Don't mention the "R" word: considering the alternatives

The winding-down of the furlough scheme over the coming months signals the withdrawal of the safety-net for staff salaries. Many employers will balance precariously on the tight-rope between business survival or becoming yet another casualty of the COVID-19 crisis. The travel, hospitality, leisure and retail sectors were all forced to close during the height of the pandemic. As lockdown eases and the return to work evolves, can employers think creatively? Can employees co-operate and work together to keep the business alive?

Before taking the drastic decision to make redundancies, employers should think carefully about the alternatives. Tribunals will be ready to scrutinise claims for unfair dismissal where employees (with more than two years’ service) claim that their employer did not act reasonably in dismissing them for redundancy. The employer will need to demonstrate that alternatives to dismissal were considered as part of following a fair and reasonable procedure.

Short-term measures are already being used, such as recruitment freezes, home-working, and flexibility for staff with caring responsibilities or particular health concerns. What other alternatives should be considered?

Limiting use of contract workers:

Reducing or stopping the use of casual workers, agency staff, self-employed consultants and contractors can be a relatively low-risk way of reducing employment costs. The employment status of this contingent labour force should be assessed carefully as de facto ‘employees’ enjoy statutory rights such as redundancy pay and unfair dismissal.

Be extra careful when terminating part-time or fixed-term staff. They are protected from less favourable treatment in comparison to full-time and permanent colleagues, unless it can be objectively justified by the employer.

Zero-hours staff also offer the advantage of a rapid reduction in working hours (and pay) where circumstances dictate, often with short or no notice periods.

Maintaining connections and offering work when you can will help to ensure that they will be there for you when you need them again.

Lay-offs and short-time working:

There is no automatic right for employers to lay off staff (suspend them from work for a period without paying them) or put them on short-time working (reduced hours and reduced pay). Imposing these arrangements is only possible if employers have a contractual right to do so. This is rare and generally only found in the manufacturing sector and some professional services. However, if the only alternative is deeper cuts at a later stage, many employees may be prepared to agree to such an arrangement in the short to medium term if it means keeping their jobs and avoiding redundancy.

Unless an employee's express consent is obtained to lay off or short-time working the employer will potentially face claims for unlawful deduction from wages, breach of contract and constructive dismissal. Without agreement, or the contractual right to impose a lay-off or short-time working, the considerations in relation to changing terms and conditions described below will apply.

Where employees agree to being laid off or put on short time working, provided they have two years’ service, they have the right to resign and claim a statutory redundancy payment if the lay-off/short-time continues for four weeks or more, or for more than six weeks in any 13-week period. The rules in this area are complex and specific advice on individual circumstances should be taken.

Freezing salaries and bonus reductions:

It is rare for employees to have a contractual right to a pay increases. Commonly, the right is to a salary review and no more. Taking the decision not to increase salaries will be possible provided the employer doesn’t act in bad faith or in breach of trust and confidence.

In the current climate it may be possible to legitimately reduce performance related bonuses to zero or thereabouts. Many bonus clauses in contract of employments describe the entitlement as ‘non-contractual’ and/or discretionary. But employees may seek to argue that they have an implied contractual right to a bonus as a result of past custom and practice. Whilst that may be so, the current climate will inevitably mean that performance and profit, and as a result, bonus entitlements may dwindle to nothing for the time being.

Try and maintain the good will of your staff during these turbulent and testing times. Reassurance that ‘short term pain will produce long-term gain’ is bound to help.

Seek volunteers for a sabbaticals or a temporarily reduced working week:

If your organisation is large enough and diverse enough, it may be worth considering redeploying employees elsewhere within the organisation or seconding them to other departments or group companies. Not only can this avoid redundancies in a particular part of the business it can also assist in keeping hold of key members of staff with valuable skills and experience. But be careful not to impose these changes without the employees’ consent where there is no contractual right to redeploy or second.

