Difficult redundancy situations

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It may be one employee or many and certain circumstances can make it feel almost impossible to achieve the workforce balance your business needs.

You probably know the usual tripwires, such as inadequate redundancy pools and subjective selection criteria. We look at some of the more tricky problems which arise and provide our steer.

Redundancy and maternity leave 

Common misconception: ‘Pregnant employees or employees on maternity leave cannot be made redundant’.

This is a common misconception held by many employers. You can make pregnant employees redundant as long as the reason for their redundancy is unconnected to their pregnancy.

Employees on maternity leave have priority over others at risk of redundancy. This does not mean that you should automatically select employees on maternity leave to keep their role (which would amount to reverse sex discrimination against male employees). This obligation means that once an employee on maternity leave has been selected as part of the redundancy pool, they should be offered suitable alternatives (if available) ahead of other colleagues. Failure to prioritise in this way is automatically unfair dismissal.

If you are including employees on maternity leave within your redundancy pool, also make sure they are able to access the relevant information about their redundancy. For example, in the recent case of South West Yorkshire Partnership NHS Foundation Trust v Jackson the tribunal held that sending a letter containing information about the proposed redundancy to the employee’s work email (which was inaccessible during her maternity leave) amounted to unfair treatment. With many employees working from home or on furlough it is vital to ensure that you have adequate communication facilities in place to conduct the redundancy process.

The BEIS currently also has a consultation in progress on extending this protection so that it applies from the date an employee notifies the employer (in writing) of their pregnancy, to six months after they return from maternity leave. There is also the potential that this prioritisation obligation may be extended to similar types of leave such as adoption leave and shared parental leave.

A number of parents may take part-time parental leave. Again, it is possible to make these employees redundant but beware of the illusion of cost-saving. The EU case of RE v Paxair MRC SAS held that the calculation of the compensation payment for dismissal of employees on part-time parental leave must be carried out on the basis of their full-time salary.

If an employee is made redundant during or after the 15th week before their baby is due, including while they are on maternity leave, that employee will still be entitled to receive Statutory Maternity Pay. This will be payable for 39 weeks, even if this means payments are still being made after the employment has come to an end.   

Bumping 

Common misconception:  An employer cannot bump employees off on redundancy to make way for employees whose jobs are redundant but they wish to retain.

Businesses are tightening purse strings. One way to do this might be to make juniors (that are not otherwise at risk of redundancy) redundant and bump more senior, experienced employees (who are at risk of redundancy) down to the junior (less well paid) role. There is no general obligation on an employer to consider bumping, but in some circumstances it may be unreasonable not to do so.

The tribunal in Mirab v Mentor Graphics Limited recently considered this issue. Mr Mirab was the director of sales for one division of the business. The tribunal agreed that there was a genuine redundancy situation on the facts. On bumping:

  • Mr Mirab had previously stated that if he were treated as an Account Manager (the job level below his current position) he would treat it as constructive dismissal. For this reason the company put Mr Mirab in a redundancy pool of one (directors of sales) rather than pooling him with Account Managers – the tribunal found this was within the range of reasonable responses.
  • The company did propose alternative roles but Mr Mirab did not consider these. He did suggest the company make an Account Manager redundant, although his employer took this at face value, that were this to happen Mr Mirab intended to continue in the role as director, not as a suggestion to ‘bump down’.

But had they followed the correct procedure with regard to ‘bumping’? In short the employment appeal tribunal held that they had.

There is no rule that an employer must always raise and consider bumping with an employee who is at risk of redundancy (particularly where the role is subordinate). Nor is there a rule that an employee at risk of redundancy must tell their employer that they wish to be considered for a more junior role before their employer is obliged to consider bumping. The question for the tribunal is whether the employer has acted within a range of reasonable responses.

Following Mirab, employers should ask themselves whether they have acted within the reasonable range of responses, including considering whether senior employees should be bumped into more junior roles, with junior employees made redundant as a result. Failing to do so could result in reinstatement (with compensation) or a compensatory award for unfair dismissal, which can be costly for a business struggling financially.

Redundancy and parachute clauses 

Common misconception: Parachute clauses are unenforceable as they are penalty clauses. This is not always the case.

A redundant employee with at least two years’ continuous service at their termination date is entitled to a statutory redundancy payment. This is calculated by reference to weekly pay (subject to the current maximum of £538 pw), age and length of service. The cost of making senior executives redundant can therefore be quite high. But there is a risk that contractual agreements will make the required payment even higher.

Whilst many employers also offer an ex-gratia settlement some go further, including ‘golden parachute clauses’ in employment contracts or directors’ service agreements. These clauses typically entitle the employee to an enhanced severance package on a takeover of the business, but they can also apply if the employee is made redundant within a specified period.

Golden parachute clauses can be a great incentive for attracting talent and avoiding the debate on valuing loss at termination, but these payments do not qualify for the £30,000 tax exemption that applies to settlement packages nor do they tend to be commercial, as they often exceed the maximum amount which an employee could hope to recover through an employment tribunal.

It’s a general principle of contract that a liquidated damages clause (i.e. a term which pays an injured party a fixed sum which might exceed the amount they could claim for a breach of contract) will be an unenforceable penalty where the amount paid under the clause does not reflect a genuine pre-estimate of loss. Golden parachute clauses pay more than the employee would otherwise be entitled to in a normal redundancy situation. Does this mean they are unenforceable penalties?

In Murray v Leisureplay plc the court held that a golden parachute clause (in this case explicitly referred to as a liquidated damages clause) in a CEO’s service contract providing for one year’s gross salary, pension and benefits in the event of wrongful termination was not a penalty clause. This meant the clause was enforceable, despite the fact that it was more than the executive would otherwise have obtained in damages if he had pursued a wrongful termination claim through the employment tribunal.

Employers therefore do tend to end up paying more under golden parachute clauses than they would otherwise, which is worth remembering for the future if you are trying to attract new blood in the current market. 

If you have any questions relating to redundancy please do call us. We work with you to find simple, efficient and commercial solutions.