Daniel Peyton examines why employers cannot rely solely on the financial impact of higher national insurance contributions or a higher minimum wage to justify a fair redundancy.
Recently, 82 CEOs from the UK’s biggest retailers sent a letter to Rachel Reeves informing her that her budget measures would “create a cumulative burden that would make job loss inevitable”.
All of these employers agree that when faced with cost pressures, redundancies can be a cost-saving measure.
There are limitations to the extent that relying on cost savings alone is sufficient to make redundancies just and to avoid unfair dismissal cases.
Discrimination and the ‘cost plus’ rule
Cost-saving alone is not a “legitimate goal” that would justify discriminatory acts in the Equality Act 2010 because the “cost-plus rule” also requires a “plus-factor”.
It could be that, for instance, the employer needs to save money in order to maintain employment, avoid bankruptcy, or work within a budget.
Cost-plus does not apply in redundancy cases, but dismissing employees solely on the basis of cost will not always satisfy the requirements of a fair termination. Fair redundancy requires more than just the cost of employment.
True or fair redundants
The Employment Rights Act of 1996 defines true redundancies as the removal of a job, either because the business has closed or the need for that role has diminished or ceased.
Redundancy does not mean that you simply replace expensive employees with cheaper ones.
Redundancies may be made to reduce costs, but a “plus-factor” is needed, like the commercial decision to stop, reduce, or change certain elements of the company, so that the need for specific roles has diminished or ceased.
Fair redundancy requires a consultation process, which includes employers evaluating and consulting on whether redundancy is possible, alternative to redundancy, and suitable alternatives employment.
Employers must also consider other ways to reduce or avoid redundancies, even if the redundancy was driven by a desire to cut costs.
The salary spreadsheet makes the result of redundancy inevitable.
Selection process
When a redundancy is required, selection and pooling must be done fairly. Selecting the highest-paid employees for a specific role can lead to unfair dismissal.
In some cases such a method of selection may not be objective or logical. Payroll costs are not always a good indicator of the true value or cost an employee brings to a business. For example, some employees incur higher indirect costs while others generate more revenue.
In many cases, however, other factors than direct payroll costs are “plus-factors”. If, for example, the cost comparison of employees performing the same job includes an assessment on their revenue generation, then this is effectively a “performance assessment”, meaning that cost is not the only criteria.
Discrimination is a risk
Indirect discrimination can be a result of making an employee redundant, or choosing from a group based solely on cost. For instance, employees who are more expensive may be older, more experienced, and have a longer service history.
“Payroll costs alone may not accurately reflect the true value or cost of an employee for a business.”
It may be argued that this selection process is discriminatory towards older employees. Would the cost justify an otherwise discriminatory act if it was a proportionate way to achieve a legitimate goal? The cost-plus rule applies and requires reliance on “plus factor”.
Contracts can be changed
Employers have tried to reduce employment costs in the past by changing employee terms and conditions. As a last resort, they may even fire and rehire employees on less generous terms, if the employees do not accept the proposed changes.
The proposed changes to the Employment Rights Bill, which will outlaw fire-and-rehire, except for businesses in distress, appear to be a step towards putting an end this practice.
The desire to reduce costs is almost always the driving force behind redundancies. There’s nothing wrong with this.
It is important to note that financial pressures should not be used as an excuse for employers who have already started a redundancy procedure.
It is very difficult for employers, based solely on cost, to make the selection and commercial decisions that are required without being exposed to unfair dismissal claims and other types of claims.
