Managing the Financial Impact of Higher Wage Bills – Are Redundancies the Answer?  

With rising wage bills putting pressure on businesses, many are questioning whether redundancies are the only way forward. Employers would have to be burying their heads in the sand not to be considering the significant impact of higher wages and national insurance increases introduced in the budget on 30 October 2024, and due to come into effect from 6 April 2025. It is clear that the impact on employers will be significant, especially for those in people-centred industries.

What are the changes?

The percentage of employers’ national insurance contributions on worker earnings will rise from 13.8% (from a base salary of £9,100) to 15% (from a base salary of £5,000). This means that, not only has the required percentage gone up, but the base salary has simultaneously been lowered, with the aim of raising an additional £25 billion per year.

Whilst the employment allowances for small businesses will increase from £5,000 to £10,500, this is unlikely to mitigate the impact of the increased costs. Overall, is it estimated that there is an additional £615 to find per employee.

This, combined with the increases to national minimum wage from 1 April 2025 (as set out below), will have a significant impact on employers.

As a result, many businesses will be forced to make difficult decisions, between absorbing the costs or considering restructures or redundancies.

Is redundancy the answer?

Whilst redundancies may appear to be a quick answer to the immediate impact of these changes, there are a number of elements to consider.

First of all, relying on cost-saving alone will not be enough to render redundancies fair and avoid potential tribunal claims. Redundancies must satisfy the definition in the Employment Rights Act 1996, which requires either workplace or business closure or a reduced need for employees to carry out a particular type of work.

Alternative solutions

A fair redundancy also requires a fair consultation process to be carried out. Employers need to consider whether redundancies can be avoided, by looking at alternatives to redundancies and suitable alternative employment. So, even when a redundancy is driven by a need to save costs, employers must consider whether this can be avoided by making savings elsewhere.

Redundancy payments

Further, depending on the age, length of service and weekly pay of your employees, there could be significant redundancy payment entitlements, up to a statutory cap of £21,000, or higher for businesses whose policies are more generous than the statutory entitlement.

Notice periods

In addition to a redundancy payment, there are decisions to be made regarding notice periods. Will an employee who has been made redundant be the most productive employee during their notice, and if not, is it really value for money to pay employees in lieu of their notice? Either way, an employee will be entitled to be paid for their notice period.

Commercial costs

As well as financial costs, there are commercial costs to consider. Management time in considering and identifying a new structure, identifying the groups or ‘pools’ of employees at risk. There is then the task of identifying appropriate criteria and engaging in a meaningful consultation with employees, before finalising decisions. For those employees selected for redundancy, they will have the right to appeal this decision, which can add an additional layer to the process. This dedicated management process, together with the cost of any legal advice on the procedure, will have an impact on the company for the duration of the redundancy exercise.

Impact on the wider workforce

Together with the financial and commercial cost, there are the workforce implications to consider. Those employees at risk, who gain a job at the end of the redundancy exercise, are still likely to be affected by the procedure. For those not at risk, seeing valued colleagues exit can have a negative impact on morale, especially in circumstances where the existing workforce needs to work harder to maintain the same performance with a reduced headcount. Plus, if your organisation’s aim is growth, losing skilled and dedicated employees to achieve a short-term saving, may hamper future growth plans.

Potential tribunal claims

Finally, employers must consider the associated risks. There is a risk of an employment tribunal claim where an employee considers the procedure has been unfair, or alternatively that there is another, disguised reason for their dismissal. The costs of getting a redundancy exercise wrong can outweigh the perceived savings achieved. Further, with the planned changes to employment rights in the near future, this risk could increase significantly, as unfair dismissal rights are set to become available to employees with less than two years’ service.

Given the financial, commercial and workforce impact, together with this risk of employment tribunal claims, redundancies are not an “easy option” and usually something only explored by employers when all other alternatives have been fully considered.

What are the alternatives to redundancy?

In good news, there are a number of avenues that can be explored by employers before going down the path of redundancies, including:

• Reducing overheads – for example, withdrawing overtime arrangements, reducing reliance on consultants or agency work and considering supplier arrangements.
• Flexibility – encourage flexibility in the workplace, it may be that some employees would be keen to explore changing their working hours to achieve a better work life balance, or if you operate a hybrid model, it may be possible to make savings on office space costs or utilities without having to make significant changes to how you work.
• Salary or bonus freezes – although it may not be well received initially, most employees would prefer a temporary freeze to facing redundancy. If you do need to take these measures, communication with employees is important to ensure that there is an understanding of why these measures have been implemented.

Key takeaway

Overall, whilst there are some situations where redundancies are appropriate and required, redundancy should not be a knee-jerk reaction to increased costs to the business.

If, after considering alternatives, redundancies are required for your business, it is important to get the process right, including taking legal advice where appropriate.