Reorganising your business: Employment law implications
The aim of this note is to help owners of firms to familiarise themselves with some of the key concepts related to reorganisation.
This practice note is the Law Society’s view of good practice in this area, and is not legal advice. For more information see the legal status.
Introduction
Who should read this practice note?
Owners and managers within firms that are considering a reorganisation.What is the issue?
Reorganising a business can be an unsettling experience for all those involved. The aim of this note is to help owners of firms to familiarise themselves with some of the key concepts related to reorganisation.
For in-depth information, either go to the Law Society's Business management or HR and people management pages or visit the Managing in difficult times section of the Acas website. No two reorganisations are ever exactly the same. Firms that are seriously considering reorganising should seek advice from a solicitor who specialises in employment law.
Legal obligations
If a reorganisation could involve redundancies or transferring a part of the firm there are legal requirements around:
- consulting the workforce
- seeking to avoid job losses
- having fair redundancy selection criteria
- ensuring continuity of employment when employees are transferred from one business to another
- having provisions for laying-off employees or short time working
- varying a contract.
Changing employees' contracts
Depending on the situation, firms facing a cut in income may wish to change the salaries or working arrangements of staff. Wherever possible this should be done by mutual agreement. It is good practice to explain the problem to affected employees and give them the opportunity to discuss alternative solutions. This gives employees the chance to feel a part of the process.
Where agreement is not possible, the employer may terminate the original contract with proper notice and following relevant procedures. The employer can then offer a new contract to the employee, including the revised terms.
If the employee accepts the new contract, continuity of employment is preserved. There will be no breach of contract as a result of taking this action. If the employee rejects the new contract, the termination will be regarded as a dismissal. Eligible employees will be able to claim unfair dismissal before an employment tribunal if they believe the dismissal decision was not taken in a legally compliant way.
For more advice read the Acas leaflet, Varying a contract of employment.
Redundancy
Section 139 of the Employment Rights Act 1996 legislates that:
'For the purposes of this Act an employee who is dismissed shall be taken to be dismissed by reason of redundancy if the dismissal is wholly or mainly attributable to-
- the fact that his employer has ceased or intends to cease-
- to carry on the business for the purposes of which the employee was employed by him, or
- (ii) to carry on that business in the place where the employee was so employed, or
- the fact that the requirements of that business-
- for employees to carry out work of a particular kind, or
- for employees to carry out work of a particular kind in the place where the employee was employed by the employer, have ceased or diminished or are expected to cease or diminish.'
For a redundancy to be genuine, the employer must therefore demonstrate that the employee's job will no longer exist.
Those employees with two years service or more have to receive a redundancy payment. They can also challenge the fairness of a dismissal. Employees who have less than two years of service can challenge the redundancy if they believe the dismissal was due to them asserting a statutory right, eg, requesting flexible working, or discrimination.
For more information visit the Acas website.
All employees under notice of redundancy have the right to:
- be offered suitable alternative employment
- a trial period in any alternative role without losing any right to redundancy pay
- reasonable time off to look for a new job or arrange training
- not to be unfairly selected for redundancy.
Redundancy selections
Employees have the right not to be unfairly selected for redundancy. When selecting employees for redundancy, employers must be able to show that they are using objective criteria that are being applied fairly, The same criteria should be consistently applied to all employees and there should also be an appeals procedure. Below are some examples of criteria that are often used:
- attendance record (if this is accurate and the reasons for and extent of absence are known)
- disciplinary record (if this is accurate)
- skills or experience
- standard of work performance
- aptitude for work
- formal qualifications and advanced skills should be considered, but not in isolation.
You cannot select an employee for redundancy because they are:
- pregnant or taking maternity leave
- acting as an employee representative or trade union representative
- a member or not a member of a trade union
- on a part-time or fixed-term contract
- refusing to give up rest breaks or assert their right to the national minimum wage or statutory holiday entitlement
- a certain age, have a disability, of a certain race, hold particular religious beliefs, or because of their sexual orientation, or
- on the basis of when they were employed (ie, last in, first out).
Redundancy payments
Those employees with two years' continuous services are entitled to redundancy payment. Statutory redundancy payments are based on age, length of service and salary. Employees get:
- 1.5 weeks’ pay for each year of employment after their 41st birthday
- a week’s pay for each year of employment after their 22nd birthday
- half a week’s pay for each year of employment up to their 22nd birthday
- Length of service is capped at 20 years and weekly pay is capped at £479. The maximum amount of statutory redundancy pay is £14,370.
The amount of statutory redundancy pay an employee is entitled to can be calculated on the Gov.uk webpage: Redundancy: your rights.
Some employers have redundancy policies that provide more generous redundancy terms.
Voluntary redundancy
Sometimes employers will offer staff the option of applying for voluntary redundancy.
Employees who apply for voluntary redundancy should be consulted on an individual basis and advised as to how their position will be affected, how the redundancy would be implemented, if there are any financial incentives for taking, and other relevant information, such as notice periods. Employers do not have to accept requests for voluntary redundancy.
