UK businesses are set to make some difficult decisions regarding their workforce this year as the UK economy is on course to shrink. With labour expenses accounting for as much as 70% of total business costs, many employers will be forced to reduce their headcount in an attempt to stay afloat.

In fact, according to a recent survey conducted in collaboration with our sister company, WorkNest, this revealed that 1 in 5 organisations would reduce their headcount to drive cost savings to help tackle some of the challenges presented by the current cost-of-living crisis.  

Employment law surrounding redundancy is particularly complex, and the legalities involved can be confusing for anyone facing a redundancy situation. First and foremost, it can be difficult for organisations to establish when redundancy actually applies.

Is there a business case for redundancy?

When contemplating making redundancies, employers should give thorough consideration to the practicality, viability, and necessity of making them. While many businesses are facing financial hardship in 2023, and redundancy may seem like the only viable way forward, this is still a consideration that should always take place.

More specifically, every redundancy situation should start with a plan. Employers must consider necessity, what alternatives have been considered or implemented, how many redundancies are needed, where will they come from, how people will be selected, and the timeline.

Many of these points may well be flexible and, as part of a proper consultation process, may be liable to change following discussion with employees. That said, it is still vital to start with some kind of plan of what you are trying to achieve and why. As employment lawyers, we will always want to see a client’s redundancy rationale as a first port of call to make sure their business case is robust, and to better understand what they are trying to achieve.

While an Employment Tribunal won’t look behind the decision to make redundancies or judge whether or not they were commercially sound (instead being concerned about the process, the consultation, the pooling, the selection criteria and the search for alternatives), having a sound business case is still important for your own planning requirements, as well as to explain the ‘why’ to your workforce. The latter will be crucial to avoiding disputes.

When is redundancy an option?

Employers must also understand what constitutes a redundancy situation.

Under the Employment Rights Act 1996, there are three situations in which an employee may be dismissed due to redundancy. These are:

• If the employer has ceased, or intends to cease, trading (i.e a total business closure);
• If the employer has closed, or intends to close, a particular site; or
• If there is a reduced requirement for employees to carry out work of a particular kind.

In order to legitimately issue a redundancy, one of these scenarios must apply. In other words, redundancy cannot be used as a way to evade a problem or as a convenient workaround to get rid of a troublesome or underperforming employee; these situations must be dealt with through the correct route, i.e. via the disciplinary or performance management procedure.

Total versus temporary closures

The ‘total closure’ scenario is self-explanatory. If a business is due to close completely, then that will amount to a redundancy situation. Here there is no issue about pooling, selection, or alternative employment, as it’s likely everyone will be made redundant.

However, this can include temporary closures too, which is where it gets complicated. A common example of this would be if the site was closed for refurbishment. Whether this sort of situation would provide grounds for redundancy would be fact-specific and determined on a case-by-case basis.

When it appears that the employer is replacing one business with another, a Tribunal may have to decide whether the new business is sufficiently different in nature from the original one. If so, the dismissal of the employer’s original employees will be for redundancy. Again, this will come down to a question of fact.

A site or workplace closure is, again, relatively self-explanatory. For instance, if a company owns a series of factories and closes one of them, then that is likely to be a redundancy situation.

One caveat that often arises is the question of which site the employee actually works at and if they should even be affected at all.

The general consensus here is that the Tribunal will largely ignore what the contract says and instead look at the reality of the situation.

When considering this type of redundancy, the starting point is the requirements of the business. This implies a commercial judgement, on the employer’s part, about the priorities of the business and about which kind of work has become surplus to requirement.

When does TUPE apply?

When it comes to a business closure, employers must also be mindful of the Transfer of Undertakings (Protection of Employment) Regulations, also known as TUPE.

With business closures, especially those being instigated as part of a pre-pack administration, TUPE will apply and the workforce will transfer to the new owner rather than being made redundant.

These situations can be very fact specific, so you always want to run any sales/takeovers past your legal advisers to be sure that you don’t accidentally make employees redundant when they are legally entitled to something else.