Recession plus redundancies equals risk for ill-prepared directors. But if you tick all the right boxes when you handle job losses you’ll avoid a costly day in court
Companies slashing costs to survive the recession can pay a heavy price for cutting corners when making staff redundant. And as firms shed jobs, fired workers are growing more confident of suing their old employer. When unemployment topped two million in March, business experts predicted that employment tribunal claims would soar this year. Latest figures for 2007/2008 revealed a 47 per cent rise in claims on the previous year.
But rushing to cut payrolls can leave organisations exposed to costly tribunal defence and the prospect of paying out up to £66,200 for unfair dismissal. Add in the waste of management time, the negative impact if the case is lost and an erosion of morale, and the stakes are clearly high.
Business advisers, insurers, the government and law firms are united in spelling out the dangers of rushing redundancies. They argue employees are better prepared to lodge unfair dismissal claims and will be more likely to resort to law as the likelihood of finding another job fades. Reviewing employment practices, planning layoffs, exhausting alternatives and avoiding subjective decisions are key messages for companies. But even big business gets it wrong. The High Court ruled last autumn that Rolls-Royce had discriminated on age grounds when picking workers for redundancy.
“The volume of calls we’re receiving related to redundancy has doubled in the last 12 months,” says Richard Smith, head of litigation at Croner. “Employees are more confident and more successful [at tribunals]. In the late-1980s, employers won two-thirds of unfair dismissal cases. Now, they win one-third. Employees are able to identify those cases where they might challenge decisions. People are much more familiar with the idea of asking, was it a fair decision?”
Smith adds that small firms are more vulnerable when downsizing. “SMEs are less likely to have an HR presence, and are more pressed in terms of finance and want to make a quick decision. They don’t have people to turn to and find themselves going inadvertently awry.” Common pitfalls, he says, are a failure to consult workers properly, a lack of clarity about proposals and ignoring alternatives to dismissal. “A final decision is made often before there is a chance for discussion.”
If businesses anticipate demand rising, keeping people on a part-time basis or allowing them unpaid leave are options for avoiding lay-offs. The Chartered Institute of Personnel and Development calculates that the cost of letting a worker go and re-hiring them when the economy recovers is £16,375. “There may be a way of retaining the person without retaining the cost,” says Smith. “It’s a case of thinking creatively about alternatives because it is an expensive business to get rid of people.”
His advice to directors falls into three key areas: ensure employment policies, procedures and documents are correct; take advice from tribunal experts; and don’t rush decisions. And the risks of a wrong move? “One is that you deal with today’s cost issues but undermine the future. Have you lost the skills you need to bring back? Have you taken out the next tier of managers? You need to think not just about the next few months, although that’s critical when you’ve got the wolf at the door and the bank manager around the corner.”
Insurers report a link between rising job losses and their workload. Hiscox says the number of insurance claims has risen for the past five months. “There’s no such thing as an industry that’s not exposed to the credit crunch,” says Callum Taylor, management liability underwriting manager. “SMEs are particularly exposed; they often struggle with the extremely complex procedure. The most common area where you will get a claim is where procedure has not been followed correctly, whether it’s a consultation or the right to appeal.”
Taylor agrees that the number of tribunal cases and payouts are climbing as work opportunities dwindle. “Awards are being linked to the ability of the former employee to get another job and as unemployment rises this ability reduces significantly,” he says. He echoes Smith’s advice for directors to prepare carefully before downsizing, highlighting the importance of adequate management liability insurance. “You cannot prevent the claim coming against you, but you can mitigate the potential for damage.”
Calling on professional HR advice is paramount to a company’s chances of defending a claim. A failure to follow correct processes can be much more costly than a conventional redundancy payout, he adds.
It’s a view shared by Ed Bowyer, senior associate lawyer at Lovells. He believes the crucial question is whether companies have assessed the pool of workers under threat. “The pinch-point comes when people say, ‘it should not have been me, it should have been someone else’.”
Bowyer stresses the dangers of pushing through redundancies without specialist help and the risks to morale of staff who survive the cull. “Larger companies have dedicated HR teams, online access to lawyers and have the budget to get it right. They do everything by the book. Smaller firms will not have dedicated HR, and when management takes over the running of redundancies they won’t appreciate the niceties of what needs to be done. They often start on the wrong foot and once you’ve done that it’s difficult to remedy mistakes.”
Last month saw the repeal of the 2004 statutory dispute resolution procedures and the introduction of a voluntary code of practice established by conciliation service ACAS. Supported by non-statutory guidance, the code aims to simplify procedures and penalties. It encourages both sides in a dispute to seek early settlement. Rules surrounding tribunals have also changed, and they now have the discretion to increase or cut awards by up to 25 per cent where either side has failed to comply with the code.
The Tribunals Service received 189,303 claims in 2007/08, up from 132,577 on the previous year. There is concern that bleaker times are emboldening former employees. Anecdotally, it is thought that tribunals are seeing a wave of spurious claims. Caroline Doran, who heads the employment law practice at solicitors Rooks Rider, reckons small changes would stop employers “being held to ransom by former staff”.
She advocates introducing a scaled fee, starting at £100, for going to tribunal, pointing to the High Court demand for respondents to pay towards trial costs in order to deter time-wasters. “People are more nervous when they’re made redundant. They’re maximising the money they get. We’re seeing some senior people who should know better launching spurious sex discrimination claims on the basis it will cost a company thousands of pounds to defend it. They’re aware that they’re not likely to win.”
Doran says professionals increasingly act for aggrieved former staff. “Compared to the cost of representation, an upfront fee to lodge a complaint is a drop in the ocean.” She argues that because a tribunal is loathe to award costs, there is no urgent need to hear cases quickly. “Claimants can drag out a hearing, landing their employer with a large solicitor’s bill. They think it is worth something from a nuisance-value perspective.”
While firms’ biggest cost may be the staff, employees are their most valuable asset. As Croner’s Smith points out: “The businesses that are going to do best coming out of recession are those with the best skill base, the best-trained workforce and the best products and services. This won’t come about just by hacking back on the staff.”
Five steps to keep within the law
BERR provides free, online practical advice to help companies meet employment law and manage redundancies. Follow these five tips to ensure you comply. More guidance is available at www.businesslink.gov.uk/employingpeople.
1 Consider your downsizing options. Short-time working may suit your business better than redundancies.
2 Redundancy selection. A pool of candidates and selection criteria needs to be established. The criteria must be objective, non-discriminatory and applied consistently.
3 The consultation process. For individuals, you must write to each employee setting out the rationale for redundancy and invite them to discuss the proposed dismissal. For 20 or more redundancies, you need to notify BERR and consult workplace representatives. A collective consultation must also be carried out.
4 Employee rights. Be aware of the entitlement of employees to receive a statutory redundancy payment (SRP). If you fail to make an SRP, an employee can make a claim to an employment tribunal, and can challenge the amount of pay you have offered.
5. Keep it simple. You must prepare a written statement for the redundant employee that will highlight the amount of redundancy payment owed and how you worked it out.