Can we make an employee redundant if their salary is costing us too much?

Can we make an employee redundant if their salary is costing us too much?

Published:

Author: Kevin McCavish

We consider whether organisations can make employees redundant because their salary is too expensive?

Answer:

Definition of "redundancy"

Redundancy is one of the potentially fair reasons for terminating someone's employment but, unless there is a genuine redundancy situation within the business organisations will not be able to dismiss employees fairly by simply saying they are "redundant".

A redundancy situation only occurs where a business closes down altogether, re-locates or the employer has a reduced need for employees to carry out work of a particular kind. Therefore, if there is still a job to be done by someone and the issue is just that the current employee is too expensive, there will not be a genuine redundancy situation.

An alternative approach

If an employee's salary is clearly out of kilter with industry practice and cannot be sustained for genuine economic reasons then the employer could enter into discussions and consultation with them to try and agree a contractual variation to salary as an alternative to dismissal. No deduction can be made from salary without the employee's agreement however, as this would be a serious breach of contract enabling them to resign and claim constructive dismissal.

Understandably the employee may be very reluctant to agree to such a change, but if the situation is openly discussed and the consequences (for both the business and them) of failing to agree are fully explained the employer may be able to reach a compromise. One suggestion is to try and agree a gradual tapering down of salary over several months or years rather than an immediate one-off reduction.

If no agreement can be reached then dismissal may be the only option but this would be for "some other substantial reason" (another potentially fair reason for dismissal) rather than redundancy. The employee will need to be made aware that this is a potential outcome if no variation can be agreed. The employer could then immediately offer to re-engage them on the new terms in order to try and reduce any potential legal liability.

Going through such a process involves legal risk and would need to be very carefully handled; specialist advice should be taken. To defend any resulting unfair dismissal claim, the employer will need to be able to produce evidence of good business reasons for the reduction in salary which are more than trivial.

Recent case law

This can be seen in practice in the case of Garside and Laycock Ltd v Booth [2011]. In this case the Employment Appeal Tribunal (EAT) overturned an employment tribunal's decision that an employee had been unfairly dismissed when he refused to accept a pay cut and the majority of the workforce had accepted a reduction following a drop in sales and profits at the employer.

Has there been a TUPE transfer?

The position may also be complicated if the employee has previously transferred to the employer under the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") and this should be established before any action is taken.

A variation of contract following a TUPE transfer will be void and a dismissal will be automatically unfair if the reason is the transfer itself or "a reason connected to the transfer which is not an economic, technical or organisational reason entailing changes to the workforce".

If there has been a change in financial circumstances and, for example, other costs savings measures are being made within the business at the same time, it may be that the link to the transfer has been broken. However, the mere passage of time since any transfer will not, by itself, break the connection.

Following the recent EAT cases of Enterprise Managed Services Ltd v Dance & others and Smith v Trustees Of Brooklands College there is perhaps more leeway when considering what constitutes a transfer connected contract variation than was previously thought as it is now clear from the case law that the question to be asked by tribunals is: what was the reason for the change and not, "but for" the transfer would the change have happened?