Reducing Employment Costs in the UK

Labor & Employment Workforce Watch
November 2020

The pressure imposed on many businesses by the pandemic highlights the complications in the UK of imposing reductions in force (or redundancies as they are more commonly known in the UK) or of unilaterally changing terms of employment. Employment at will does not exist in most jurisdictions outside the US, and UK employers cannot simply notify employees unilaterally that their salary is being reduced, their benefits are being cut, or that their roles are being eliminated with immediate effect. These cost-saving measures are possible, but as is often the case in European jurisdictions, the process of implementing these measures is more involved than in the US.

Individual Redundancies

The UK recognizes redundancy as a potentially fair reason for dismissal, provided the process for executing the redundancy is fair. Otherwise, employers may face a claim for “unfair dismissal.” In the UK, unfair dismissal is a statutory claim for which damages are generally based on the financial loss that an employee is likely to suffer as a result of the termination. In other words, the amount of time the employee will likely be unemployed, capped at the lesser of a year’s basic salary and about £90,000. Juries do not assess damages and there are no punitive damages. With that context in mind, a fair process for implementing a redundancy should involve:

  • Consulting with employees about their potential redundancy over a period of approximately two weeks, including a discussion about the employees’ selection for redundancy and any suitable alternative employment in the organisation.
  • The process differs when redundancies occur within a team. Normally, employers create a selection grid with criteria to evaluate employees within a team (e.g., performance, experience, skills and expertise) relevant to the future structure. Then the employer conducts a comparative numerical scoring exercise for each employee in the team, along with written comments in support of the scores. Upon request by an employee, employers must disclose the selection criteria used and the individual employee’s score, but not the scores of others.
  • The HR team should confirm the employees’ scores to mitigate potential allegations of discriminatory selection. Similar to unfair dismissal, damages for discrimination and whistleblower claims are based predominantly on financial loss, but there is no cap on damages, which means potential damages for highly paid employees can be significant.

Once selected, redundant employees are entitled to work for the remainder of their notice period or receive pay in lieu of notice. Additionally, if the employee has at least two years of service with a company, there is a statutory redundant payment calculated at £538 per year of service, and multiplied by 1.5 if the individual is over the age of 41. Many employers choose to increase the redundancy payment in return for execution of a settlement agreement waiving claims.

Collective Redundancies

Employers face additional obligations when conducting “collective redundancies” (20 or more redundancies in one location over a rolling period of 90 days). For example:

  • The employer must engage in collective consultation for at least 30 days, or 45 days if 100 or more redundancies are proposed.
  • Employers do not consult with the employees directly, but through “employee representatives,” which either is a recognised union, or if there is none, elected employee representatives. Electing employee representatives is generally a simple process conducted over the span of a few days via email.
  • The consultation should focus on: ways of avoiding the redundancies; reducing the numbers to be dismissed; and mitigating the consequences of the dismissals. Detailed information about the redundancy proposals must be disclosed at the start of the consultation period.
  • Employers are not required to reach an agreement, but must consult with an open mind.
  • The collective redundancy consultation may occur parallel with the individual consultation outlined above.
  • In both collective and individual redundancy consultations, it is important to use the language of contingency (e. g., “may,” “envisage,” “proposal,” rather than “will,” “is going to,” or “decision”). 

Changing Terms of Employment

In the UK, even employees not subject to a written contract are deemed to have an unwritten employment agreement. Accordingly, if an employer wants to change a contractual right of an employee, the employee must consent.

It is worth, however, looking carefully to see what provisions of an agreement are actually contractual. It is customary for fringe benefits (such as medical insurance or income protection insurance) to be provided on a discretionary basis, with significant flexibility reserved to amend the provider or level of coverage or even to discontinue coverage. In those circumstances, employers may withdraw benefits, subject to informing employees first and providing time for them to raise concerns.

On the other hand, if the term to be changed is definitively contractual (such as salary), then employers must obtain consent from each employee to make an adjustment. Large employers which have implemented across-the-board pay cuts in recent months have often decided that securing individual consent from each of their many employees was impractical. Instead, those employers announced a unilateral pay cut, after having discussed them with unions or appropriate employee representative bodies. In the current environment, where employees fear unemployment more than a reduced salary and there is a widespread “all in it together” attitude, most employees have acquiesced. As a matter of law, however, an employee could claim constructive dismissal if his or her salary has been unilaterally adjusted.

This is not to say that employers cannot ever lawfully reduce the salaries of their workforce or change other terms of employment. If they can articulate a real business need, and have tried to secure consent from employees, employers may initiate a collective redundancy consultation process prior to serving notice to terminate employment or offering new contracts on reduced terms effective immediately upon expiration of the notice period.