Redundancy is defined in the Redundancy Payments Acts 1967-2007 (the Redundancy Payments Acts). The definition covers several scenarios including circumstances where an employer intends to close down a business in its entirety or at a particular location. It also includes where an employer decides to reduce the number of its employees or has decided that, in future, the work for which a particular employee is employed will be done in a different manner for which the employee is not sufficiently qualified or trained or will be done by a person capable of doing other work for which the employee is not sufficiently qualified or trained. A genuine redundancy arises as a result of change in the work place that the employer’s decision brings about.
If an employee is dismissed due to redundancy the dismissal will not be unfair provided the following conditions are met:
- there are substantial grounds justifying the dismissal;
- the selection process observed is fair and in particular does not breach any of the statutory prohibitions or any procedures that, by agreement or through custom and practice, apply within the particular employment; and
- the employer’s conduct is reasonable.
If an employer does not observe one or more of these conditions there is a strong likelihood that the redundancy will be successfully challenged. As termination of employment due to redundancy amounts to a dismissal, most challenges are brought before the Employment Appeals Tribunal (the Tribunal) under the Unfair Dismissals Acts 1977-2007 (the Unfair Dismissals Acts). However, in certain circumstances,an employee may bring an application for an injunction before the court torestrain a dismissal. This is a high risk, potentially expensive, but not uncommon course of action.
In an unfair dismissal hearing where the employer is relying on redundancy as justification for the dismissal, the employer’s case is heard first. The Tribunal will require sound and detailed evidence to support the employer’s position. If this evidence is not compelling, particularly where the employee gives evidence that another factor, eg personality or performance was the real reason for the dismissal, the employer is likely to be in real difficulty in defending its position.
Alternatives to redundancy
There are options open to employers short of terminating employment for redundancy. The Redundancy Payments Acts provide that employees can temporarily be laid off or put on short time for a defined period. After the permitted period the employee may be entitled to seek a redundancy payment.
Changes to fundamental elements of the employment contract, such as salary and working hours, are where most cost savings are likely to lie. However, these elements cannot be changed unilaterally without exposing the employer to a payment of wages claim or a claim for constructive dismissal. Even where employees choose not to bring such claims because of a desire to continue in employment, industrial relations issues are likely to arise. Consequently, frank discussion with employees in relation to the alternatives, securing agreement to proposed changes and as much advance notice as possible of change is recommended. Phasing in changes and setting a future date on which the situation will be reviewed should alsobe considered.
Another issue that is currently a topic of much discussion is the scope employers have to vary existing bonus arrangements. The terms of the employer’s bonus scheme will indicate what latitude the employer has. Again, where the employer is contractually bound to make bonus payments to employees, a unilateral decision to defer, reduce or refuse to make bonus payments is likely to create both industrial relations and legal problems for the employer.
Many employers are now looking closelyat the terms of their bonus arrangements and of their standard contracts of employment to seek to retain more discretion in key areas, including the flexibility that can be required of employees, the basis upon which benefits will be paid and the right to review key elements of the contract such as remuneration and hours of work, in the future.
The Irish Small and Medium Enterprises Association, which represents largelynon-unionised firms, has recently reported that 91% of its members have introduced either pay freezes or reductions in the past six months. Many larger organisations have also announced measures including pay freezes and/or cuts, incentivised career breaks and shortened working weeks.
Non-Collective Redundancy
Where the number of employees being made redundant does not reach the threshold required to amount to a collective redundancy (see below), there are relatively few stated procedural requirements that apply. However, where an employer has entered into an information and consultation agreement with employees in accordance with the Employees (Provision of Information and Consultation) Act 2006 (the 2006 Act), the employer will be obliged to inform and consult with the employees’ representatives in advance of proposed redundancies. In contrast to a collective redundancy situation, there is no minimum number of redundancies required to trigger the obligation to inform and consult with employees where an information and consultation agreement is in place under the 2006 Act.
If an employer is contemplating redundancies, regard should also be had to any collective agreement in place or custom and practice in the particular work place or industry that could be relevant to selection criteria and/or the level of redundancy payments.
Selection Criteria
When an employer is contemplating redundancies affecting a portion only of the work force, the selection criteria to identify which roles are to become redundant is likely to be the single most complicated issue to address. An employer is under an obligation to select fairly for redundancy where the circumstances apply equally to more than one employee in similar employment. The selection criteria applied should, as far as possible, be objectively justified and applied in a fair manner. The selection criteria must be identified and examined for fairness and objectivity at the outset of the process. There are no absolute rules as to what constitutes appropriate selection criteria. Generally it is preferable to avoid subjective criteria, such as performance and attendance, even where there is some evidence to back up the employer’s conclusion. This is particularly so where employees will not be allowed the opportunity to make their case or defend their position on selection. Secrecy or confusion regarding selection criteria should also be avoided.
