly insolvency statistics for March, released by the government on Tuesday, paint a similarly bleak picture. The number of registered company insolvencies last month was 2,457. This is 16% higher than in the same period during 2022 – higher than during the pandemic.

Déjà vu: businesses succumb to cost pressures similar to COVID-19

The latest ONS findings on proposed redundancies show that, in 2022, an average of 41 employers per week handed out HR1 redundancy notices.

Companies have now drawn up their payroll year end statements for FY 2022/23. The staffing costs appear to have become untenable for many, causing the number of proposed redundancies to upsurge alongside insolvencies.

So far in 2023, the number of employers who have proposed 20+ redundancies has been increasing month-on-month by around 44%, since January, for an overall average of 66 per week.

In tech, the situation has been dire for some time. Layoffs have been making headlines since mid-2022, with large-sale enterprises like Meta, Indeed, and Amazon announcing thousands of redundancies last month alone.

The influx in redundancies spells trouble for the UK economy. Job losses reduce spending in local areas, jeopardise economic recovery and heighten the risk of further layoffs.

Notably, the last time planned redundancies reached current levels was November 2020, during the second COVID-19 lockdown. At the time, companies were forced to let go of thousands of team members to manage the financial impact of the crisis.

Government business population estimates show that, in 2022, employment in small businesses (with 0 to 49 employees) was 12.9 million (48% of the total).

Debbie Porter, managing director of Bakewell-based Destination Digital Marketing explains, “Small businesses cannot keep accepting increases in costs across the board like this and still remain profitable. Inevitably businesses will fold and people will lose their jobs.”

Smaller organisations struggle to stay afloat as government lifelines wane

Startups has been tracking the various financial pressures that have perforated small business bank accounts over the last 12 months. Chief amongst them has been the rise in energy bills, which has sent costs spiralling upwards across the supply chain.

Despite having to contend with hiked business gas and electricity prices for over a year, the data suggests that most employers had managed to delay making reductions to headcount. Until now.

Earlier this month, we reported that the end of the Energy Bill Relief Scheme (EBRS) – the government’s support policy for helping SMEs grapple with mounting energy price rises – would lead to a surge in business closures from early April.

According to research from the Federation of Small Businesses (FSB) 28% of small firms which signed up to fixed energy contracts last year are predicted to either downsize or close after the scheme was pulled on April 1.

The growing redundancy rate could be a result of the fallout from the government’s decision to close down the EBRS and weaken a key pillar of support for SMEs.

Another argument is that the delayed response to inflation could be as a result of hiring woes caused by the digital skills shortage. Many firms are already struggling to hire for specialist roles, such as tech.

In this barren jobs market, firms may have decided not to cut staff numbers in case they struggled to rehire talent if the economic downturn proved short-lived.

How can I avoid making redundancies?

The ONS data indicates that today’s employers are at a cliff edge when it comes to making cutbacks. Lots of the small-scale budgeting tips proposed by experts – have a penny for every time you’ve been told to switch to energy saving light bulbs – simply don’t cut it anymore.

However, while drastic changes like firing staff are often thought of as the go-to solution, there are still alternative options for small business owners to explore. Crucially, in the midst of talent shortage, cutting job roles might also do more harm than good.

One way to limit labour costs without causing redundancies is to reduce staff hours to short-time working. For example, you might ask an employee to work a three-day week, instead of a five-day week (although remember, any changes to an employee’s contract must be made with their permission).

Workers who have experienced a fall in real wages are expecting a corresponding salary increase, while small companies find it increasingly difficult to offer a competitive rate.

We recently published an analysis of UK pay rises that provided stark reading for employers.

Data from the ONS shows that average weekly earnings in the private sector had increased by 4.97% (excluding bonuses) between January 2022 and 2023 – unaffordable for most small employers.

To increase staff satisfaction without raising wages, business owners might explore alternate routes to paying staff. Our guide to employee benefits has over fifty perks and subsidies that can relieve financial stress for colleagues, without stemming cash flow.

Making redundancies: what to consider

For some companies, the squeeze on profits will simply be too much. If you explore all of the options above, more extreme action might need to be taken.

Take time to properly research and understand the legal considerations if you are unable to avoid making layoffs.

Asha Kumar is an employment partner at Keystone Law. Kumar advises that, for those “who have to make tough decisions about their workforce, it’s important to vigorously adhere to fair redundancy procedures to avoid any future Employment Tribunal claims.

“They also need to ensure that, in addition to an individual redundancy process, they comply with the collective redundancy consultation process where this is triggered by the number of employees being made redundant within a 90-day rolling period.”

More on this: learn everything you need to know about the redundancy process in our guide to making redundancies for small business owners.