Reducing overheads –
the alternatives to redundancy

Adele Martins at Magrath LLP sets out creative ways to retain talent

In the current economic climate, most businesses are looking to reduce overheads and many are “downsizing”, “rationalising” or “reducing headcount” in an effort to meet management targets. However, making redundancies without considering creative alternatives that may reduce overheads, whilst retaining talent for the future, could leave employers facing a skills shortage when the economy recovers.

Provided proposals are reasonable and go some way to meeting the needs of the individual as well as the business, many employees are prepared to seriously consider options that avoid the need for job losses and keep them in employment.

Sabbaticals

Offering sabbaticals can be an effective way of reducing overheads – and if done in stages throughout the workforce can do so over a relatively long period. The terms of any sabbatical can be agreed to suit the employer and employee and may enable a business to reduce overheads to a manageable level whilst not only retaining, but also motivating key staff.

The terms governing any period of sabbatical must be agreed in writing. Careful consideration should be given to terms in relation to pay and benefits, returning to work, the appropriate notice to be given to terminate employment, what will happen if redundancies are required in any event or the employee’s role is eliminated, what work may/may not be carried out during the sabbatical, what provisions are required for keeping in touch, whether the employee will remain on circulation lists etc.

Temporary Lay-Off/ Short-time Working

A business may be able to deal with an unexpected downturn in business by layingoff employees or putting them on shorttime working. In some industries, notably manufacturing, employers anticipate this need and include an express right to lay-off in employment contracts. Others operate within industries where there is a custom and practice of laying-off employees, creating an implied right for the employer to do so.

For there to be an implied right to lay off, there must be a custom of laying-off within that particular business that is both “reasonable, certain and notorious”; and such that “no workman could be supposed to have entered into service without looking to it as part of the contract”. If there is no express or implied right in existence an employer will be in fundamental breach of contract by imposing it – entitling the employee to resign and claim constructive dismissal. Whilst there are conflicting Employment Appeal Tribunal (“EAT ”) decisions about the period of time for which an employee may be subject to lay-off, there will come a point in time (possibly as early as four weeks) at which the employee is entitled to resign and claim constructive dismissal on grounds of redundancy.

Changing Terms and Conditions of Employment

An employment contract is like any other contract – neither party can alter its terms without the agreement of the other. The unwary employer could, by imposing changes to the employment contracts of employees without following appropriate procedures, be faced with claims for breach of contract, unfair dismissal, discrimination, unlawful deduction of wages and protective awards. Unless employment terms are sufficiently widely drafted to permit the change that an employer wishes to make, or the contract expressly permits the relevant variation, appropriate formal consultation procedures will need to be undertaken with affected employees.

Employers must still be mindful of the fact that clauses permitting variations are construed very narrowly by Courts and Employment Tribunals. There is every possibility that the mutual duty of trust and confidence implied into employment contracts may affect the operation of the clause to such an extent that although the change is contractually permitted, the employee may still claim that he has been constructively unfairly dismissed.

Varying the Terms and Conditions

There are two key ways in which a contract of employment can be varied. Either an employer must obtain the employee’s agreement to the new terms or it must terminate the employee’s employment and offer to re-employ under the new terms. In order for any variation to be legally binding, both parties must receive some benefit (consideration) from agreeing to the change – for example, increased salary or promotion. However, the Employment Appeal Tribunal has found that by the employer continuing to employ the employee and the employee continuing in employment, such requirement is satisfied.

It is not uncommon for an employer to vary a contract unilaterally – albeit normally after an appropriate period of consultation to minimize the risk of allegations of constructive dismissal. If the employees continue to work without objection after the change takes effect, the employer may be able to rely upon the employee’s conduct as constituting implied agreement. However, if employees continue to work, but make it clear they have not accepted the change, those employees may retain the right to sue for any losses that they suffer (either as a breach of contract claim in the Courts or as a claim for unlawful deduction from wages in the Employment Tribunals) and the employer could be forced to reverse the change.

Of course, employees do have the option to resign in response to the change and claim constructive unfair dismissal. In order for a claim to be successful, the change would have to be so fundamental as to constitute a repudiation of the employment contract on the part of the employer. Detrimental changes to employees’ remuneration, or forcing a transfer to a new place of work without a contractual right to do so would probably be sufficient. However, provided the employer has sound business reasons for introducing the change, undertakes appropriate consultation and complies with applicable statutory procedures concerning dismissal and/or re-engagement, the risk of successful claims of constructive dismissal are limited.

Termination and re-engagement

Termination of employment may be the best option for an employer if an employee refuses to accept a variation after appropriate consultation has taken place. Then the employer should consider terminating the existing contract (on appropriate notice or pay in lieu of notice) and offering continued employment under new terms. In such circumstances, employees will have the options of accepting the new contract; accepting the new contract but still claiming that dismissal under the old contract was unfair; or rejecting the new contract and claiming unfair dismissal.

If an employee accepts the new contract, but successfully claims he was unfairly dismissed, compensation will be limited to the basic award (calculated by reference to length of employment), plus any financial losses as a result of the new terms being less favorable. If the employee rejects the new contract and claims unfair dismissal, an employer will need to persuade the Employment Tribunal that it had a fair reason for the dismissal, that is, “some other substantial reason”. Factors that are commonly taken into consideration by Employment Tribunals in assessing the reasonableness of an employer’s decision to dismiss in such circumstances include:

The employer’s motives for introducing the changes
The employees’ reasons for rejecting the changes (and whether other employees have accepted them)
Whether the employees were given reasonable warning
Whether appropriate consultation was undertaken
Whether the employer considered alternatives to any changes
Whether the employer attempted to obtain the employee’s agreement to the changes
Whether any recognized trade union recommended or objected to the changes.

There are numerous creative ways in which employers can reduce overheads without implementing redundancy procedures and, provided appropriate processes are followed, there is normally a way in which an employer can achieve its aim without being subject to successful Employment Tribunal claims.

For more information, contact:
Adele Martins, Partner –
Employment Practice,
Magrath LLP
Tel: +44 (0) 20 7317 6719
Website: www.magrath.co.uk