Many family businesses are facing tough decisions as they feel the effects of the coronavirus pandemic.  Consequently, a large proportion have considered making staff redundancies, which has raised a number of legal questions.

Christian Mancier, Partner at Stockport-based Gorvins Solicitors (a key partner of The Family Business Network) has put together some advice to address common questions which have frequently arisen around redundancies and cash payments to departing employees.

Christian is an active champion of family businesses, and through his work within the family business community, is able to offer family firms legal service with a unique depth of understanding. He has recently been involved with our Action Learning Peer Group programme through Be The Business, as well as with our North West Family Business Awards.

Question 1 – What are the legal positions around redundancy if a family firm holds consultations now, agrees in writing that a person is to be made redundant but agrees that the redundancy will not take place until the end of the furlough scheme. Is this ok legally?

Needless to say, many employers are currently having no choice but to undertake redundancy exercises in the current climate, where staffing levels need to be reduced either on account of reduced demand, or simply to cut overhead.  As the question anticipates, before a redundancy is confirmed an employer should undertake a process of consultation with affected staff.  Such a process of engagement is basically intended to ensure that any employees at risk are clear about and have the opportunity to comment on the basis and their selection for redundancy, and also to undertake a joint exercise of exploring any means by which redundancy can be avoided.  However, once such process is completed, and no alternative to redundancy can be found, then the employer is in the position of having to make the relevant staff redundant.  In this sense, it is not a case of “agreeing” that any such employee in question is redundant, as the question suggests.  If an employer has reached that decision and consultation has not identified any means by which the redundancy can be avoided, then the employee is dismissed on a compulsory basis for that reason.  “Agreement” as such does not come into it.

An employee who is dismissed by reason of redundancy has 3 basic financial entitlements at the point of their dismissal, in addition to any accrued pay and benefits due up to that point.  They are entitled to a reconciliation of their accrued holiday entitlement, which may entail a payment in lieu of accrued but untaken holidays; they are entitled to notice in accordance with their contractual entitlement, and they should also be paid out any statutory redundancy pay which they are due (or contractual redundancy pay, if the employer operates any kind of enhanced scheme, which is more common in bigger, institutional employers).

Not least to soften the financial blow and potential hardship of redundancy, and particularly where a redundant employee has a fairly short contractual notice entitlement, some employers are looking to effectively extend such notice entitlements to take advantage of the potential funding available through the Government’s Job Retention Scheme.  That Scheme is due to run until the end of October, with an increasing contribution expected to come from the employer to a furloughed employee’s income over the months within that period.  Assuming that the redundant employee in question is capable of being placed on furlough, and all the relevant qualifying criteria are met, it is possible for an employer and employee to agree to an extended period of notice, to tie in with the Government Scheme.  However, such an arrangement is not without its consequences.  Thought would have to be given to what level of pay the employee receives for the relevant period (mindful of their notice entitlement and the increasing contribution to come from the employer) and also holiday entitlement will continue to accrue, and will need to be managed for as long as employment continues.  Equally, there is a risk that such an arrangement could ultimately be regarded as an abuse of the Government Scheme.  HMRC have confirmed that it is possible for an employer to continue to claim for a furloughed employee who is serving their contractual notice period, however, HMRC have naturally not anticipated or endorsed a situation of an employer and employee agreeing an extended period of notice in the scenario anticipated by the question.

On that basis, the direct answer to the question posed is “yes”, in principle, an employer and employee can agree an extended period of notice to tie in with the furlough scheme, but an employer in such circumstances should be mindful of the possible risk in entering into such an arrangement, and also ensure that they take advice on how any such arrangement should be recorded and managed.

Question 2 – If redundancy is agreed now and parting amicably, is there a legal issue with providing a parting cash gift?

Again, as with my previous answer, redundancy is not something that is necessarily “agreed” between employer and employee.  If an employer finds itself in a position of needing less staff, then redundancy is something that ultimately amounts to the employer bringing an employment relationship to an end on an imposed or compulsory basis.  Subject to honouring an employee’s basic entitlements of accrued holidays, notice and statutory redundancy in circumstances of a dismissal by reason of redundancy, it is open to an employer to make a “parting cash gift” to an employee in such circumstances and, broadly-speaking, so long as the employee has no entitlement to any such payment under their contract of employment, any such sum can be paid tax-free up to £30,000.

Employers who enhance the severance packages of departing employees commonly introduce a settlement agreement (formerly called a compromise agreement) to reflect their commitment to make an enhanced payment on departure to an employee, and under which the employee would waive any rights of claim against the employer in accepting the additional monies.  However, there is no necessity for an employer to use a settlement agreement, should they so wish and if the parting is entirely amicable, as the question anticipates.  In such circumstances, there is a value in simply recording in writing the basis for the enhanced payment being made, but no other formality is necessary.

Gorvins Solicitors – If you or your Family Business are considering taking any form of redundancy action then it is worth contacting the dedicated Family Business team at Gorvins Solicitors. Christian Mancier, who heads up the team, can be contacted via [email protected] or on 0161-930-5185.

*The above is an overview summary of a complex area of law and proper legal advice should be taken if you are considering taking any of the above actions.