COVID-19 Coronavirus Business Impact: Restructuring and cost cutting in response to COVID-19

March 25, 2020

As the impact on businesses of the Covid 19 pandemic becomes more severe, employers are increasingly havingto consider, often as a matter of urgency, how to respond in terms of costs savings and the balancing of theneeds to retain staff and reduce labour costs. In this note we highlight some of the options open to employersand the challenges which they present. The recently announced Coronavirus Job Retention Scheme will also need to be considered as its details become clear.

Controlling costs – straightforward cost savings measures can include ceasing recruitment, limiting overtime wherepossible and deferring or not awarding pay increases. Careful consideration of individuals’ contractual entitlements shouldbe conducted before decisions are made not to pay bonuses or to make lower awards than anticipated. Any indications asto future pay and bonus decisions must be carefully considered and communicated.

Reduce non-employee staffing – reducing the use of zero hours workers and those who are genuinely self-employedcontractors and consultants rather than employees may be a speedy way to reduce costs as the employer may be entitledto reduce their utilisation or to terminate the relevant engagements without significant costs in terms of notice or othertermination claims such as unfair dismissal. Care should be taken, however, to guard against decisions to dispense with orreduce the utilisation of an individual’s services that could give rise to a discrimination claim. The handling of the reductionof an employer’s use of non-employee staff may also be important for the longer term if the employer may needsubsequently to re-engage such individuals and maintaining their goodwill therefore needs to be addressed.

Compulsory lay offs and short-time working – employers do not have the right to impose lay offs or short time workingautomatically unless they have an express contractual power to do so or, as may be difficult to establish, the employer candemonstrate that there is a “custom and practice” giving that right. To impose a lay off or short time working not only risksconstructive dismissal and breach of contract claims from those affected; claims may be made for a “statutory guaranteepayment” in respect of any period not worked. Also, after a lay off or period of short time working of four weeks or morethan six weeks in any thirteen week period, an employee has the right to terminate his or her employment and claim astatutory redundancy payment. Detailed rules govern those entitlements. If the employer does have the contractual powerto reduce employees’ hours of work, this power must be exercised with care, not least to avoid the risk of discrimination orconstructive dismissal/breach of contract claims being triggered by the way in which the power is exercised.

Agreed unpaid leave, reduced working hours or pay/benefit cuts – in the absence of an ability unilaterally to reducehours or lay off staff, it may be appropriate to seek employees’ agreement to changes to working patterns and voluntarilyagreed unpaid leave. Clarity as to the duration of the period of unpaid leave or reduced hours will be essential to avoiddisputes. Granting outstanding or previously declined flexible working requests may also assist. A further step which maybe seen to be necessary is to seek employees’ agreement to reductions to pay and benefit provision in order to seek toavoid compulsory measures – such as redundancies - being taken. For senior as well as junior staff to be asked to agreepay and benefit adjustments may be important presentationally in facilitating this process. Any undertaking subsequentlyto make good any reduction in pay needs to be carefully considered and recorded to reduce the risk of disputes down theline.

Imposing pay reductions and redundancies – in the most serious cases employers may need to make redundanciescompulsorily or seek to impose changes to employees’ terms and conditions of employment. In that situation, carefulconsideration needs to be given to the requirement which may then be triggered to conduct a collective information andconsultation process with a recognised trade union or, if there is none, suitably elected employee representatives. Inplanning such a process, employers will need also to be mindful of the termination costs which will be incurred on adownsizing exercise - in terms of notice entitlements, statutory redundancy entitlements and any contractual enhancedseverance arrangements that may be in place.

Collective redundancy consultation – the obligation to conduct collective redundancy consultation applies where anemployer proposes that 20 or more employees be made redundant – and this includes dismissals for failure to agree newterms of employment – in a 90 day period at one “establishment”. An employer considering redundancies will need toconsider carefully whether its plans bring it within the scope of this obligation by reference to the numbers involved as wellas what it can legitimately argue is an “establishment” for the purposes of these rules (which can be a challenging andtechnical issue). Importantly, those employees with under two years’ service, who therefore cannot generally claim unfairdismissal, still count for the purposes of determining whether the obligation to conduct collective redundancy consultationarises. The expiry of a fixed term contract on its scheduled expiry date does not, however, count as a dismissal for thesepurposes.

In very broad summary, where 20-99 redundancies are proposed in a 90 day period, the employer is required to providevarious information to the representatives of the affected employees concerning, and collective consultation is required–which is to be conducted “with a view to reaching agreement” - about the redundancy exercise. The minimum periodrequired for this consultation is 30 days - this increases to 45 days where 100 or more redundancies are proposed in a 90day period. The employer must also file an HR1 form with the Department for Business, Enterprise and Industrial Strategynotifying the detail of the redundancy exercise – failure to do so is a criminal offence.

The consequences of failing to conduct a collective information and consultation process where required liability can bevery significant. The penalty for breach is a “protective award” of up to 90 days’ pay per affected employee. An employerdoes have a defence to a claim for a protective award where it can establish that there are “special circumstances”excusing its breach of the applicable information and consultation requirements. Historically, it has been difficult toestablish that this defence applies, even where the employer faces a serious and immediate economic challenge. Whilstthe current situation is unprecedented, the response of tribunals to special circumstances arguments is difficult to predictgiven that each situation will be assessed on its own facts.

Individual redundancy consultation – individual consultation will in any event be needed with affected employees tominimise the risk of an unfair dismissal or other claim – the usual issues of identifying the pool for redundancy selection,establishing and applying appropriate selection criteria, consideration of alternative employment and consultation with theindividual employee will also need to be addressed.

Practical concerns – the increasing prevalence of homeworking in the current situation and the need to avoid meetingspresents practical issues for employers seeking to set up elections for employee representatives and then to conductcollective and individual consultation meetings. The use of technology may be crucial to solving the logistical issues whichwill arise.

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