Articles

Employment: Redundancy Rights

Joanna Blackburn discusses the implications of redundancy and outlines your rights if you have been made redundant.

Already the credit crunch has claimed some big scalps, but whilst the departures of Stan O'Neal and Chuck Prince might grab the headlines, the reality is that across the City, firms are already starting to implement redundancy programmes which are likely to see deep cuts being made before the annual bonus rounds in the first quarter of 2008.

Until August, many City workers were rightly feeling upbeat about their earnings potential for 2007. The corporate market was booming and on the face of it, there was an endless stream of credit available to finance deals. However, the scale of the losses suffered by a number of firms have seen profits severely dented and inevitably, this will be passed on to employees, regardless of whether they keep their jobs.

For those who face redundancy, it can often come as a surprise to discover how unsympathetic the English legal system can be. Employees will have the benefit of whatever rights to notice or termination payments their contracts may give them, but this is often not particularly generous in a market where comparably short notice periods are the norm. Outside of contractual rights, employees must look to statutory rights, and this is where disappointment can lie. The system was not devised to protect highly paid workers and, if the employer does its job properly in making its employees redundant, then the compensation awarded to redundant employees can be trivial – a maximum of £9,300 for an employee aged over 61 with 20 years of service with the same employer. For most employees, statutory redundancy payments are significantly less.

However, the reality, particularly in the City, is that few employers are prepared to go through the often lengthy procedures which are required to effect a fair dismissal. As a result, when redundancies are made, the employees affected need to consider carefully whether their employer should be compensating them at higher levels for the termination of their employment. The main issues which crop up are as follows:

Consultation

Did your employer consult with you in accordance with the rules set down in law? All employees are entitled to participate in genuine consultation before a decision is taken to make their position redundant. The nature of the consultation depends on the scale of the redundancies. Where more then 20 employees may be made redundant over a 90 day period, the employer is obliged to enter into collective consultation with representatives of the affected employees. In a non-unionised environment, this involves consulting with elected representatives, who may be appointed purely for the purposes of discussing the proposed redundancies. It is the employer's obligation to invite the employees to elect representatives and to provide the facilities to enable a fair election to be undertaken.

After the representatives are elected, which can take some weeks to arrange, the employer has to provide the representatives with certain information about the proposed redundancies and then enter into consultation with the representatives with a view to reaching agreement on the reasons for, manner and extent of the redundancies. The length of the consultation depends on the number of employees who may be made redundant. For 20 to 99 employees, the minimum consultation period is 30 days. For 100 or more employees, it is a minimum of 90 days.

Crucially, whilst this consultation is ongoing, the employees who might be made redundant cannot be given notice of dismissal. As a result, the consultation period, properly observed, can add many months onto the employer's timescales to dismissing the redundant employees, during which time, they continue to work, may earn bonuses (see below) and will be undoubtedly a dangerously demoralised workforce. For all these reasons, most City employers dispense with collective consultation altogether. However, in so doing, they open themselves up to owing each employee who is made redundant without this consultation a further 3 months pay (which does not include bonus). They will also be highly likely to render any dismissal unfair, the cost consequences of which are discussed below.

If only small-scale cuts are being undertaken, the employer still has an obligation to consult on an individual basis with the affected employee, following the statutory dismissal procedure. This requires an employer to explain, in writing, that it is contemplating dismissing the employee for redundancy, the reasons for its proposal and to have a meeting with the employee to discuss the mechanics of the potential redundancy. Again, this must be done before a decision is taken to dismiss the employee. The employee can insist on seeing how he has been selected for redundancy and challenge the decision, appealing any notice of dismissal if necessary.

Even where there is collective consultation being undertaken, the employer also has to consult with employees individually before making them redundant, although the times that collective consultation is actually undertaken in the City are so rare that it is rarely an issue in practice.

Selection

How an employee is selected for redundancy tends to be the main battleground when challenging the fairness of a decision to make an employee redundant and can open up more interesting and lucrative avenues for employees to explore in terms of obtaining compensation for their dismissal. An employee cannot be selected for redundancy on grounds that are discriminatory on the grounds of sex, race, religion, sexual orientation, disability or age. Nor can employees be selected because they are pregnant or on maternity leave, or because they have in the past made a protected disclosure (see box). The decision to make an employee redundant on one of these grounds may not be conscious but can still be unlawful.

