Redundancies - They Aren't Big And They Aren't Clever

So the recession has caught you out. For whatever reason, you did not see this coming, denied it could effect you, the global market conditions changed in an instant or all of those things and the result is that you have to drastically cut costs. So that's it - people have to go.

We can can go on and on about the appalling lack of planning by companies in the lead up to the obvious effects of the recession but let's park that there for a while. Sales have dropped, costs are too high - you need to drastically re-align. Redundancy is one of the major options - for many small firms payroll is easily the largest overhead and so it has the biggest effect if cut.

Firstly, I would make this point. Lack of planning is a mortal sin - the results of which are things like redundancy. So my point is that as a management technique it should be the place of last resort because it is neither a good reflection on your company or on you as individual managers. The stigma of redundancy is all too quickly transferred to the individuals who get their notice and join the dole queue. In my book, the stigma should lie with the managers who caused it due to their incompetence.

Secondly, redundancy is all too often applied as some sort of way to weed out poor performers or people not liked or trusted by management. Many managers use it as a tactic to clear the decks and settle minor scores with individuals they do not like. Once again, redundancy as a management tool is neither a big or a clever thing to do. Unless it is done for the right reasons and in the right way, it will almost certainly cost more than the numbers say.

Thirdly, often redundancies are triggered by the abdication of bullish managers of their responsibilities. Sales orientated directors are classic examples of good managers when the graphs point up, the moment they point down they let the cost cutting people from finance take over. From here, decisions are based on numbers - it will take the loss of 10 of those sorts of people to save £X,000 in the short term - go do it. Naturally, unless they have a department participating in the process, they will not be the managers who have to sit across the table and watch people deflate in front of them as the news is given.

I have had to endure watching a grown man cry and his manager plead with me not to make the person redundant - and while I have had to do it again since, the memory of that first time still haunts me to this day. And so it should with any manager who resort to redundancy to manage their business. Making people redundant is an admission of failure.

Redundancy - The Reality

The first obvious mistake small to medium size companies (SME) make is that they view redundancy as a management tool - it is a chance to get rid of specific individuals. The process of redundancy is in fact all about making the SPECIFIC ROLE redundant to the organisation, as a direct result of a management review in the face of a crisis in the business. That role is no longer required and the associated cost can be saved. So 5 people have to go in the sales department and the sales manager immediately writes down the 5 individuals who should go. Wrong.

The first thing that should happen is a review of the roles and what is required. Then the specific roles which are no longer required should be identified. Lastly, you should then see how many of those roles actually exist and then start using objective criteria to apply to ALL people in those roles.

When you start manufacturing the criteria to fit an individual you are not making the role redundant, you are making a specific individual redundant who happens to occupy that role.

Here comes the first reason why redundancy is not clever - because it is a form of dismissal. Too often managers use redundancy as a cloak for dismissing individuals who they either don't like or they think aren't performing well. The moment you go down the performance route you are entering rugged and treacherous territory. How do you apply performance criteria fairly? Over what period? Against what benchmark? How does everyone else stack up? The only way you can do this rigorously and fairly is to have had rock solid performance criteria already in place against which you do thorough and regular reviews with actions arising agreed by all parties.

In other words, it presupposes you have good HR governance already in place.

If you suddenly spring performance as a reason and you haven't been managing against it previously, then you are wide open for attack. Remember, redundancy is not a clever way to manage a business - this will be a creeping theme which I will return to and not allow managers to get a away with. Making people redundant is a direct consequence of managers failing to manage properly - so the process of making people redundant as a result of it will almost certainly be itself flawed. It is very rare that the individual actions or lack of will have caused the overall bad performance of the company - redundancies are usually made because the business has not reacted to market changes.

Already, an individual might claim that there was little they could have done personally to have prevented overall bad figures.

Recently, an SME company I know made a significant proportion of its staff redundant. The MD told me that he had no regrets as those who were given their leaving orders were poor performers, and were front line salespeople in the main which stood to reason. A few days later he received official notifications of grievances by some of the people made redundant, two of them cited grounds for sexual harassment and sexual discrimination.

The recent reforms of Employment Law since October 2006 have created a minefield for HR governance and there is no doubt that it is significantly harder to dismiss employees without due process and for anything other than the right reasons. To many managers, they see this as unnecessary protection of poor performing employees while others would argue that if the managers do not manage properly then they deserve to be brought to book. In the case of the company I have used as an example, clearly there had been a lack of due management process in managing performance generally and then as applied to the redundancy process - the redundancies were used as a cheap way to performance manage in the extreme. In the process, poor HR governance and lack of proper procedure on performance reviews has left the company wide open to the suggestion that criteria other than performance was used in the process of selecting who would be made redundant.

