A new order?

November 2009 Supplement

Wyn Lewis summarises the legal position surrounding redundancies and explores more creative approaches to restructuring

‘Restructuring isn't what it used to be…’ is an expression that sits on the lips of many finance and HR directors in the current economic climate. Is this nostalgia for simpler times, when ‘restructuring’ was merely shorthand for ‘redundancies’? Not necessarily: there is an increased awareness and appetite in recessionary Britain for more creative approaches to replace or supplement redundancies as a solution to headcount, payroll and other HR management issues.

This article touches on redundancies as the traditional restructuring solution. It also focuses on how to effect the more creative choices that have been widely adopted by the private sector, but which are also open to and are being taken on board by financially-pressed voluntary / not-for-profit bodies with a reduced income and discretionary spend, but where redundancies are bad PR and sit less easily with corporate or organisational values than with profit-driven companies.

The traditional approach

Traditionally the first port of call in a restructuring is redundancies; and the exclusion, with effect from 6 April 2009, of redundancy dismissals from the ACAS Code of Practice on Disciplinary and Grievance procedures , has made small scale (i.e. fewer than 20 redundancies) marginally easier to carry out than before. The prospect of automatically unfair redundancy dismissals for not following ‘tick the box’ procedural steps has also been abolished, though individual and collective contractual redundancy arrangements and policies still have to be observed if unfair dismissals are to be avoided.

The procedure for large scale (i.e. 20 or more redundancies) remains unchanged: the collective notification, information and consultation obligations (and the risk of protective awards to each employee of up to 90 days' actual pay for failure to follow these) remain a considerable financial and operational burden and risk management issue.

These procedures, as well as increased management time and a recognition that fewer staff now will mean fewer staff when the economic upturn arrives – when employers will be vying with competitors to recruit good staff – have made it more desirable to retain staff (but on a lower cost base) than to lose them and demotivate further those who remain in place on voluntary / not-for-profit sector salary and benefit levels, but who have to work harder to meet targets.

The new approach

As a result, several solutions are being pulled, like rabbits, out of what would otherwise be the well-worn hat of redundancy.

The main solutions include recruitment freezes; natural wastage; pay freezes; cutting down on agency staff; overtime bans; short time working; and, in the manufacturing sector, shutdowns.

However more creative cost-cutting solutions, often known by the euphemism of ‘flexible working’, include sabbaticals on reduced pay; salary reductions or deferrals; part time working on reduced pay; holiday and other benefit changes; secondments where salaries are subsidised by third parties; retraining to cover future (not current) work needs; and adjusting bonuses and other incentives. Many of these solutions infer, or require a voluntary commitment to new or collaborative ways of working and to ‘doing the right thing’ in hard times. This chimes with the ethos of voluntary/not-for-profit sector bodies. In many instances that is exactly what happens, resulting in short and long term advantages to all concerned: employees retain their jobs, while employers have an ongoing, cheaper workforce to draw on, both now and later.

The unspoken secret

There is, however, another very important driver. The prospect of not having a job presents an opportunity to employers (including those who pride themselves as being employers of choice) to push through long-wanted changes to terms and conditions of employment and to other arrangements and practices that are desirable or necessary in the long term, which would not be acceptable by workers or unions in the good times, but where resistance to change in the current economic climate may be fatal to jobs and result in dismissals, and be equally fatal to union recognition rights for those unions that do not ‘play ball’.

This is the open secret that dare not speak its name in modern restructuring exercises.

As a result, the implementation of flexible working solutions from an employment law and HR perspective requires determination. It also requires an approach which, within many
voluntary/not-for-profit bodies, is alien.

The reason is that it requires employers to understand that, while being ostensibly collaborative, in fact there is little choice, either for the employee, or for a recognised union. Employers who fail to grasp the opportunity and power that this offers could also be failing to look after an organisation’s current and future wellbeing, or indeed its survival.

Given the historical desire of voluntary/not-for-profit bodies to have good and constructive relations with staff and their representatives, and given that the public can be fickle with its donations if an organisation appears to be taking a private sector approach, the stakes are high.

The legal framework

A significant slice of modern restructuring is therefore essentially all about varying terms and conditions of employment in a way that results in a binding change that entitles an employer to pay and offer less in the short and, possibly, longer term. Employees must understand that this is, for them, a least-worst option – certainly better than redundancy.

What are the legal and practical issues that should be on employers’ radar in this situation? There are four main questions: can you effect a variation by agreement? If not, how can you make a variation effective? What are the relevant contractual provisions? And is there any relevant legislation? These questions are addressed below.

Contract issues

The contractual position is relatively straightforward: if an employer wants to make a variation that is effective, then it must have the agreement of the relevant employee, or of the union that is recognised to negotiate on the employee’s behalf.

Many employers make the mistake of relying on a term in a contract of employment that entitles the employer to make unilateral variations from time to time. Although this works in practice for minor changes, it does so only because employees don’t object and because, by not objecting, they are deemed to have accepted the change to their contracts (especially if they have accepted their next monthly salary after the date of the change). This ‘let’s just make the change and see what happens’ approach is a route that some employers take anyway, and do so successfully: that is their prerogative. But they do so at their risk, because the ‘variation clause’ in an employment contract may often not be worth the paper it is written on.

On the other hand, a variation that has been agreed by the employee and by any relevant union, is binding (the main exception being if the change is void by being linked to a TUPE transfer). Consequently, variation by agreement is the Holy Grail. How do you get agreement? It doesn’t matter, so long as it is recorded somewhere. So letters, emails, counter-signatures, contemporaneous notes of oral agreements (except where the contract of employment specifically requires a written record to effect a valid variation) are all acceptable.

