7 Ways for SMEs to Avoid Redundancies

Every SME owner will want to avoid making redundancies. This isn’t just on a ‘human’ level; the loss of your staff’s collective experience and the loss of client connections can also be substantial. Not to mention the cost of recruiting when business picks up again. So what are the options for SMEs in this position? Daniel Barnett of Getting Redundancy Right explores.

1. Recruitment freeze / withdrawing job offers

Not replacing departing staff saves on recruitment costs, and existing staff can be retrained to cover other vacancies.

If a job offer hasn’t been accepted, it can be withdrawn without cost to you. If it has been accepted, then withdrawing the offer can expose you to making a small payment, usually for minimum notice. Although you might feel bad about letting a prospective employee down, it’s preferable to dismissing someone with several years’ employment under their belt (and it will also cost less).

2. Lay-offs and short time

Both lay-offs and short time were popular in the 1960s and 1970s but went out of fashion in the 1980s. They came back in the 2000s as professional service firms realized they might not need all their staff all the time.

Lay-off is where an employment contract gives you a right to stop giving work to an employee for a while, and not pay them. Short time is where an employment contract gives an employer a right to reduce someone’s working hours to less than 50%, and dial down their pay accordingly.

This only works as a temporary solution, and it can’t be used as an alternative to redundancy, or a way to avoid making a redundancy payment. A typical lay-off or short time clause in a contract will look something like this:

‘If we do not have enough work for you, we are entitled to place you on short time (which means we can reduce your hours and reduce your salary pro rata) or lay you off (which means we will not provide you with any work, and you are not entitled to any pay except for statutory guarantee payments).’

This is a useful way to temporarily reduce the wage bill without having to dismiss or pay notice and redundancy payments.  However, if you leave somebody on lay-off or short time for more than a few weeks, they sometimes have a legal right (if they’ve worked for more than two years) to claim a redundancy payment.

3. Voluntary redundancies

Of course, voluntary redundancies aren’t a way of avoiding redundancies. But they are a way of avoiding, or at least reducing, compulsory redundancies.

Some employees may be willing — or even eager — to be selected for redundancy. If there are sufficient volunteers then you’ll avoid the process of selection, which can be stressful and upsetting for all affected employees. And you also reduce the risk of legal proceedings. Some employers offer enhanced packages to volunteers to help avoid having to implement compulsory redundancies: this is often part of agreed redundancy procedures negotiated with trade unions.  Just make sure you reserve the right to say ‘no’ to any particular volunteers - you don’t want your best employees leaving.

4. Reducing working hours or salary

You can reduce the number of hours or days employees work, with a pro rata reduction in salary. This works well to reduce costs without making compulsory redundancies — a common example, if the workforce agrees, is to move to a four-day week. You can also think about job sharing, which allows two or more people to fill one job role.

But if you’re reducing someone’s hours, you normally need their agreement. Some employees will willingly agree whilst other may need to go down a more complicated process of imposing the changes by dismissing and rehiring them on the new terms and conditions. That carries risks, and you should seek professional advice.

5. Salary reductions or deferrals

You can ask your employees to agree to a pay reduction. Many will agree if they understand the business may not otherwise survive (as seen with employees agreeing to go on furlough for 80% of their pay). You need to be able to show the pain is shared, and that senior managers and directors are taking a cut in salary as well as those lower down the company hierarchy.

Perhaps more palatable is asking employees to defer their pay. For example, you can ask your employees to defer — say — 50% of their salary for six months, at which point you can agree to pay them the deferred salary over a further, say, 12-month period. With this approach, the employees don’t feel they’re being taken advantage of in the same way as if they were being asked to take a pay cut. It's fairer, and it also helps with short-term cashflow problems.

Just remember that you can’t do this if the effect of reducing or deferring part of the salary is to take it below the national minimum wage.

6. Sabbaticals

Offering employees an unpaid sabbatical of, say, 6-12 months, is another option. This is more often found in the public sector than the private sector, and is particularly common in higher education where sabbaticals are regarded as part of an academic’s career development.