You may be an employer who already offers a discretionary sabbatical/career-break scheme. Some employers operate discretionary schemes; they may be paid, part-paid or unpaid. Offering such an extended period of leave may appeal to some staff who can afford to take time off work or who have caring responsibilities requiring flexibility at this time. Holding onto their jobs and preserving their continuity of employment may prove far more attractive than redundancy.

Changing terms and conditions or redundancy:

Changing contractual terms and conditions of employment is a well-known legal minefield requiring employers to tread carefully and take legal advice. In short, the options are:

• changes allowed by the contract; or
• variation by mutual agreement; or
• unilateral imposition of new terms; or
• terminating contracts and offering re-engagement on the new terms.

Changes to hours of work, salary and other financial benefits will almost never be permitted by an express contractual term. Flexibility clauses in contracts of employment may relate to bonuses and place of work (see above) but must be exercised with caution. Clauses of this type are interpreted restrictively and any ambiguity will be resolved in favour of the employee. The implied duty of mutual trust and confidence also restricts the exercise of a flexibility clause, usually requiring the employer to give reasonable notice of the permissible changes.

Making changes to terms and conditions with the employee's consent is by far the most trouble -free option; although it may not be a path without resistance. For many employees, the option to agree to a pay-cut and/or other cost-saving measures may prove irresistible when redundancy is the fall-back position. Offering something in return, such as future bonuses, may also sweeten the pill. Employers may also offer voluntary redundancy before going down the compulsory route.

Securing agreement to change is a delicate process requiring full and effective communication and consultation. Employees need to be seen to be making an informed choice and to do so they need to fully understand the business needs driving the decisions. Invite staff to briefings and offer one-to-one consultation meetings. Make sure you have each employee’s written agreement to the changes to avoid any future disagreements about the changes.

Purporting to implementing changes without agreement (particularly where it involves cuts to pay) is a high-risk approach that will be a breach of an employee's contracts. Unhappy employees (and they will be!) may:

• continue to work according to the changed terms, but under protest — preserving their right to sue for breach of contract and/or bring a claim for unlawful deduction from wages; or
• resign and claim constructive dismissal; or
• refuse to accept the new terms, leaving little option but to dismiss - giving rise to potential claims for unfair dismissal.

Dismissal on notice and re-engagement on the new terms is often viewed by lawyers as the preferred option for those employees who persist in refusing to accept the proposed changes. It seems tough but it will avoid the risk of employees suing for breach of contract - the employment contract is lawfully terminated with notice; the employer is therefore not in breach.

But, employees with at least two years’ service can claim unfair dismissal (whether they accept the re-engagement offer or not). The defence to such a claim is to show ‘some other substantial reason’ for the dismissal – in the current climate this would be the pressing business need to introduce the changes to balance keeping the staff and keeping the business afloat. Employers will also need to show that they acted reasonably by following a fair procedure involving consultation about the changes and the rationale for them.

Staff who refuse the offer of re-engagement on the new terms may still argue that their dismissal was by reason of redundancy and claim entitlement to a redundancy payment (in addition to their notice pay). Each case will be fact specific as to whether the statutory definition of a redundancy has been met and specific legal advice on the particular facts is a must.

And don't forget that a proposal to dismiss and rehire in the context of changes to terms and conditions counts as ‘redundancy’ for collective consultation purposes. If 20 or more employees will be dismissed within a period of 90 days or less, the employer must consult for a minimum of 30 days with the appropriate employee representatives unless there are “special circumstances” not to. The current crisis may be “special circumstances” for collective consultation purposes but, as yet, there is no case law on this.

No employer wants to take such drastic decisions. Now, more than ever, is the time to pull together to protect both businesses and their workforce. Maintaining goodwill is key, as businesses hope for the best and plan for the worst.

This article does not constitute legal advice and liability for reliance on the views and opinions expressed is excluded. Specific advice on your own particular circumstances should always be sought.

If you require specific legal advice please contact Katie Bird at Burnetts on 01228 552222 or kbi@burnetts.co.uk and she will put you in touch with the Employment team who will be happy to assist you.