Is the cost of living crisis a good enough reason to make redundancies?

As businesses are hit by rising inflation, Damian Kelly looks at whether the squeeze on finances provides legal justification for employers to reduce headcounts

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Rising rates of inflation and the record-breaking cost of living crisis are a growing concern for businesses and families.

In an attempt to keep inflation under control, the Bank of England has raised the base interest rate four times since December 2021, which has pushed up the cost of borrowing for businesses. 

Combine this with spiralling energy costs, higher raw material costs and supply chain pressures, and many businesses are facing a particularly challenging trading environment. 

Some businesses may already be seeing a fall in consumer spending while at the same time adapting to the rise in National Insurance rates, and facing up to the possibility of a further increase in interest rates this month (June), which could be as high as 2 per cent by the end of 2022, according to some experts.

That means businesses are being forced to consider a wide range of cost saving measures – including redundancies. Data from the Office for National Statistics shows the number of redundancies planned by businesses has increased by a staggering 103 per cent already this year – from 8,869 in January to 18,043 in February.

According to Acas, nearly one in five (18 per cent) employers are considering making staff redundancies over the next year (up to March 2023). Its YouGov survey of more than 1,000 employers also found that large businesses (with more than 250 people) are more likely to make redundancies than small and medium sized (SME) businesses.

Do these factors provide employers with legal justification to make redundancies? 

Broadly speaking, redundancy situations fall into three categories:

  • Business closure (ie, closure of the business altogether).

  • Workplace closure (ie, closure of one of several sites, or relocation to a new site).

  • Diminished requirements of the business for employees to do work of a particular kind.

The statutory definition of redundancy is explained in section 139 of the Employment Rights Act 1996 and supplemented by the case of Safeway Stores plc v Burrell [1997] IRLR 200 (EAT). 

This legislation and case law make it clear: an employer looking to reduce employees in response to the cost of living crisis, and make better use of remaining resources, will have to show there is a reduction in the requirement for employees to do work of a particular kind. 

Importantly, this does not mean there must be less work for employees to do.

This means a dismissal may be by reason of redundancy where there is the same amount of a particular kind of work, but fewer employees are needed to do it. 

Where a business is looking to save money, it may consolidate two roles into one and dispense with a management level. This was the case in McCrea v Cullen & Davison (1988) where a managing director absorbed the duties of a general manager, who was made redundant. 

There is no need for an employer to demonstrate income, profits, or customer demand is falling. A tribunal will not look behind the employer's decision, or require it to justify how or why the diminished requirement has arisen, provided it is genuinely the reason for the dismissal.

Association of University Teachers v University of Newcastle upon Tyne (1987), illustrates this: the Employment Appeal Tribunal decided a lecturer was redundant, notwithstanding continuing student demand for his course, and that the university was entitled to decide it could no longer afford to offer such a course following a cut in funding. 

Consideration

Therefore, the cost of living crisis is likely to provide legal justification for many employers to consider making redundancies. However, this consideration should be the beginning, and not the end, of any redundancy process. Redundancies should only ever be a last resort and tribunals will expect employers to show they have first considered all viable alternatives. There are also various consultation requirements employers must fulfil to ensure redundancies are fair in the eyes of the law. 

Any tribunals arising from redundancies are likely to be time consuming and expensive, and employers considering redundancies should take legal advice and ensure any measures are taken with care and sensitivity.

Damian Kelly is a partner and head of the employment law team at Lodders Solicitors