It is a legal gold mine and there are plenty of lawyers out there willing to take up the challenge in such situations.

The grievance process is also very strict and time consuming and by no means conclusive. While the company may rule that there was no suggestion of wrongful criteria used or that there was dubious conduct by management, lawyers can see things very differently. And while compensation for cases upheld are generally capped, when there is a whiff of sex or race discrimination involved, compensation is open ended and unlimited. Lawyers just love it.

Compromise Agreements

It has become fashionable lately, thanks to the bullish behaviour of US companies who have 'Fire at Will' clauses in all their contracts of employment in the States and so their executives struggle with onerous European laws, to use a Compromise Agreement as a form of dismissal and sometimes to replace redundancy. The essence of the Compromise Agreement is that the company acknowledges it has either not gone through the full due process but wants to get rid of the employee just the same or that it knows that there is a chance that the decision could be questioned and so in signing it, the removed employee effectively waives any right to protection from the law. In return, the settlement for leaving is generally a compromise between what could be claimed legally as compensation and what the company want to pay. It must allow for the employee to have the Agreement reviewed by a lawyer and usually there is a specific allocation of money as part of the Agreement to cover such a review. Once signed, the employee accepts the money on the terms of the Agreement solely and usually they will have restrictive covenants on working at direct competitors and strict confidentiality on revealing the details of the compensation to any other parties.

The Compromise Agreement generally involves an element of tax free money which is handy for both parties and so it typically can approach where a Tribunal might fix the compensation unless, of course, either race or sex allegations are involved.

Redundancy, by contrast, is a relatively low cost method of removing people from the organisation and this makes sense as if a company is truly in trouble and needs to resort to redundancy then it would be pointless to make it high cost. This is why managers get so tempted to abuse the process. In their minds, if they go above the statutory redundancy terms then they should make the leaving package sufficiently generous as to avoid scrutiny by either the employee or any lawyer. The fact is, the moment a manager steps outside the normal redundancy costs then an alarm bell should go off. What are they up to?

Many large firms give quite generous redundancy terms and this is usually as they can account for them differently and take them as one off charges to the business and not interfere with their operating margins in the accounts. BT is rumoured to be taking charges as write offs and 'restructuring' of around £1.5 bn but it will try to demonstrate that underneath is a still healthy business by separating this cost out. However, the astute amongst us will just think that their profitability has been overstated for a period.

For SMEs, of course, redundancy cost itself is nothing other than a direct cost. There may not be vast reserves of profit and cash swilling around and so each redundancy is a direct incremental cost initially while the saving comes a while later. This means, that every SME resorting to redundancies would be absolutely suicidal to not use good HR governance and proper due process.

Redundancy Processes and Options

A) Avoiding Redundancies

1) Non Compulsory Redundancies

There are many sources of good information on how and why to make people redundant and what the process should be. Of course, the first thing you should realise is that redundancy does NOT have to be brought about just because the business is doing badly - in fact this is not generally a good reason for this. The more viable reasons are that the business ceases to operate, relocates to beyond a certain distance or due to the introduction of new working practices or technology as a direct result of which specific job roles are rendered redundant. So when making people redundant purely to SAVE costs you are already entering a shady area which can be made far worse if proper due and fair process is not accurately followed.

Once again, prior business planning should avoid redundancy and one aspect of that should be communication to employees. Nothing hurts a company more than a sudden bolt from the blue, 'Sales have dropped, we are making redundancies'.

It would be far better if the first step could be to announce something like, 'The business is not performing well, management have anticipated a downturn which will affect sales and profit which will result in a specific shortfall in the region of £xxxx and are considering actions to take in order to save the equivalent sum in cost. So management invites cost cutting suggestions by staff, some of which that you might like to ponder are:

a) Reduced working hours for a period
b) Lay offs for a period
c) Reduced pay or a foregoing of any pay rises or bonuses for an unspecified period
d) Voluntary redundancies.'

You may be very surprised that by joining staff into the problem they actually may come up with the solutions - some of which you may have thought of and desired, others which are fresh thinking. Either way, you have prepared the ground ahead.