If, statistically, a group of protected employees is more adversely affected in a redundancy process, they may still be able to show that their dismissal was discriminatory. For example, if a team consists of 18 men and 6 women, and out of 6 people made redundant, 3 are women, the females will be disproportionately affected in the group. Fifty percent of the women will be made redundant, as opposed to only 16 percent of the men. An affected woman may be able to challenge the decision to make her redundant on the basis that it is tainted by discrimination and it will be for the employer to show that it had a non-discriminatory reason for selecting the woman for redundancy. This can be a difficult task, particularly if the decision to make certain employees redundant has not been made on clear and objective criteria.

Levels of compensation

Whether or not an employee can point to a discriminatory reason for dismissal, or can argue that their redundancy is linked to a protected disclosure, is critical for highly paid employees, because the compensation for these claims is uncapped. This differs from unfair dismissal, where the maximum compensation that can be awarded is capped at just £60,600. Even if a claim is uncapped, it does not follow that the employee will necessarily be awarded vast sums of compensation. The award will depend on how much the employee earned (including bonus awards and deferred compensation) and the time, or likely time, it will take for him to obtain other employment at an equally remunerative level.

Unlike in some other jurisdictions, for example America, the UK does not have the concept of punitive damages, where significant sums can be awarded to a wronged employee to punish the employer for its illegal behaviour. Here, a successful discrimination claimant will receive a small award for injury to feelings, but in redundancy cases, this is unlikely to be greater than £10,000. Mainly, the award will compensate an employee for financial losses suffered as a result of the dismissal. The higher the earnings enjoyed by the employee before his dismissal and the longer it will take him to find a job where he can earn the same amount, the greater the compensation will be.

Bonuses

There is a reason why many City employers are making redundancies now and that is because the new year will bring them into bonus season. For most employees, without the benefit of guarantees, their contracts will say that they must be in employment and not on notice on the day that bonuses are paid if they are to be able to be considered for a discretionary bonus. The fact that an employee may have worked the vast majority of the bonus year, or even the whole year, will not prevent the contract precluding them from receiving a bonus if they are not in active employment on the payment date.

This is considered to be a significant unfairness in a market where highly paid employees derive a major proportion of their remuneration from their bonuses. However, previous legal challenges to these types of clauses on the grounds that it is unfair for an employer to be able to evade liability for payment of a bonus when the employee has worked part or all of the year have failed. The law is organic and continues to move and develop, but it would be a brave, some would say foolhardy, employee who chose to litigate against his former employer if that former employer has a well-drafted bonus clause, which excludes payment. This of course assumes that the clause is well drafted, and in some contracts there may well be better arguments for an employee who has been dismissed to be paid a bonus for a part year, or whole year worked.

For those employees who are not made redundant, the bonus round may still be disappointing in 2008. Again, where a bonus is genuinely discretionary, it can be very hard to challenge the amount of the award where an employer has determined the level of bonuses in a fair, non-discriminatory and transparent manner. Where the employer has not done this, the possibility of mounting a successful legal challenge to the amount of a bonus payment may increase, but such litigation is expensive, high risk and, for employees who remain in employment, unlikely to be career enhancing.

What to do if you are affected

Every person's circumstances are different and every firm adopts a different procedure when making employees redundant and calculating the compensation that they are prepared to offer to a departing employee. Almost universally however, employees who are being offered compensation on dismissal will be required to sign a settlement agreement, known as a compromise agreement. In order for that agreement to be valid, the employee must be advised on its terms by an independent lawyer. Part of that lawyer's job is to honestly and realistically advise on whether the offer made is a fair one. In the hands of an experienced employment lawyer, an employee who is being made redundant should receive clear advice about his rights and, importantly, understand the consequences of mounting a legal challenge to the lawfulness of his dismissal should it prove impossible to negotiate a fair settlement. It is rare cases that lend themselves to litigation and it is not a path to follow without careful thought. For most employees facing redundancy, the situation, although not pleasant or welcome, is one that is resolvable through negotiation and compromise. And one thing that any experienced City employee knows – the market will turn upward again, just as inevitably as it has now fallen.

For more information please e-mail Joanna Blackburn