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COVID-19 Managing UK employment-related costs

How can employment-related costs be reduced?

In the most extreme cases (for example, as a means of avoiding business collapse), compulsory redundancies are a way of reducing costs.

Alternatives should be explored if time allows. Alternatives will help to manage legal risk and may be preferable from an employee relations / PR perspective. They may also help ensure the business can get ‘back on its feet’ quickly when the current crisis subsides. Alternatives include:

  • Hiring freezes
  • Reducing your temporary workforce
  • Reducing working hours or patterns (e.g. shorter working days, shorter working weeks or fewer shifts)
  • Cancelling all but non-essential overtime
  • Periods of unpaid leave
  • Reductions in pay (e.g. salary or benefits) or not paying bonuses
  • Cutting all discretionary costs e.g. bonuses or other incentives
  • Voluntary redundancies

Can we impose changes to working hours / enforce unpaid leave / reduce pay unilaterally?

For most employers, the strict legal answer will be ‘no’. Employees’ pay and working hours will be contractual terms and changes to those terms will require agreement. Equally, employees will have a contractual right to continue to be provided with work (and to be paid for it).

However, in these exceptional circumstances employers will need to find ways to practically manage this risk. That is likely to involve:

  • Communicating with employees the options that are under consideration.
  • If your workforce is unionised then consultation with the union may also be required.
  • More generally, agreeing these sorts of changes may prove easier in unionised workforces, as there will already be established mechanisms in place for collective agreement to be reached;
  • If time allows (i.e. depending on the financial strain the employer is under), inviting employees to volunteer for all or any of the changes;
  • Explaining that the employer is seeking to avoid redundancies if at all possible, and that these measures are designed as cost-reduction measures to achieve that objective;
  • Asking employees for their agreement, noting that the probable alternative is compulsory redundancies. Note that employees may argue this places them under undue pressure and that any agreement is therefore invalid. This risk must be balanced against the financial risk of not proceeding.

Employers shouldn't necessarily assume that employees will not agree to these sorts of changes. They may need unpaid leave to care for sick relatives or may be prepared to take a pay cut if it will help to avoid redundancies.

There will be more flexibility in certain sectors – for example, employers who engage people through zero hours contracts (e.g. in the gig economy) will have greater scope to reduce working hours unilaterally (although they should be mindful of the reputational impact of this).

Can we reduce or eliminate things like enhanced sick pay?

This will depend on the terms of the employer’s sick pay arrangements. Many employers operate contractual enhanced sick pay, so reducing or eliminating that would strictly constitute a breach of contract. However, this is again a question of balancing the risk of a claim versus the financial risk of not proceeding. If changes are made, employee communication will be key to manage the employee relations fallout.

Companies will need to monitor government announcements regarding statutory sick pay so that employees can be given accurate information about the benefits available.

What are the risks if we go-ahead with changes to terms without agreement?

There are three primary legal risks (as well as employee relations and PR risks):

  • Breach of contract claims by employees, i.e. a claim for the loss they have suffered as a result of the unilateral change to their terms. If brought, this type of claim is highly likely to succeed as a court would take no account of the underlying motivation for the change. These claims could take the form of an unlawful deduction of wages claim in the employment tribunal.
  • Constructive dismissal claims, i.e. a claim that the change is so unreasonable as to constitute a fundamental breach of contract, so the employee can treat himself or herself as dismissed. Damages for unfair dismissal (broadly, capped at the lower of a year’s salary and around £86,000) could then be claimed, as well as damages for notice pay. Whether this type of claim would succeed would depend on how fundamental the change is. In this instance, the underlying motivation would be relevant, meaning that the employer may have a reasonable chance of defending any claim (particularly if the reason was clearly communicated and explained at the outset).
  • Redundancy claims, i.e. a claim that the change to terms is so fundamental that the employee’s role has essentially been eliminated. As well as unfair dismissal claims (e.g. arguing that the dismissal process has been unfair, even if the reason is sound) there would be potential claims for failure to consult collectively if the number of redundancies is 20 or more. This type of claim would be more likely if, for example, the employer sought to impose a period of unpaid leave or made fundamental changes to working patterns.

Is any sort of consultation required in respect of changes to terms and conditions?

As a practical matter, engagement with employees and/or their representatives (e.g. trade unions) will be important and helpful even if not strictly required. This will help to manage risk. From a legal perspective, the terms of any collective bargaining agreement applicable to a unionised workforce should be checked as consultation on particular changes may be required. If the alternative to any contractual changes is redundancy, that would lead to separate consultation obligations (both individual and collective) at the time there are proposals to make redundancies. It is often difficult to pinpoint when an employer has “proposals” but in the current scenario they are likely to arise quite quickly.

We need to make redundancies on a short timetable and we don’t have time to consult. Can we go ahead?

For collective redundancies (20 or more in one establishment in a 90 day period), consultation with employee representatives is required. There must be a delay of 30 days (for 20-99 redundancies) or 45 days (for 100+ redundancies) between the start of consultation and the first dismissal taking effect. Failure to adhere to that requirement can lead to a protective compensation award of up to 90 days’ actual pay per affected employee.

In addition, an employer must submit a form HR1 to the government if it proposes to make collective redundancies. That form must be submitted 30/45 days (depending on the thresholds above) in advance of dismissals taking effect. There is potential criminal liability for directors for failure to comply with this requirement.

In the case of both protective awards for failure to consult and failure to submit an HR1 form in sufficient time, there is a potential ‘special circumstances’ defence. The employer can run this defence if there were special circumstances meaning that it was not reasonably practicable to comply with the relevant requirement, and if the employer took such steps as were reasonably practicable. In practice, this means that an employer should:

  • Take the protective step of submitting an HR1 form as soon as it considers there is a material risk of needing to make redundancies. Further updates can be provided as the situation evolves; and
  • Do whatever consultation it reasonably can in the time available. This may mean, for example, dispensing with the election of employee representatives if none are in place and holding town hall calls instead to impart information to employees as quickly as possible.

The employment tribunal has taken a strict approach in interpreting the special circumstances defence, but our view is that in the current circumstances there is a reasonable prospect of it succeeding, providing an employer takes the above steps. Even if a tribunal decides to make a protective award, it will take into account the consultation that the employer undertook in setting the compensation limit – so any degree of consultation is likely to help reduce the compensation from the upper 90 day maximum.