The outcome of such an involvement of staff may still not get you to where you need to go, but what you can quickly gauge is the APPETITE of the employees to accept drastic action or not. For example, if employees are not happy about the thought of redundancies then they may say that they would accept a selection of other things. Immediately, it is not only pointing to a potential course of action and solution, but it may help alleviate any repercussions of dissenters as you can legitimately claim that you had consulted people and your actions were using the suggestions made.

If you have planned so badly that such a communication exercise is not viable due to time constraints, you can still come up with a range of selections and communicate them but always put the figure you are looking to attain. Giving staff no view of the target savings does not allow them the chance to come up with alternative suggestions which will add up - also make sure they are fully aware of what would happen if the cost savings are not met and the timescales involved.

One of the most powerful ways to avoid nasty action and repercussions is to ask for non-compulsory or voluntary redundancies. You will need to craft a package which poses enough of an incentive for some staff to take it. As an advantage, usually the types who accept voluntary redundancy are the sort of people who would leave if they got the chance and it is a fair assumption to make that they will not be the most industrious types - they may be cynics who have been sniping at management for years or resistant to change. However, drawbacks could be that as such an option is not necessarily role related, you may find one of two of your best people leave plus it is generally a more costly option as long servers can take up more of the available pot. You can have a clause in there to veto certain people's request to leaving if it causes imbalances.

Here's the rub on this - if your best people do take voluntary redundancy then you truly know that as a management team you have not managed the company well. However, it can save a massive amount of back end costs for getting the process wrong and inviting lawyers in.

2) Get Rid of Contractors or Part Time Employees First

Why am I saying this? It's my lifeblood! However, the reality is that much contract, temporary or part time work may itself be redundant. You have to review hard what is required. The beauty of contract workers is that they are flexible and can be quickly brought back on board if things start to change again - it's a powerful way to avoid redundancy. BT has almost a third of its staff as contractors and that is both daft and useful. It means that they can make just 10,000 redundant and a stack of contractors. The really stupid thing would be to not make savings by ridding yourself of contractors first as a) it shows a lack of loyalty to your staff, b) you save less ongoing cost and c) you are showing to HMRC that the contractors are employees in all but name - so if someone is not paying taxes appropriately the alarm bells go off.

3) Stop Recruiting

Believe me, I have been in companies where this kind of crassness goes on. As a ton of employees exit from various parts of the business, other parts either are replacing ones lost through attrition or because there is a new business venture going on, are actually hiring. Of course, the first thing should be to stop all hiring as this also saves recruitment costs, the second thing should be to assess whether any of the outgoing employees are either suitably skilled or can be trained to do some of the vacant jobs.

Certainly, back filling empty headcounts is just daft without considering such options - it is also required by the law. And any employee identified for redundancy should have the option of reading the job description and having the choice to apply, then be properly assessed against the job criteria as any candidate would be.

If you are making an offer of an alternative job to an employee selected for redundancy it has to be unconditional and in writing - do not start changing the rules either just before or after they have accepted. Also, make sure the offer is made before their current contract end - it seems obvious but when their current contract ends they are actually redundant so they can claim the redundancy package and be re-employed.

4) Ban Overtime

This is self-evident. There is no point in people working overtime if it can save money.

5) Restrict Or Stop paying Bonuses

A moratorium on bonuses should be imposed. One of the really crazy things I have not got my head around in the management at banks is how they seem to think that certain people should get bonuses even if the company is losing money hand over fist. The perverse logic is that those individuals will walk. Yet as they were instrumental in clocking up the vast losses, it seems logical that they should be the first to go.

Management cannot see beyond their own stomachs sometimes. Bonuses should be at the discretion of the company. You can always defer them or pay them in a different, less costly format.

6) Adjust The Commission Plans of The Salesforce

Make sure the commission scheme is aligned to new goals and is appropriately geared for succeess and pays little for failure. As an example, reset the barrier or the point at which commission commences to be paid but compensate by having higher accelerators for over target performance.

7) Early Retirement

This may not be applicable to many SMEs but it is an option and one preferred by larger companies. It can be more costly than one-off costs as usually it means some larger contribution to the affected person's pension pot but again it avoids the stigma.

8) Exhaust All Options Before Choosing Redundancy

This goes back to the employee communication and suggestions - make sure you explore all options to save the cost first. Redundancy is a sad business and those affected by it often do not get over it while those managers who have to 'do the deed' can be very emotionally destabilised. The company PR engine goes into reverse, the competition and the markets get a bad message, you can have knock effects in the local area - it is just not a good thing so if you can avoid it - do so.

