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Published on 23 December 2010 by Tony Groom

Redundancy Costs Due to Staff Reduction Can Leave a Company Insolvent

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

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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.

We are not Insolvency Practitioners. We operate within the law to protect our clients and their wealth. Our team has worked for over 20 years to help stabilise and return hundreds of businesses to profitable growth. Once appointed, Insolvency Practitioners do not work for you, they work for creditors and use your company’s assets to pay themselves. We work for you, not creditors.

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