What is and what isn’t a redundancy situation?

It is a sad fact that the current economic crisis is causing many employers to consider cost saving measures like redundancies. But it can be difficult to know what amounts to a redundancy situation. We consider the legal definition and how it applies. 

What the law says

Redundancy is a mechanism used by employers when a company needs to reduce the number of its employees. It is one of the five potentially fair reasons for which an employer can dismiss an employee.

According to the legal definition, a redundancy situation can occur in three types of situations:

  • when a company closes or intends to close all or some of its business operations;
  • where a particular place of work is closed; and 
  • where there is a diminished requirement for employees to carry out a particular type of work. 

Whilst this sounds straightforward, in practice there are nuances to the definition that employers need to bear in mind.

Business Closure

Interestingly, a business closure is not required to be a permanent closure for it to trigger a redundancy situation. It is possible for a redundancy situation to arise even where an employer only intends to close a business on a temporary basis. This, of course, begs the question as to what amounts to a temporary closure, which will be decided on a case-by-case basis depending on the particular facts. For example, case law suggests that a 4-week closure to enable refurbishment was not significant enough to constitute a temporary closure resulting in a redundancy situation. 

Workplace Closure 

Employees will only be potentially at risk of redundancy where it is their place of work that is closing or ceasing to support the work they undertake. Whilst in many cases it will be easy to establish an employee’s place of work, employers should be mindful that the assessment must be based on the factual circumstances prior to the dismissal, not simply the terms of the employee’s contract. For example, if an employee worked in one location throughout their employment, even though their contract may include a mobility clause to allow them to work from any location, it would be nonsensical to suggest the employee was employed anywhere but at the one location. If that location is then closed or the work performed there relocated, the employee would be at risk of redundancy. 

Diminished Requirements

As noted above, a redundancy will occur if a dismissal is made, wholly or mainly, because of a reduced requirement for employees to carry out a particular kind of work. For example, when work is still needed but it requires fewer employees to carry it out because some of the process has been automated or there is less work required because of a loss of a customer order or because the work is outsourced, and therefore fewer employees are needed. 

One of the most common misconceptions is that a redundancy situation only arises where the employer is in financial trouble or struggling to provide work. A successful employer with plenty of work but who decides to reorganise the business because it is overstaffed, would still be looking at a proposed redundancy situation. 

It is also important to remember that a reduction in headcount is not necessary to fall within this limb of the legal definition. Reducing the amount of work to be done by the same number of employees, so in turn reducing the hours they are required to work, can give rise to a redundancy situation. As a result, a full-time employee being asked to work part time would fall within the legal definition of redundancy. The alternative, asking an employee to move from part time to full time work, however, would not, because there would be no diminished requirement for work of a particular kind. 

Reorganisation 

Often employers are uncertain as to whether the changes they are planning to make to working structures simply amount to a reorganisation or will give rise to a redundancy situation. However, redundancy and reorganisation are not necessarily mutually exclusive. “Redundancy” is a technical, legal definition whereas “reorganisation” simply means a change in working structures and has no specific legal meaning. Each case involving whether a business reorganisation has resulted in a redundancy situation must be decided on its own particular facts. A particular reorganisation may involve making redundancies, if the definition of redundancy is met, or it may not, where for example work is redistributed more efficiently but without the need for a reduction in either the number of employees doing work of a particular kind, or the amount of work done by those employees.

Changes to Terms and Conditions

In some situations, it may be necessary for a company to change the terms and conditions of employees’ contracts of employment. Historically, it was argued that changes to terms and conditions amounted to a redundancy situation because the old job had essentially gone, and a new kind of work was being proposed. However, this argument has been rejected by the Court of Appeal. 

Employers do need to be mindful that, in situations where agreement to changes cannot be reached so that dismissal and re-engagement on revised terms and conditions is considered, and that process could result in 20 or more employees being dismissed at one establishment in a 90 day period, the employer will need to follow a collective consultation process. 

Fixed term contracts

Non-renewal of a fixed term contract can also constitute a dismissal by reason of redundancy, where the reason for the non-renewal is a reduction in the need for employees to do work of a particular kind. The exception to this is where the fixed term contract is used to cover a period of absence by another employee, such as maternity leave, and it is clearly stated in advance that the fixed term contract will end when the period of absence ends. In such a situation, the ending of the contract will be for some other substantial reason rather than redundancy.

Why is it important to identify a redundancy situation correctly?

Correctly identifying a redundancy situation is key, as for any dismissal to be fair a proper redundancy exercise must be undertaken, and redundancy payments will need to be made to those employees who have 2 or more years’ service at the point of dismissal. Employers should also be wary of labelling a situation as redundancy where that is not the case, such as in a settlement agreement, as this can have tax implications. 

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2024.

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