Selection on the basis of an employee’s gender, marital status, family status, sexual orientation, religion, age, disability, race or membership of the travelling community will render a dismissal automatically unfair and will amount to discrimination under the Employment Equality Acts 1998-2008.
Employer’s Conduct
One of the conditions for determining whether a dismissal for redundancy is fair is whether the employer’s conduct was reasonable. There is no statutory obligation on employers to consult with an individual employee in advance of a decision to terminate his or her employment for redundancy. However, an employer who does not engage in some form of discussion with an employee in advance or who fails to consider if there are any options other than redundancy will be in a difficult position in the event that the termination is challenged. Recent decisions of the Tribunal indicate that in the current economic climate, where it is likely to prove difficult for employees to secure alternative employment, an employer is expected to go to greater lengths then ever before to satisfy the Tribunal that its conduct was reasonable. The employer will be expected to show what consideration it gave to possible alternatives to redundancy. This would include considering proposals that the employee put forward. The potential for redeployment within the organisation must certainly be explored.
In the event that the Tribunal considers that the redundancy was not genuine or that there was a genuine redundancy but that the employee was unfairly selected and/or the employer’s conduct was not reasonable, the Tribunal can direct re-engagement, reinstatement or compensation of up to two years remuneration.
Collective Redundancy
The primary legislation concerning collective redundancy is the Protection of Employment Acts 1977-2007 (the 1977 Acts).
Collective redundancy will arise where the number of dismissals for redundancy in any 30-day period are:
- at least five in an establishment normally employing more than 20 and less than 50 employees;
- at least ten in an establishment normally employing at least 50 but less than 100 employees;
- at least 10% of the number of employees in an establishment normally employing at least 100 but less than 300 employees; and
- at least 30 in an establishment normally employing 300 or more.
In circumstances of collective redundancy the employer must give written notice to the Minister for Enterprise, Trade and Employment (the Minister) at least 30 days before the first redundancy takes effect, setting out certain information in relation to the proposed redundancies. The employer must also inform and consult with the representatives of the employees affected at least 30 days before the first notice of dismissal is given. Notice periods cannot run concurrently with this 30-day consultation period.
The consultations must include the possibility of avoiding/reducing the proposed redundancies and the selection criteria to be observed in deciding which roles will become redundant. The employer is also obliged to give the employees’ representatives certain information including the number, category and reasons for the proposed redundancies, details of when the redundancies are to take place and the redundancy payment to be made.
The employer must supply a copy to the Minister of all information supplied to the employees’ representatives. Employers often prepare a questions and answers type document to hand out to employees with a view to minimising confusion and dealing with anticipated questions.
The employer must consider alternatives to the proposed redundancies during the consultation period. The European Court of Justice has stated that the obligation to consult in this regard is an obligation to negotiate, however there is no obligation on the employer to reach agreement with the employees’ representatives.
On conviction of an offence under the 1977 Acts an employer can face fines of up to €250,000. To date there have been few prosecutions under the 1977 Acts. In addition, an employee or their representative can make a complaint to a rights commissioner where an employer has not entered into a consultation process at least 30 days prior to the first notice of dismissal being served or has not supplied the employees with the required information. The rights commissioner may, in finding for the employee, require that the employer comply with the provisions of the 1977 Acts, and/or award compensation of up to four weeks’ pay to the employee(s) who made the complaint. Due to the delay normally experienced in having claims heard before a rights commissioner, employees could seek to restrain a breach by their employer of its obligations under the 1977 Acts by applying to the High Court for injunctive relief.
Exceptional Collective Redundancy
The Protection of Employment (Exceptional Collective Redundancies and Related Matters) Act 2007 (the 2007 Act) was introduced to give greater protection to employees in collective redundancy situations. An exceptional collective redundancy is a dismissal by reason of a collective redundancy that is not considered a genuine redundancy because the dismissed employees are subsequently replaced by new employees doing the same job at a lower rate of pay.
Successful claimants in an unfair dismissal claim arising out of an exceptional collective redundancy can be awarded up to five years’ remuneration.
Payments to employees on redundancy
Notice
Employees will be entitled to the longer of their contractual notice entitlement, statutory redundancy notice (14 days if more than two years service) or their entitlement under the Minimum Notice and Terms of Employment Act 1973. The latter entitlement depends on length of service (see table below).