B) Compulsory Redundancies

So you have exhausted all of the above and you have nowhere else to trun. You are going to have to make people redundant. For SMEs, this may be relatively small numbers but it is best to try to follow the main procedures as, if nothing else, it affords protection. It is also standard procedure to use more than one criteria as by using one only, you are almost certainly going to discriminate even if you don't mean to.

1) Establish A Pool Of Identified Employees Earmarked For Redundancy

The pool can be as wide as you like or just one person.

2) Make Selection Criteria

These criteria must be objective, non-discriminatory and applied consistently. Here are some pointers:

a) Skills, Qualifications and Aptitude - this can be justified on keeping a good balance in the organisation.

b) Standard of Work Performance - Yes, this is allowable. However, this must be provable as an extension of a continuous performance assessment process, you cannot just invent it to suit the situation. You have to know, objectively, what is historic good performance and bad in order to prove your point. If the employees can legitmately say that such rigours have not been applied before or to them individually, i.e. no one has ever mentioned they have under-performed before, then you are leaving yourself wide open. This all needs to be backed up with documentary evidence, seen by the employee and stored on their HR records.

c) Adaptibility - Employees need to be assessed as to whether they can be adapted to do other roles in the company.

d) Attendence/Disciplinary Record - Stands to reason but again, just producing this at the point of redundancy is not good practice - the employee needs to have been aware of any problems beforehand and records show it - the reasons for the absence should have been explored as well. Obviously, don't be silly and include things like maternity, paternity or adoption leave.

Avoid automatically unfair reasons like being a union member and associated activity, being involved in industrial action, actions taken on grounds of health or safety, anything to do with pregnancy, maternity, paternity, adoption or parental leave and reasons relating to regulations on part-time work.

Think hard on all these - any one of them can be due cause for unfair grounds.

3) Redundancy Consultation

If you fail to consult employees (and their representatives if applicable) on redundancy beforehand, then you will almost certainly make the whole process unfair from the start. SMEs may not be affected by this but there is a process for making groups of 20 people or more redundant in one place of work in a 90 day period. You will need to inform the Department for Business Enterprise for Regulatory Reform (BERR) in writing or via the attached form and then consult with representatives of the employees in the pool of those identified to be made redundant. There is a formal process which is available at the Business Link website.

At the start of the consultation, you must provide written details of:
- The reasons for redundancies
- The numbers and categories of employees involved
- The numbers of employees in these categories employed at the establishment
- How you plan to select employees for redundancy
- How you will carry out redundancies
- How you will work out redundancy payments

Consultation does not have to end in agreement, but it must be properly carried out with a view to reaching agreement, including ways of avoiding the redundancies or minimising their effect.

While that is applied to groups, remember, for Individual Redundancy Consultation, you should consult employees individually regardless of the number you plan to make redundant.

If you fail to do so, any subsequent dismissals may be unfair.

4) Respecting The Rights of Redundant people

Redundant employees have a number of rights, the main one being the right to receive a statutory redundancy payment (SRP).

a) The right to receive an SRP

To receive an SRP, an individual must:
- Be an employee, i.e. partners, casual workers, agency workers, the self-employed and directors not working under a contract of employment do not qualify - here's a guide on employment status
- Have at least two years' continuous service
- Have been dismissed, laid off or put on short-term working, ie those who opted for early retirement do not qualify - check on this here: redundancy selection - non-compulsory
- A redundant employee also has the right to receive a written statement setting out the amount of any redundancy payment and how you worked it out.

You must make the payment when or soon after you dismiss the employee.

b ) How is an SRP calculated?

An SRP is based on:
- The employee's age
- The employee's amount of continuous service - up to a maximum of 20 years
- The employee's weekly pay - up to a limit of £350 where the employee's employment ends on or after 1 February 2009)
Currently, the maximum SRP payable is £10,500. here's an interactive tool to calculate the statutory redundancy pay due to your employee.

c) Taxation of SRPs

As long as it's not more than £30,000, a statutory redundancy payment (SRP) is not taxable. Any redundancy payment you make in addition to SRP is subject to tax and National Insurance (NI). You must be careful however, when you are making other termination payments to the employee at the same time, eg a payment in lieu of notice and holiday, as you may have to deduct tax and NI for these.

d) Failure to make an SRP

An employee has six months from the date their employment ended to make a claim for payment to an employment tribunal where either:
- The employee disagrees with the amount of the payment, or
- You fail to make any SRP, eg because you think that the employee is not entitled to it. If they fail to make the claim in time, a tribunal still has the power for a further six months to decide whether or not the employee should receive an SRP.