But there’s no reason not to offer sabbaticals to employees in the private sector.

A sabbatical can be unpaid or paid. For example, a few years ago BT offered a year’s sabbatical on 25% pay to avoid further redundancies. This can be done in the same way as offering — or inviting applications for — voluntary redundancies.

The benefits are obvious: you avoid the stigma of redundancies, unsettling your staff, and the potential reputational damage associated with redundancies. You keep hold of the talent you have nurtured, avoid recruitment costs when the business is ready to grow again, and — best of all — you avoid the risk of tribunal litigation.

7. Invite early retirement

You can sometimes offer early retirement under a pension scheme. It is important to make sure that retirement is indeed voluntary, or it could amount to dismissal giving rise to potential claims — in particular age discrimination. When seeking volunteers, you need to consider the effect of early retirement on employees' future pension entitlements and advise them to obtain independent advice on this issue.

About the Author

Daniel Barnett is a leading employment Barrister and co-presenter of the Legal Hour on LBC Radio. He is the creator of Getting Redundancy Right, an online course teaching businesses how to carry out redundancies fairly and safely. You can use the discount code FLEXIMIZE when ordering for a 10% discount.

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4. Reducing working hours or salary

You can reduce the number of hours or days employees work, with a pro rata reduction in salary. This works well to reduce costs without making compulsory redundancies — a common example, if the workforce agrees, is to move to a four-day week. You can also think about job sharing, which allows two or more people to fill one job role.

But if you’re reducing someone’s hours, you normally need their agreement. Some employees will willingly agree whilst other may need to go down a more complicated process of imposing the changes by dismissing and rehiring them on the new terms and conditions. That carries risks, and you should seek professional advice.

5. Salary reductions or deferrals

You can ask your employees to agree to a pay reduction. Many will agree if they understand the business may not otherwise survive (as seen with employees agreeing to go on furlough for 80% of their pay). You need to be able to show the pain is shared, and that senior managers and directors are taking a cut in salary as well as those lower down the company hierarchy.

Perhaps more palatable is asking employees to defer their pay. For example, you can ask your employees to defer — say — 50% of their salary for six months, at which point you can agree to pay them the deferred salary over a further, say, 12-month period. With this approach, the employees don’t feel they’re being taken advantage of in the same way as if they were being asked to take a pay cut. It's fairer, and it also helps with short-term cashflow problems.

Just remember that you can’t do this if the effect of reducing or deferring part of the salary is to take it below the national minimum wage.

6. Sabbaticals

Offering employees an unpaid sabbatical of, say, 6-12 months, is another option. This is more often found in the public sector than the private sector, and is particularly common in higher education where sabbaticals are regarded as part of an academic’s career development.

But there’s no reason not to offer sabbaticals to employees in the private sector.

A sabbatical can be unpaid or paid. For example, a few years ago BT offered a year’s sabbatical on 25% pay to avoid further redundancies. This can be done in the same way as offering — or inviting applications for — voluntary redundancies.

The benefits are obvious: you avoid the stigma of redundancies, unsettling your staff, and the potential reputational damage associated with redundancies. You keep hold of the talent you have nurtured, avoid recruitment costs when the business is ready to grow again, and — best of all — you avoid the risk of tribunal litigation.

7. Invite early retirement

You can sometimes offer early retirement under a pension scheme. It is important to make sure that retirement is indeed voluntary, or it could amount to dismissal giving rise to potential claims — in particular age discrimination. When seeking volunteers, you need to consider the effect of early retirement on employees' future pension entitlements and advise them to obtain independent advice on this issue.

About the Author

Daniel Barnett is a leading employment Barrister and co-presenter of the Legal Hour on LBC Radio. He is the creator of Getting Redundancy Right, an online course teaching businesses how to carry out redundancies fairly and safely. You can use the discount code FLEXIMIZE when ordering for a 10% discount.