If the contract of employment contains a payment in lieu of notice provision, income tax and social insurance are deducted from the notice payment.
Redundancy payment
An employee who has been employed by an employer for a period of 104 weeks or more is generally entitled to a statutory redundancy payment. The amount of the payment is two weeks’ salary per year of service, plus an extra week (capped at €600 per week). Employers are entitled to a 60% rebate from the Department of Enterprise Trade and Employment in respect of this payment. Employees with less than two years’ service have no entitlement to a statutory payment, but are entitled to statutory or contractual notice and payment for holidays accrued.
Ex-gratia payments
The extent to which employees are paid in excess of statutory entitlement depends on the particular employer and/or the industry in which the employer is engaged. Employees may have acquired a right to an ex-gratia payment where there is custom and practice within the employer of making such payments. The circumstances in which an employee will have a contractual entitlement to an ex-gratia payment have not been tested in the Irish Courts. There are however English authorities that are likely to be persuasive in Irish litigation.
Employers may offer different termination packages to employees within the same organisation. Occasionally an employee will be unhappy with an ex-gratia payment, particularly where others have received better terms. Treating employees differently may cause industrial relations issues but does not give grounds for complaint under the Redundancy Payments Acts or the Unfair Dismissals Acts.
Tax treatment of redundancy payments
The statutory redundancy payment is tax-free. There are several different tax reliefs available in relation to ex-gratia payments. The most beneficial for a particular employee will depend on that employee’s length of service and average salary for the three years preceding termination.
Redundancy Payments Scheme
Where an employer is insolvent and is unable to pay employees the whole or part of their statutory redundancy entitlement, payment may be made by the Minister out of the Social Insurance Fund. The Minister can then seek to recover from the employer any amounts paid out of the Fund (less any rebate that would have been payable had the employer originally made the payment).
Insolvency Payments Scheme
The Insolvency Payments Scheme exists to protect pay-related entitlements owed to employees who are made redundant as a result of the insolvency of an employer. Protected entitlements include arrears of pay, holiday pay and pay in lieu of statutory notice. Certain contributions to occupational pension schemes or Personal Retirement Savings Accounts are also covered. All entitlements based on pay are subject to a cap of €600 per week. There is also a limit of eight weeks for arrears of pay, sick pay, holiday pay and pay in lieu of statutory notice.
Conclusion
Redundancy is a difficult issue for both employers and employees to deal with. The manner, extent and timing of an employer’s engagement with the employees affected will impact greatly on the redundancy process. It is critical that employees and/or their representatives are consulted as early as possible in the process and that the employees are informed of any decisions at the earliest possible opportunity.
Before effecting redundancies an employer should consider the following:
- Does the proposed redundancy come within the definition of redundancy under the Redundancy Payments Acts?
- Is the position genuinely redundant or is the process a means to terminate the employment of an unsatisfactory employee?
- Are there alternatives to making the employee redundant such as other work, reduced hours etc?
- Is there an agreed selection process or is there an established custom and practice for selecting which roles are to be made redundant? If not, have the selection criteria been identified? Are they fair, objective and defensible?
- How and when is the situation going to be discussed with the employee(s)? If there is an information and consultation agreement in place with employees, have its terms been observed?
- Will the collective redundancy legislation be triggered? If so, has provision been made to ensure that the obligations of the 1977 Act are complied with?
- What redundancy payment will be made to employees? Statutory and ex-gratia or statutory only? Will employees with less than two years service get a redundancy payment?
All relevant documentation should be prepared in advance of formal notice of redundancy being given and should include:
- The necessary statutory forms (RP50/notification to the Minister).
- A letter to the employee:
- confirming the redundancy;
- confirming the consequences of the redundancy, eg whether the employee will be required to work out the notice period, what datethe employee will cease their employment, whether an ex-gratia payment will be made to the employee and when the employee will be paid;
- detailing the calculation of the gross figures, setting out the tax deductions, the tax exemption limits and the net payment that the employee will receive;
- restating any continuing obligations, eg confidentiality post-termination of employment; and
- if an ex-gratia payment is to be made, consideration should begiven to the terms on which itwill be made, ie will the employeebe required to accept that the ex-gratia payment will be in settlement of all claims that the employee may have against the employer arising out of their employment or its termination?
Considering and addressing these issues before redundancy is implemented may assist in easing a difficult situation for all concerned and should avoid or reduce room for disputes at a later stage.
By Alicia Compton, partner, William Fry.
E-mail: alicia.compton@williamfry.ie.
