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What are the true costs of redundancy?

Published: 9th April 2021
Area: Employment

As a result of government financial support gradually starting to wind down, including the furlough scheme, many employers will be beginning to feel concerned about the future impacts of COVID-19. For some, restructuring workforces and streamlining teams may be required, and in the worst cases, making roles redundant will be one option to save money in the longer term.

Although a difficult decision for employers, it can sometimes be the most effective solution, especially when work levels are down. However, redundancy does come with its own costs. We highlight the key points to consider when faced with those difficult decisions.

The direct costs of redundancies

The price of redundancy will vary depending on individual circumstances, with scale being a major factor. Here are the main direct costs surrounding the process:

  • Statutory redundancy pay: Statutory redundancy pay will only be available to employees with at least two years’ service and will usually equate to between 1 to 1.5 week’s pay (depending on age) for each full year worked.
  • Enhanced redundancy pay: Not all employers offer enhanced redundancy, however, for those that do this will obviously increase overall costs, particularly if those made redundant have longer service. Don’t forget that enhanced redundancy entitlements can carry over from previous jobs under TUPE, so employers need to profile who they are dismissing.
  • Notice pay: Longer serving employees will have longer statutory notice periods, up to 12 weeks. This means that the cost savings will only start showing at a later date. Alternatively, businesses may choose to pay in lieu of notice, bringing forward savings but requiring a significantly larger initial pay out.

From 6 April the weekly cap on pay for statutory redundancy purposes has increased.

Considerations of redundancy

Businesses also need to consider the indirect and less tangible costs that can arise, such as:

  • A dip in productivity: As the redundancy process can be time consuming, with managers having to hold meetings with every individual who has been placed at risk of redundancy, there may be a dip in general productivity. Even those not being made redundant will likely feel the impact, which could potentially making them less motivated and result in poorer productivity.
  • Legal ramifications: With good legal counsel, businesses can ensure they are undertaking a fair redundancy process. However, this does not prevent ex-employees from bringing unfair dismissal claims. Defending these claims will impact the company productivity, morale and comes with substantial associated costs. Making enhanced redundancy terms conditional upon employees signing settlement agreements is a good way of mitigating these risks, but will obviously only apply to those employers prepared to offer enhanced pay.
Alternatives to redundancy

As an alternative to redundancy, businesses can look at restructuring alternatives that don’t rely on reducing headcount, for example:

  • Reduce workforce related costs: Reducing wages is difficult but possible in extreme circumstances. Stopping discretionary bonuses and withdrawing discretionary benefits are less risky alternatives.
  • Evaluate the space requirements: Consider whether property portfolios are still suitable now that agile working practices are becoming more common.
  • Review financial arrangements: Assess whether more beneficial rates are available in the market.
  • Releasing financial assets: Look into whether assets, such as stock and machinery, are an option for cash generation.

Find out more about alternatives to redundancy in our free webinar, available to download now.

Reducing the workforce can cost more than expected. Reassessing the company’s property portfolio or rethinking other overheads can help businesses to avoid redundancies. However, if a redundancy programme does go ahead, business owners and HR managers must ensure they do what is required by law, treating employees fairly and with compassion.

We’re here to support you

If you have concerns or queries on the implications of making redundancies then speak to a member of our employment team for guidance and support.

Our corporate restructuring and insolvency team can also work with you to identify areas of business stress and distress as early as possible, and help you develop and put in place a successful corporate restructuring and turnaround strategy.

Our updated guide to recovery and resilience covers everything you need to navigate your business out of lockdown, unlock your potential and make way for a brighter future. Further advice in relation to COVID-19 can be found on our dedicated coronavirus resource hub.  

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