Union issues

But what if there is no agreement? Although many employees will agree to variations as part of a restructure, some will not. There will also be instances where some employees are happy to agree to some or all of the variations, but where the union representing them will not.

Where there is no recognised union, the employer’s approach will be a combination of ongoing persuasion (having identified those employees who may be awkward) followed by agreement, if things go well. Alternatively, if no agreement can be reached, there is the ultimate sanction of dismissal, but with a contemporaneous offer of re-engagement on the varied terms (although dismissal in this way has its own complications as referred to later).

Where there is a recognised union, the stakes are higher. The ultimate sanction (if the union is recognised on a voluntary basis) is derecognition, followed by a reversion to dealing with the employees (either direct, or via an alternative employee representation body – which itself can pave the way for better long term industrial and public relations). This can, however, be risky, even in the voluntary/not-for-profit sector, where staff have historically been patient or accepting, and where unions have in the past tended to be more helpful than in (say) manufacturing or transport. If the terms and conditions that the employer is seeking to vary have been collectively negotiated, the very fact of making an offer of alternative terms and conditions direct to employees brings with it the risk (if derecognition is not finely timed) of inducing employees to avoid collective bargaining. Currently this carries with it the potential sanction of an award of compensation of £3,100 in relation to each employee who is a union member under the little-used s.145B of the Trade Union & Labour Relations (Consolidation) Act 1992. Whilst this is a relatively obscure anti-avoidance-of-collective-agreements legislative byway, the risk is nevertheless there.

Of course if a union is recognised under the statutory recognition procedures, the option of derecognition is not available, other than via the same statutory recognition procedure in reverse, and then only if statutory recognition has already been in place for three years.

How does it work in practice?

Leaving aside union issues, how does the ‘dismiss and offer to re-engage’ route work? This is where contract law gives way and legislation takes over. It does so in the form of unfair dismissal and sex discrimination rights and collective information and consultation obligations.

The unfair dismissal issue is as follows: in order for a dismissal to be fair, even when balanced with an offer of re-engagement, it must be for a potentially fair reason and be the result of a fair process. In the context of flexible working, the use of ‘redundancy’ as a ground for dismissal is not available, because employers still need their employees – it is simply that they want to pay less to keep the employees on the books. The reason for dismissal must therefore be ‘some other substantial reason justifying dismissal’. In the case of varying terms and conditions, one ‘substantial reason’ would be that if the variations leading to flexible working are not agreed, then the cost of retaining the employee would be prohibitive and they would have to be dismissed anyway. This should be a plausible fair reason for dismissal, but it must be backed up by an equally plausible paper trail. It must also be carried out in accordance with a fair process (this leads on to the collective consultation obligations mentioned earlier). Even a plausible ‘fair dismissal’ reason may also amount to indirect sex discrimination if the flexible working variation is to be imposed differently as between men and women, or is less able to be complied with by a woman than by a man. The latter is a bigger issue that is not within the scope of this article, although employers need to know about the risk of such a claim.

Collective information and consultation obligations (including notification to BERR; 30 days consultation where 20 or more redundancies are proposed; 90 days consultation where 100 or more redundancies are proposed) will also be familiar processes in a straightforward redundancy situation. What employers need to remember, however, is that these obligations are also triggered if people are to be dismissed with an offer of re-engagement in order to implement variations to terms and conditions as part of a flexible working restructuring. The reason is that the definition of ‘redundancy’ for collective information and consultation purposes is different than for a ‘normal’ redundancy: it covers any dismissal that is for a reason not related to the individual concerned. In other words, the fact the dismissal is for restructuring or flexible working reasons (i.e. not to do with, say, an individual’s conduct or performance) triggers the obligation to inform and consult with appropriate representatives, normally the recognised union. The timing of any restructure involving 20 or more flexible working dismissals must therefore have factored into it the need to inform and consult for at least 30 days and for possibly up to 90 days (depending on the number of dismissals proposed). Forgetting this could result in an expensive 90 day protective award.

Opportunity knocks

In conclusion, both employees and employers should welcome the creative new elements of restructuring discussed above.

There are at least two opportunities for voluntary/not-for-profit organisations:

the first is to continue to treat staff more supportively than many private sector organisations and so foster loyalty for when job mobility increases when the economy improves;
the second is to ‘slim down and shape up’ in an increasingly commercial and cost-conscious world populated by external trustees who have a previous or ongoing business career, and where corporate and individual donors expect more ‘outcome’ for their money and less to be spent on cushioning staff.

Private sector organisations are also catching up fast with the voluntary sector in ways of treating staff well, not only due to external influences such as CSR programmes and tendering enquiries, but also with an eye to recruiting and retaining staff who might in the past have stayed in the voluntary sector, but who in future might move into a slightly softer, more generous private sector that pays much higher wages.

The benefits of engaging in the type of restructure issues touched on above are therefore considerable; however the risks of getting the process wrong, though avoidable, are also high. The opportunity to make such changes will also diminish as the economy recovers, so restructuring now can reasonably be seen as an investment in the future of the sector.

Author: Wyn Lewis

Wyn Lewis is an employment partner in the London office of Pinsent Masons LLP. He has almost 25 years experience of advising on all aspects of commercial and individual employment law, discrimination and HR issues and advises a range of charities, NGOs and other NfP bodies, as well as companies and regulators. Prior to joining Pinsent Masons in 1995 he worked for 10 years at Turner Kenneth Brown (now Nabarro) in London and in Hong Kong.

www.pinsentmasons.com

Click here for other articles written by Wyn Lewis

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