3 Oct 2016

Many employers are this year facing the prospect of redundancies to a scale they have never previously required and in an environment in which the cash to pay more than the statutory minimum is tight yet their redundant employees have little prospect of mitigating their losses by finding new work and therefore little in the way of a financial cushion.

If a business can afford it and wants to help their employees financially it may consider introducing an enhanced scheme. Given that there are so may redundancies taking place at the moment and that the statutory redundancy payments are small, an enhanced redundancy scheme should make the redundancy easier for employees to accept. This ought to make the process smoother for employers and hopefully mean fewer tribunal claims from disgruntled employees.

Below are out tops tips on the factors which need to be considered when doing this.

1. Decide whether the scheme will be contractual or discretionary and make this very clear in all written material?

One of the most important issues to decide at the outset on is whether you wish to adopt a contractual redundancy policy i.e. redundant employees will be entitled to payments under the scheme calculated in accordance with the formula it sets out, or a discretionary one i.e. there is no entitlement to the payment and it is at the employer’s discretion as to whether to make the payment on each redundancy that occurs and how much it pays.

2. Decide how long the scheme will be effective

If you opt for a contractual scheme, bear in mind that it will be very difficult to cease to operate the scheme or to reduce the amount of payments set out in the scheme without employee agreement and such agreement is unlikely to be forthcoming. Unilaterally changing the terms of the scheme without agreement could therefore leave you exposed to claims that the original scheme applies in any event (with all the cost and time dealing with such claims entails). If you are nervous about being bound by the scheme over the longer term (not least because you may not know whether you can afford to pay particularly in a large scale staff cutback) but want to give your employees certainty over what they will receive if made redundant, make it clear that the scheme is limited to a particular round of redundancies but that payments in any further rounds may change.

3. If you opt for a discretionary scheme take steps to ensure that it doesn’t become contractual

The obvious advantage of a discretionary scheme (assuming it has not become contractual via custom and practice) is that the employer has flexibility, both as to whether to apply the scheme at all (i.e. whether or not to make a payment under the scheme) and as to the terms i.e. the formula for calculating payments or the conditions attached to such payments. However, if you opt for a discretionary scheme, beware the scheme becoming contractual over time due to custom and practice. There is a particular risk if you consistently apply the same formula to calculate the bonus. Luckily the threshold for terms becoming contractual as a result of custom and practice is relatively high: the scheme needs to be drawn to the attention of the employees in a way which indicates that the employer intends to be contractually bound by its terms and the scheme needs to be followed without exception for a significant length of time. So, to guard against this:

  • do not publish the scheme;
  • do not refer to it as an entitlement;
  • emphasise that it is at the employer’s discretion;
  • either vary the formula for payment periodically or ensure that on some occasions the scheme is not applied i.e. payment is not made.

4. Consider whether you require a compromise agreement before payments of any enhancement.

You may wish to make the receipt of a payment under the enhanced scheme subject to conditions. One such condition might be the signing of a compromise agreement. The usual pros and cons of compromise agreements apply. Obviously the big advantage is that on signing the compromise agreement, the employee will not be able to bring any legal proceedings against you, the former employer. The downside is that use of a compromise agreement may be disproportionate to the risk involved. If there was a genuine redundancy and you have carried out a proper, fair procedure, you may take the view that there are no claims that the employee could properly bring. It may therefore be unnecessary to use a compromise agreement which will oblige the employee to obtain legal advice. This can delay the process and cost more as employers generally provide a contribution to the employee’s fees as an incentive to sign. It may also be counter-productive if the lawyer instructed tries to negotiate or identifies other potential claims which the employee was not aware of.

5. Beware age discrimination
When considering the formula for calculating the enhanced payment, beware falling foul of age discrimination. The statutory redundancy payment scheme is dependant on an employee’s age and length of service, so is, on the face of it, discriminatory on the grounds of age. However, the Age Regulations address this. Although potentially age discriminatory, if calculated using an employee’s age or length of service, enhanced redundancy schemes are not unlawful if:

  • they mirror, albeit using multipliers which are more generous, the conditions under the statutory redundancy schemes; or
  • the scheme is objectively justifiable.

Since whether the scheme is objectively justifiable will be open to debate, the safest course is to follow the statutory redundancy payment scheme but with increased multipliers.

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