Reorganising your business: Employment law implications

Who should read this practice note?

What is the issue?

Reorganising a business can be an unsettling experience for all those involved. The aim of this note is to help owners of firms to familiarise themselves with some of the key concepts related to reorganisation.

For in-depth information, either go to the Law Society's Business management or HR and people management pages or visit the Managing in difficult times section of the Acas website. No two reorganisations are ever exactly the same. Firms that are seriously considering reorganising should seek advice from a solicitor who specialises in employment law.

Legal obligations

If a reorganisation could involve redundancies or transferring a part of the firm there are legal requirements around:

• consulting the workforce
• seeking to avoid job losses
• having fair redundancy selection criteria
• ensuring continuity of employment when employees are transferred from one business to another
• having provisions for laying-off employees or short time working
• varying a contract.

Redundancy selections

Employees have the right not to be unfairly selected for redundancy. When selecting employees for redundancy, employers must be able to show that they are using objective criteria that are being applied fairly, The same criteria should be consistently applied to all employees and there should also be an appeals procedure. Below are some examples of criteria that are often used:

• attendance record (if this is accurate and the reasons for and extent of absence are known)
• disciplinary record (if this is accurate)
• skills or experience
• standard of work performance
• aptitude for work
• formal qualifications and advanced skills should be considered, but not in isolation.

You cannot select an employee for redundancy because they are:

• pregnant or taking maternity leave
• acting as an employee representative or trade union representative
• a member or not a member of a trade union
• on a part-time or fixed-term contract
• refusing to give up rest breaks or assert their right to the national minimum wage or statutory holiday entitlement
• a certain age, have a disability, of a certain race, hold particular religious beliefs, or because of their sexual orientation, or
• on the basis of when they were employed (ie, last in, first out).

Redundancy payments

Those employees with two years' continuous services are entitled to redundancy payment. Statutory redundancy payments are based on age, length of service and salary. Employees get:

• 1.5 weeks’ pay for each year of employment after their 41st birthday
• a week’s pay for each year of employment after their 22nd birthday
• half a week’s pay for each year of employment up to their 22nd birthday
• Length of service is capped at 20 years and weekly pay is capped at £479. The maximum amount of statutory redundancy pay is £14,370.

The amount of statutory redundancy pay an employee is entitled to can be calculated on the Gov.uk webpage: Redundancy: your rights.

Some employers have redundancy policies that provide more generous redundancy terms.

Voluntary redundancy

Sometimes employers will offer staff the option of applying for voluntary redundancy.

Employees who apply for voluntary redundancy should be consulted on an individual basis and advised as to how their position will be affected, how the redundancy would be implemented, if there are any financial incentives for taking, and other relevant information, such as notice periods. Employers do not have to accept requests for voluntary redundancy.

According to the Employment Rights Act 1996, employees who opt for voluntarily redundancy are classed the same as those who have been forced into redundancy. Those who opt for voluntary redundancy are still protected by relevant legislation and eligible for the full statutory and contractual redundancy pay.

Transfer of Undertakings (TUPE)

The purpose of TUPE is to protect employees if the business in which they are employed changes hands. Employees have the right to transfer to a new employer on their existing terms and conditions of employment and with most of their existing employment rights intact.

TUPE applies when a business, or part of it, is transferred from one employer to another where:

• all or part of a sole trader's business or partnership is sold or otherwise transferred
• a company, or part of it, is bought or acquired by another
• two companies cease to exist and combine to form a third, or
• a contract to provide goods or services is transferred in circumstances which amount to the transfer of a business or undertaking to a new employer.

TUPE applies regardless of the size of the transferred undertaking.

For more information visit the Acas website

The steps

Consider all the options

• What size of team is needed? What skills are needed?
• Are some skills transferable?
• Are there other services that the firm can provide or other areas that can be grown?
• What financing options are there?

Changing employees’ contracts

• Consult employees or their representatives.
• Explain and discuss the reasons for the proposed changes.
• Give the employees a chance to express their view and offer solutions.
• If changes are agreed the employer needs to write to the affected employees within one month of the changes taking effect, laying out the new terms and conditions.

If no agreement can be reached, the employer can serve notice to terminate the existing contracts and then offer the employee re-engagement on new terms. It is important that this is only done after a full and proper consultation and the employer follows a fair dismissals process, which offers the employee the right to appeal.

If the firm decides to dismiss and offer re-engagement new terms to 20 or more employees there is a legal obligation to collectively consult recognised trade unions and/or workforce representatives.

Making redundancies

The redundancy process needs to be managed carefully as it can lower the morale of the whole firm. You should inform employees and their representatives of what is happening. Keeping people in dark, especially if they know that the business environment is changing, is not good for emotional wellbeing or productivity.

The law states that when proposing to make 20 or more employees redundant at one establishment within 90 days, an employer must:

• consult any recognised trade union and elected employee representatives
• start consultation at least 40 days before the first dismissal takes place
• look at ways of avoiding dismissals, reducing the numbers to be made redundant and mitigating the effect of the dismissals
• disclose in writing to the appropriate representatives certain information concerning the proposed dismissals
• notify the Department of Business, Innovation and Skills at least 45 days in advance of the first dismissal taking effect.

The purpose of consultation is to provide an early opportunity for all concerned to share problems and explore options and alternatives. The firm may discover that employees will find acceptable alternative ways to tackle the problem, or if redundancies are inevitable, ways of minimising hardship.

The firm needs to create the criteria against which it will judge who should be made redundant. (Details of what these criteria may and may not include are provided above). Individuals may question why certain decisions were made, so the firm needs to be able to evidence the process.

Redundancy notices must not be issued until the consultation has been completed. This notice may be given before the end of 90 days if the consultation is genuinely complete. The dismissal itself cannot take effect until the minimum period has expired and individual notice periods have been observed. Employment can be terminated before the end of notice period where an employee has agreed to take a payment in lieu.

The Acas document, How to manage collective redundancies, contains a useful ten-point checklist for employers.