The Law on Redundancy

Introduction

Wider economic circumstances may cause the employer to shut down or reduce the size of the workforce, changing the structure or even the nature of the work or sell all or part of the business enterprise, as redundancy, reorganisation, and transfers of undertakings all involve significant employment consequences.

What legal consequences follow if jobs are lost and what remedies are available for employees who lose their jobs as a result not of their own conduct, but of closure of or changes to their employer?

How must people be selected for a redundancy, and what responsibility does an employer have to notify and discuss alternatives; are the employees at the mercy of the employers; do the employees employment contract may continue to protect them or there is any protection available to employees; these are the questions that employees may ask when made redundant or in fear of being made redundant.

Law on redundancy.

If an employer decides to make people redundant, he needs to ensure the dismissals are fair, and the circumstances that make a dismissal a ´redundancy – leading to a redundancy payment but probably not unfair dismissal compensation.

Whether redundancy is the principal reason for a dismissal is determined not by whether the employer claims it as the reason and can prove it, but by whether the definition applies to the factual circumstances.

For the purposes of unfair dismissal and the redundancy payments scheme, however, redundancy it is defined in the section 139 of the Employment Rights Acts 1996.

The s 139 (1) ERA 1996 criteria.

Looking at the definition of definition by s 139 (1) ERA 1996, an employee is dismissed by reason of redundancy if the dismissal is attributable and occurs in three main situations:

  • Cessation of business – ´job redundancy´.

´Business´ is widely defined in the s 235 ERA 1996 as including a trade or profession or any activity carried on by a body of persons, whether corporate or unincorporated.

Within s 139(1)(a)(i) of the ERA 1996, an employee who is dismissed by reason of the closure of the employer’s business will be dismissed by reason of redundancy. This will be the case whether the cessation of business is permanent or temporary.

  • Reduction in work at place of employment – ´place of work redundancy´.

Here, the place where the employee is employed is being relocated (ERA 1996, s 139(1)(a)(ii)). There were, in the past, difficulties in determining whether ‘place of work’ is where the employee could be required to work according to the contract of employment (the ‘contractual’ test), or alternatively where the employee actually works (the ‘factual’ test).

The EAT Court held that an employee’s place of work, for the purposes of redundancy, is a question of ‘fact’, taking into account where the employee ‘actually’ worked, as to determine the place where the employee was employed, the court position by case law is as follows:

(a) if an employee has worked in only one location, that is his place of work, regardless of any mobility clause in his contract;

(b) if an employee has worked from several locations, the place of work is still to be established by a factual enquiry, taking into account any contractual terms that might assist in evidencing his place of work, for example a mobility clause.

  • Reduction in requirement for employees to do work of a particular kind – ´employee redundancy´.

What if a change in the nature of a job leads to the dismissal of an employee? Will the dismissal be by reason of redundancy? If the nature of the work has changed fundamentally so that work of a particular kind has ceased or diminished, even though it has been replaced by different work, this will amount to redundancy?

An employee is dismissed by reason of redundancy within s 139(1)(b) ERA 1996 if the reason for his dismissal is that the requirement for employees to do work of a particular kind has ceased or diminished.

This will clearly cover the situation where the dismissed employee’s own job has disappeared through lack of work, but the section also covers other situations, some of which may not be so obvious.

Surplus employees, if the requirement for employees to do the work is reduced, even though the same amount of work is still being done, this will come within the ambit of the s 139(1)(b) ERA 1996.

Historically, there have been two conflicting tests used for determining whether work of a particular kind has ceased or diminished: the contract test and the function test.

The contract test focused on how the duties of the employee were defined in the contract of employment.  The function test focused on the duties actually performed by the employee. Historically, the contract test prevailed.

Eligibility

An employee right to a redundancy payment, there must be a dismissal and eligibility must be checked. The employee must have two years´ continuous service before the employee is eligible to claim a redundancy payment (s 155 ERA 1996).

A redundancy payment is intended to compensate the employee for loss of his job with the employer.

Offers of Re-employment.

An employee if dismissed by reason of redundancy, an employee will lose his entitlement to a redundancy payment if he unreasonably refuses an offer of suitable alternative employment with the same or associated employer made in accordance with the provisions of s 141 of the ERA 1996.

The employer´s offer must comply with s 141(2)-(4) ERA 1996; offer made by the employer or associated employer; offer made before the contract of employment comes to an end; re-employ the employee in same or suitable employment; and the employment contract renewal or re-engagement takes effect within four weeks of the end of the original contract.

Otherwise, if the offer does not comply s 141(2)-(4) ERA 1996 the employee will be entitled to a redundancy payment even if the employee unreasonably refuses the employment offer.

Therefore, if the employee accepts an offer made in accordance with the provisions set out above – s 141(2)-(4) ERA 1996, the employee is treated as though he had not been dismissed, however, if the employee is re-employed by his employer, or by an associated employer, the employee does not need compensation an may not be entitled to a redundancy payment (sec 141 ERA 1996).

For the employee it may be difficult to decide whether or not the alternative employment is suitable. The employer may also have doubts as to the employee’s suitability for the new job. To assist both parties to decide whether the new employment is suitable s 138 of the ERA 1996 provides that there may be a ‘trial period’ of four weeks (calendar weeks), beginning on the date which the employee starts work under the new employment contract.

If the employee rejects the offer, then the question of whether or not he is entitled to a redundancy payment turns on two issues; suitability of the alternative offered; and the reasonableness of the employee’s refusal.

If the alternative offered was unsuitable, the employee will be entitled to a redundancy payment, however, if the alternative is suitable, then the second issue must be considered. If the employee has unreasonably refused suitable alternative employment, the right to the redundancy payment is lost.

Computation of statutory redundancy payments.

A redundancy payment is computed by applying a formula based on an age factor, length of service and a ´week´s pay´ (s 162 ERA 1996). Redundancy payment is not based on the loss suffered by the employee.

  1. Working from the date of termination of employment, the employee is entitled to:
  2. one and a half weeks´ gross pay for each complete year of continuous employment in which the employee was 41 years old or over;
  3. one week´s gross pay for each earlier year in which the employee was 22 years old or over, but under 41 years old;
  4. half a week´s gross pay for each earlier year.
  5. The total number of years to be taken into account is subject to a maximum of 20.
  6. A ´week´s pay´ is calculated in accordance with s 221 ERA 1996. In the majority of cases where there is a normal weekly wage, a week´s pay would be the gross basic pay to which the employee was entitled in the week ending with the dismissal, subject to a statutory maximum of £489 (at April 2017).

Enforcement of Employer´s liability.

Provided written notice of the claim for a statutory redundancy payment has been given to the employer within six months of dismissal it is not necessary to refer the matter to an employment tribunal within that time.

If the employer fails to make a payment or there is a dispute about the amount, the employee may refer the matter to an employment tribunal, during a time limit which must be observed.

Where an employee is entitled to a statutory redundancy payment from his employer, but the employer is declared legally insolvent and the redundancy payment remains unpaid, the employee may apply for payment out of the National Insurance Fund to the Redundancy Payment Office (RPO).

The RPO, if satisfied that the employee is entitled to the payment, will make the payment out of the Fund (s 166 ERA 1996). The RPO then has a statutory right to recover the amount of the payment from the employer. The employee must have claimed the payment from his employer within the relevant time-limit, and the payment must have been owed when the employer became insolvent.

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This article is written by our blog writer Sérgio Garcia LLB, LLM (International Sport Law)

The Law on Redundancy