If you cannot pay, eg because you're declared insolvent, the employee can apply to the Department for Business, Enterprise and Regulatory Reform (BERR) for a direct payment from the NI Fund. However, they must have applied in writing to you for a payment within six months of their employment ending, or applied successfully to an employment tribunal within the six months after that.

e) Other redundancy rights

Redundant employees also have the right to:
- Be offered alternative employment wherever possible.
- Have a trial period in the alternative employment without losing their right to an SRP.
- Reasonable time off on full pay for job-hunting or to arrange training.
- Not be unfairly selected for redundancy. Employees normally need at least one year's service to claim unfair dismissal. However, if an employee is selected for redundancy on certain grounds, their dismissal will be automatically unfair and they do not need a minimum amount of service.

5) Alleviating The Pain

Redundancy is a bad thing - it is not a good experience for most people. It is very good practice, therefore, to try to help people after they have been made redundant. It is not compulsory so long as you have adhered to the above, but it certainly can help make the best of a bad situation.

Where possible, you should try to find ways of helping employees come to terms with their situation. The practical and financial help you offer will of course depend on the size of your business and the seniority of any employee being made redundant.

a) It is good practice to do your best to help employees find a new job.

To do this, you could:
- Contact the local Jobcentre Plus to find out about suitable vacancies or training.
- Set up interviews onsite for redundant employees. You could consider using a specialist outplacement agency - outplacement counselling and retraining is tax deductible in respect of all redundant employees, including part-time workers.
- Contact other local employers who may have vacancies.
- Offer advice on searching for suitable vacancies in the press and on the internet.
- Offer guidance on CVs, job application forms and interview techniques.
- Highlight the importance of being prepared to consider a wide range of jobs.
- Consider re-employment if business picks up, where this is appropriate.

b) You can also help with financial issues by:

- Providing clear information on the financial effects of redundancy - amount of redundancy pay, effect on pension payments and state benefits
- Pointing out the need for the employee to discuss the financial implications of redundancy with their family as early as possible.

If you have the budget, you could consider offering individual counselling. Alternatively you could train HR managers, if you have them, to carry out this task.

The Pitfalls

Finally, there is a heavy price to pay if you go about this wrongly - even if it is entirely unintentional.

a) Following redundancies, an employee can claim unfair dismissal if you:

- Have unfairly selected them for redundancy. This covers both where you used selection criteria that were - on the face of it - fair but you incorrectly applied them and where the criteria themselves make the dismissal automatically unfair.
- Failed to offer alternative work where it was available.

Employees may also be able to claim a protective award if you fail to properly consult with employees' representatives.

b) Unfair Redundancy Selection

An employee will have been automatically unfairly dismissed if you select them for redundancy for certain reasons and here's a comprehensive list.

Key to all this, and particularly for the company I highlighted earlier, is that if you are to go down the route of redundnacy or dismissal on the basis of performance, it may seem clear to you but the employee needs to have a fair assessment and comparisons with benchmarks and with others in similar roles. It has to stand up to hard testing and scrutiny.

The last thing is that if you have any 'skeletons in the cupboard' such as potential allegations of sexual harrasment or sex or race discrimination at your workplace then you need to tread incredibly carefully as almost from the start you are setting yourself up for a major downfall with terrible costs associated with it.

When you combine Unfair Dismissal with any of those such allegations you are seriously jeopardising yourself as the compensation is open ended.

The Costs of Getting It Wrong

There is no real rule of thumb here as cases vary. I was called as a witness in an Industrial Tribunal that considered the allegation of Unfair Dismissal and Sexual Discrimination by a former lady employee at a company I worked for previously. The preparation of the case alone absorbed an enormous amount of time and money but if you seriously want to defend such cases and win, you are going to need a Barrister and that escalates the cost. In this instance, the total claim against the company was over £480,000 plus costs for various reasons but the cost of fighting the case, and eventually winning it, cost over half that amount. It was a fair saving but it came straight off the bottom line and did not really account for the management time lost which included the time, travel and accommodation costs amounting to some 40 man days of senior executives.

The message is - redundancy is like any form of dismissal. Do it wrongly and it will cost you. Make it your last resort in the fight against the recession.

Please Note: I am not a qualified practioner on redundancy nor an expert on the law. The above is merely an opinion derived from experience and various sources. Please make sure you seek good advice and counsel on the subject and do not take the above as anything more than illustrating the complexities.

Sources: Business Link