According to the Employment Rights Act 1996, employees who opt for voluntarily redundancy are classed the same as those who have been forced into redundancy. Those who opt for voluntary redundancy are still protected by relevant legislation and eligible for the full statutory and contractual redundancy pay.
Transfer of Undertakings (TUPE)
The purpose of TUPE is to protect employees if the business in which they are employed changes hands. Employees have the right to transfer to a new employer on their existing terms and conditions of employment and with most of their existing employment rights intact.
TUPE applies when a business, or part of it, is transferred from one employer to another where:
- all or part of a sole trader's business or partnership is sold or otherwise transferred
- a company, or part of it, is bought or acquired by another
- two companies cease to exist and combine to form a third, or
- a contract to provide goods or services is transferred in circumstances which amount to the transfer of a business or undertaking to a new employer.
TUPE applies regardless of the size of the transferred undertaking.
For more information visit the Acas website
Steps to take during a reorganisation
The steps below are intended to help you understand the process if you need to reorganise your firm. The best way to ensure that you are legally compliant is to seek advice at an early stage in the process from a solicitor who specialises in employment law. The varying of contractual terms and running a redundancy process are complex legal matters so it is advisable to seek independent legal advice. You run the risk of being taken to an employment tribunal and/or having to pay damages if your firm makes mistakes.
The steps
Consider all the options
- What size of team is needed? What skills are needed?
- Are some skills transferable?
- Are there other services that the firm can provide or other areas that can be grown?
- What financing options are there?
Changing employees’ contracts
- Consult employees or their representatives.
- Explain and discuss the reasons for the proposed changes.
- Give the employees a chance to express their view and offer solutions.
- If changes are agreed the employer needs to write to the affected employees within one month of the changes taking effect, laying out the new terms and conditions.
If no agreement can be reached, the employer can serve notice to terminate the existing contracts and then offer the employee re-engagement on new terms. It is important that this is only done after a full and proper consultation and the employer follows a fair dismissals process, which offers the employee the right to appeal.
If the firm decides to dismiss and offer re-engagement new terms to 20 or more employees there is a legal obligation to collectively consult recognised trade unions and/or workforce representatives.
Making redundancies
The redundancy process needs to be managed carefully as it can lower the morale of the whole firm. You should inform employees and their representatives of what is happening. Keeping people in dark, especially if they know that the business environment is changing, is not good for emotional wellbeing or productivity.
The law states that when proposing to make 20 or more employees redundant at one establishment within 90 days, an employer must:
- consult any recognised trade union and elected employee representatives
- start consultation at least 40 days before the first dismissal takes place
- look at ways of avoiding dismissals, reducing the numbers to be made redundant and mitigating the effect of the dismissals
- disclose in writing to the appropriate representatives certain information concerning the proposed dismissals
- notify the Department of Business, Innovation and Skills at least 45 days in advance of the first dismissal taking effect.
The purpose of consultation is to provide an early opportunity for all concerned to share problems and explore options and alternatives. The firm may discover that employees will find acceptable alternative ways to tackle the problem, or if redundancies are inevitable, ways of minimising hardship.
The firm needs to create the criteria against which it will judge who should be made redundant. (Details of what these criteria may and may not include are provided above). Individuals may question why certain decisions were made, so the firm needs to be able to evidence the process.
Redundancy notices must not be issued until the consultation has been completed. This notice may be given before the end of 90 days if the consultation is genuinely complete. The dismissal itself cannot take effect until the minimum period has expired and individual notice periods have been observed. Employment can be terminated before the end of notice period where an employee has agreed to take a payment in lieu.
The Acas document, How to manage collective redundancies, contains a useful ten-point checklist for employers.
Practice notes represent the Law Society’s view of good practice in a particular area. They are not intended to be the only standard of good practice that solicitors can follow. You are not required to follow them but doing so will make it easier to account to oversight bodies for your actions.
Practice notes are not legal advice, and do not necessarily provide a defence to complaints of misconduct or poor service. While we have taken care to ensure that they are accurate, up to date and useful, we will not accept any legal liability in relation to them.
For queries or comments on this practice note contact our Practice Advice Service.
SRA Principles
There are seven mandatory principles in the SRA Standards and Regulations which apply to all aspects of practice. The principles apply to all authorised individuals (solicitors, registered European lawyers and registered foreign lawyers), authorised firms and their managers and employees, and to the delivery of regulated services within licensed bodies.
Must – a requirement in legislation or a requirement of a principle, rule, regulation or other mandatory provision in the SRA Standards and Regulations. You must comply, unless there are specific exemptions or defences provided for in relevant legislation or regulations.
Should – outside of a regulatory context, good practice, in our view, for most situations. In the case of the SRA Standards and Regulations, a non-mandatory provision, such as may be set out in notes or guidance.
These may not be the only means of complying with legislative or regulatory requirements and there may be situations where the suggested route is not the best route to meet the needs of a particular client. However, if you do not follow the suggested route, you should be able to justify to oversight bodies why your alternative approach is appropriate, either for your practice, or in the particular retainer.
May – an option for meeting your obligations or running your practice. Other options may be available and which option you choose is determined by the nature of the individual practice, client or retainer. You may be required to justify why this was an appropriate option to oversight bodies.