Karim Haji, the Head of Financial Services at KPMG UK, was recently quoted saying:
“We cannot underplay the challenge at hand here. A huge proportion of UK businesses face significant cash flow pressures and without cash firms can’t survive for long” (Observer 15 March 2020).
Meeting the cash flow challenge in light of the Covid-19 pandemic in the employment context, is not straightforward, but must be faced by many businesses quickly and effectively.
The vast majority of companies affected are otherwise good solid businesses, but because of Covid-19, they are facing supply chain challenges and/or a reduction in demand. In order to manage their cash flow, businesses need to consider every way in which they can manage their costs in the short to medium term. One major cost in many businesses is the cost of employees.
Reducing employee cost is not easy and companies would be unwise to wait until they are in financial difficulties before addressing the matter. Changes cannot be achieved quickly, without significant risks and the potential to irreparably damage the business, so that it is not in a position to flourish when the difficulties associated with Covid-19 lift, is real and significant.
The choices facing businesses generally boil down to the following:-
- Reducing employee’s pay;
- Laying off employees or moving to short-time working; and/or
- Large scale dismissals on the grounds of redundancy.
Reductions in Pay
In the majority of cases, employers are contractually obliged to make payments to employees on terms that have been agreed and often in place for many years. A reduction in that rate of pay can only be achieved either through an agreement with the employee or, in extreme circumstances, dismissing the employee under their existing terms and conditions and offering to re-employ them on the same conditions, but with a reduced rate of pay.
Dismissals in those circumstances will likely amount to a ‘redundancy’ within the terms of Section 195 of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA). Although an employee will not be entitled to a redundancy payment, if dismissed in these circumstances, where an employer proposes that 20 or more employees are at risk of dismissal within a 90 day period, reasonably onerous legal obligations are placed on the employer. These entail the employer in obligations to collectively inform and consult, either with the recognised trade union or works council or, in the absence of either, specifically elected representatives.
Consequently, employers should be very careful if they are seeking to embark upon dismissal and re-engagement, to achieve pay reductions. If collective consultation is engaged, there will be a minimum consultation period imposed by TULRCA of 30 days if fewer than 100 employees are at risk of dismissal or 45 days if more than 100.
Employees dismissed in this way will be entitled to their contractual or statutory notice, whichever is the longer and consequently, they will be entitled to be paid their contractual rate of pay throughout that notice period. This means that it can take many months for an employer to achieve a pay reduction of this nature, something which in the context of Covid-19, is not helpful and may not achieve the results quickly enough.
Many employees, of course, will agree to a reduction in pay, if it means that their employment can be continued and employers should talk to their staff as soon as possible to see if such pay reductions can be agreed. Any agreement should be recorded in writing for the sake of good order and to protect the employer in the future if there is a challenge.
If an employer unilaterally imposes a pay reduction, it runs the risk of employees resigning and claiming constructive unfair dismissal and/or bringing claims for breach of contract and/or unlawful deductions from wages. This would also most likely render any post-termination non-compete clauses void, which leaves the employer vulnerable to arguably unfair competition from ex-employees.
An employer, in extreme circumstances, might choose to take the risk of facing such claims rather than go out of business, but it is not the ideal choice.
Lay-Off and Short-Time Working
The term “lay-off” is often confused with redundancy. Lay-off is different from redundancy in that it is a temporary measure whereby an employer provides employees with no work (and therefore no pay) for a period while still retaining them as employees, generally, as a temporary solution to a problem such as a shortage of work or in this context the impact of a pandemic.
This is different from dismissal, a short term measure, which can, at first sight, seem attractive.
Short-time working means providing the employees with less work and therefore lower pay for a period, whilst also still retaining them as employees. Like lay-off, it is a short-term measure often designed to deal with a short-term shortfall of work.
Whilst this route may seem attractive to employees, it is fraught with a number of difficulties, including:-
- Without the express contractual right to lay-off or place on short-time working, an employer is in breach of contract if it does not provide work and therefore pay for employees. They may claim constructive unfair dismissal in such circumstances.
- It is possible for an employer to argue that there is an implied contractual right to lay-off or to introduce short-time working, but it would need to demonstrate that this was a regular practice in its business (or industry) and well known to its employees; something which it may struggle to demonstrate.
- Even if the employer has the contractual right to lay-off or introduce short-time working, where the employee has more than 2 years’ service and has been laid off or kept on short-time working for at least 4 or more consecutive weeks (or a total of 6 weeks, of which no more than 3 are consecutive, in any period of 13 weeks) they can claim an entitlement to statutory redundancy pay. An employer can serve counter-notice to an employee’s claim for statutory redundancy pay, but they would need to demonstrate that there was a likely need for future employment in the not too distant future.
Almost the last resort that an employer will consider for managing a short-term impact on its business, which the Covid-19 pandemic may prove to be, will be dismissal on the grounds of redundancy.
An employee with 2 years’ service or more can challenge the fairness of their dismissal. Such a challenge will be successful if the employer has not followed a fair and proper procedure and where the selection process, determining which employees are made redundant, is not sufficiently robust and reasonable.
Employees with 2 years’ service or more are entitled to a statutory redundancy payment (and possibly an enhanced payment if their employer has a contractual obligation to make such a payment).
As already set out above, a dismissal on the grounds of ‘redundancy’ falling within Section 195 of TULRCA will trigger the onerous obligations to inform and consult collectively under TULRCA, if the employer is proposing to dismiss 20 or more employees in a 90 day period. A failure to do so could land them with the liability for 90 days pay for each employee dismissed.
There is a concept within common law of ‘frustration’, which if triggered, automatically discharges a contract where there is a significant change of circumstances which renders it physically or commercial impossible to perform the contract or would render contractual performance radically different from the obligations to which the parties originally agreed.
Frustration is a common law concept and does not generally find favour with the courts in an employment setting.
There is some speculation in the context of the Covid-19 pandemic over whether an employer might claim no longer to be obliged to make payment or indeed employ employees where the employment contract has been frustrated by the intervention of the pandemic. There is a case from 1945 in which the intervention of the Second World War, and the conscription of an employee, was found to have frustrated the contract and thereby discharged the employer’s obligation to make payment.
Employers should be slow to see this as an easy and quick route to solve the headache caused by current commercial difficulties, but in extreme circumstances, no doubt many employers will try to run that argument. Only time will tell whether that is something which employers can rely upon in these straitened times.
The employment lawyers at Steeles Law are very experienced in business re-organisation and the difficulties associated with the short-term challenges to business in these contexts. If we can assist in any way with the challenges that your business is facing, then please do not hesitate to contact me or one of my colleagues, Robert Hickford or Denise Traube on firstname.lastname@example.org or 01603 598000.
‘Decisive, pragmatic and able to turn things around very quickly’ Chambers and Partners UK, 2020.
*The information provided in this article is designed to provide useful information on the subject, not to provide specific legal advice.