Redundancy is a sensitive topic to navigate, and so it is crucial to get redundancy processes for SMEs right.

As SMEs are usually made up of a smaller workforce, and often do not have access to HR experts who are experienced in dealing with redundancy situations, these tasks may fall to the CEO or senior management.

However, there were around 112,000 redundancies reported in the UK in the three months up to November 2024 (an increase on the previous three-month period). As such, it is crucial to consider this unfortunate possibility and put a structure in place to adhere to employment law regarding redundancy situations.

Employees have very specific rights when it comes to redundancy; these are different from dismissal as instead of being fired for unsatisfactory behaviour, their role simply ceases to exist. Employers need to know their legal obligations, whilst also warding against possible unfair dismissal claims from employees chosen for redundancy. This article will provide an overview of proper redundancy processes to consider.

Redudancy processes for SMEs – definitions and employer obligations

Redundancy is defined by the Employment Rights Act 1996 (ERA). Formal reasons for redundancy include business closure, workplace closure and reduction of workforce. There are detailed legal definitions of each scenario, and employers must be aware of these in order to confirm their eligibility for redundancy. 

Employers have various legal obligations during redundancy processes for SMEs, such as:

  • formally informing employees about the risk of redundancy
  • carrying out consultations with employees as part of a fair and objective process to determine those chosen for redundancy
  • considering alternatives to redundancy, such as layoffs or short-time working, offering reduced hours, etc.
  • determining eligibility for statutory redundancy pay
  • collective redundancies and the implications of trade union involvement (these only apply if more than 20 employees will be made redundant in a short period – up to 90 days)

There are other specific regulations and legislative changes that employers need to know which form part of redundancy processes for SMEs; for example, currently, employees on maternity, adoption or shared parental leave have the right to be offered any suitable alternative vacancy offered to the pool of employees in a redundancy situation. From April 2024, this redundancy protection was extended to employees who are pregnant but have not yet gone on maternity leave, and it will continue for up to 18 months after childbirth or adoption (as a result of the Protection from Redundancy (Pregnancy and Family Leave) Act 2023).

In addition, the Employment Rights Bill proposes to change the threshold for collective redundancy situations. Current legislation means that the ‘20 employee’ threshold is applied to each ‘establishment’ or workplace; therefore, larger companies may make much higher redundancies than the threshold in total, but will not have to consider collective redundancy rules if each site has less than 20 redundancies. The Bill proposes to change this ‘one establishment’ rule, which would mean that employers would have to consider the total redundancies across the business rather than the site-by-site approach previously adopted by the courts. The Bill also seeks to increase the ‘protective award’ (the result of a failure to comply with collective redundancy rules, 90 days’ uncapped pay for each affected employee) from 90 days to 180 days. There have even been proposals to remove the cap completely, to stop employers from simply buying off employees who may try to make employment claims due to a lack of collective consultation. For more information, have a look at our Employment Rights Bill article here.

Informing employees and carrying out consultations

Employers must send employees being considered for redundancy a ‘formal risk of redundancy’ letter as part of the redundancy processes for SMEs. This will inform the employee of the redundancy situation, and outline the process for further consultations and selection. This is a specific document that must be drafted carefully (for further assistance, please contact the Farringford Legal HR team). Collective redundancies require collective consultations with employee representatives, such as trade unions or staff associations, and there are further administrative requirements such as filing Form HR1 with the government.

Considering alternatives to redundancy

According to the ERA, employers should consider alternatives to making redundancies, for example:

  1. reduction or removal of overtime
  2. temporarily laying off employees or reducing hours
  3. putting a freeze on hiring
  4. inviting employees to volunteer for redundancy or consider early retirement under the employee pension scheme

Redundancy payments

Employees with at least two years of continuous employment are entitled to statutory redundancy payments. These payments must be calculated properly according to a formula set out in the ERA 1996 (the amount will change based on age, length of service and pay).

Employees may also be entitled to an enhanced contractual redundancy payment: for example, if their contract sets out a specific company redundancy policy, or if this is implied by a collective agreement (e.g. one negotiated by a trade union or staff association) or as part of a particular trade or industry. It is imperative that employers are aware of any implied redundancy payments, and these may be more difficult to find. It is also important that employers do not disadvantage some employees over others by giving enhanced redundancy payments – this is a tricky area to navigate, so it may be useful to have professional help.

Guarding against ‘unfair dismissal’ claims

Employees have the right not to be ‘unfairly dismissed’ by their employer. If a claim for unfair dismissal is successful, an employment tribunal may order the employer to reinstate the employee or pay damages, so leaving yourself open to claims may result in further losses for the business.

Since April 2012, employees must have been in continuous employment for two years to be eligible to claim unfair dismissal – unless this is a case of automatic unfair dismissal (the employment rights bill seeks to remove this requirement and make this a day one right, as well as adding to the automatic unfair dismissal list – see our Employment Rights Bill article here).

There are some circumstances in which the selection of an employee for redundancy will make their dismissal automatically unfair: for example, choosing to dismiss an employee because they refused to opt out of the Working Time Regulations, or if the reason relates to pregnancy, maternity or parental leave. The full list of automatically unfair reasons for dismissal can be found on the government website (here).

Reducing liability

To ward against the negative repercussions of an unfair dismissal claim, employers must ensure that employees are dismissed fairly in a redundancy situation. To reduce liability from a claim brought by an outgoing employee, employers should put an objective selection process in place. For example, this process could look like:

  1. Identify an appropriate pool of employees for selection for redundancy
  2. Consult with individuals in the pool
  3. Apply objective selection criteria to those in the pool
  4. Consider suitable alternative employment where appropriate (this can include a trial period)

As long as the process is fair and objective, an employee chosen for redundancy will have no grounds for unfair dismissal. Nevertheless, there is still a risk of claims if those carrying out the redundancy process deviate from the chosen structure. As such, it is suggested that these processes are reviewed and updated regularly to comply with current employment law.

Conclusion

SMEs face a difficult task when it comes to navigating redundancy situations. In addition to the sensitive aspect of considering job losses in a small team, there are several legal obligations for employers. It is important to uphold employee rights in redundancy; in order to do this successfully and avoid potentially harmful unfair dismissal claims, SMEs should have a process in place so they are prepared if a redundancy situation arises.