Published on 23 December 2010 by Tony Groom

Companies struggling to survive a severe economic downturn like the current one often consider ways to reduce their overheads.

Generally one of the biggest costs on a business is the payroll and looking to redundancies as a way to reduce them is a common response to a recession.

The reasons used for making employees redundant are generally economic, technical or organisational. This can be that new technology or a new system has made a job unnecessary, the company needs to cut costs (as mentioned above) or that the business is closing down or moving.

However, making staff redundant is closely regulated and there are rules for the steps that a business must follow if it chooses to go down this route. These can be extremely expensive and if not managed properly could actually leave the company insolvent rather than achieving the desired objective.

Firstly, many companies consult employment specialists to ensure that they comply with the rules and carry out the process correctly and this in itself can involve paying substantial fees.

If an employer is making fewer than 20 employees redundant in one establishment it must consult individually.  For more than 20 employees being made redundant within a 90-day period it becomes a collective redundancy and this usually occurs when the company is either relocating or reorganizing its work activity.

For collective redundancy the employer has a duty to consult with representatives of the potentially affected employees. If the employer does not consult then the employees can apply to an Employment Tribunal claim for a protective award. This is an award of up to 90 days’ pay.

There are also rules about employees’ redundancy entitlements laid down by the Government. The calculation is based on how long the employee has been continuously employed, their age and their weeks of entitlement up to a certain limit (£380 per week current allowance).

Failure to carry out a redundancy operation can also result in employees taking the employer to a Tribunal with a claim of unfair dismissal. In certain circumstances this can also add to the employer’s costs, not only if the Tribunal rules in favour of the employee but also, in some specific circumstances Tribunals now have the power to award costs of up to £10,000.  If the Tribunal finds in the employee’s favour compensatory awards can be up to a maximum of £76,700.

According to the Chartered Institute of Personnel and Development the direct financial cost to employers of redundancy per worker being made redundant in 2008/9 was estimated as ranging from £10,575 (where redundant workers are not subsequently replaced) to £15,242 (where redundant workers are replaced by new hires).

It is therefore possible that a struggling company may find that the process ends up simply adding to its financial problems in the short to medium term, especially because of the normal 90-day period of consultation.

So the wages and salaries still have to be paid for a further three months after the decision to make redundancies has been taken, and that is before any consultation fees and final payouts are included.

For a company facing difficult trading conditions and financial pressures it may be that there are other solutions then staff reduction to an expensive payroll that would put it in a better position once it starts to recover, not least because it may risk having key, experienced staff in place to help it take advantage of a recovery.

A better option for cost reduction before going down the redundancy route could be to call in a business rescue adviser to carry out a thorough review of the business to assess the business viability, look at its accounts and business model, identify any underlying weaknesses and suggest a restructuring plan.

The plan could include for example a short-term agreement between management and staff to cut hours or bonuses for a time to help the firm survive and rebuild. If more drastic measures are necessary the plan could involve a Company Voluntary Arrangement (CVA) that may be necessary when the company cannot afford to pay redundancy costs. Such plans would need the advice of a restructuring specialist rather than an employment specialist.