Strategies for reducing employment costs

– Beyond the Job Retention Scheme

As August approaches, we’re just three months away from the end of the Furlough scheme date on 31 October 2020. Many leaders are now having to think about the reality of what to do with furloughed employees, whether they are all needed and the potential financial impact of letting them go. With some staff potentially entitled to three months’ notice or more, time is already tight in addressing the difficult conversations with staff not required from 1 November.

In this Strategic Insights article, we explore the options available to organisations that need to achieve quantifiable financial savings.

employment costs

Redundancy

Where permanent reductions in people are needed, the obvious option is to explore with management teams the roles performed by furloughed employees that are at risk. Keep in mind that if you are proposing to make redundancies numbering 20 or more, minimum consultation periods apply before employees can be given notice. In practice, therefore, this plus notice periods may mean some employees overlap the end of furlough.

It’s worth keeping in mind too that in some instances, where an employee is in a pool of individuals doing the same role where some are already back at work, a redundant employee will not automatically be a furloughed employee. Employers are required to have objective selection criteria and to consult with employees before taking any decisions if unfair dismissal claims are to be avoided.

Of course, employers have the option to request voluntary redundancies as a way to avoid compulsory redundancies, but this is entirely a decision for the organisation.

Whilst redundancy brings permanent reductions in employment costs, for smaller businesses this can bring added financial pressures on cash flow, as redundancy costs can soon mount up. Employers can offset some of these costs legitimately by issuing notice to employees whilst on furlough. That way they can top up the furlough pay to the employee’s contractual salary and require that outstanding holiday is taken during the notice period (subject to the correct notice being given to the employee).

Short time working/lay off

Where employers (typically with blue-collar workforces) have a clause in the employee contract that allows them to ‘lay off’ an employee, some employers may wish to consider enforcing this clause once the furlough scheme ends. It gives employers the right to place staff on unpaid leave (with the exception of paying the first five workless days at the Government’s “Guarantee Pay” rate of £30 per day). Such a clause in the contract also gives employers the right to reduce the employee’s working time each day (Short Time Working) with a corresponding reduction in pay.

Whilst this sounds a potential way forward, rather than having to make staff redundant, there needs to be the contractual right to do it, to avoid unlawful deduction from wages claims and breach of contract claims. Of course, there is nothing to stop employers seeking the agreement of the employee to have such a clause added to their contract, particularly if this is a measure to avoid redundancy.

Keep in mind, too, that where the employee is laid off or on short-time working for either longer than four continuous weeks OR longer than six weeks in a thirteen-week period, the employee can request redundancy. Unless the employer gives counter-notice to say that the lay off/short time is coming to an end, redundancy of the individual would need to be paid.

Zero-hour contracts

Some employers may wish to consider offering employees the option to switch to a zero-hour contract on a temporary, voluntary basis. This offers benefits to both the employer and employee. From an employee’s perspective, the continuous service with the organisation is maintained, their employment continues and they are free to work elsewhere. Non-pay benefits such as life assurance continue too. From the employer’s perspective, they are under no obligation to pay the employee and do not incur redundancy costs either. They also have the flexibility of being able to offer work when needed, possibly as ‘Keeping in Touch’ days, making payment for such days only. There are of course practical issues to address, but we think this could be a popular alternative to employers and employees alike.

Unpaid sabbaticals

Unpaid sabbaticals are one stage on from Zero Hour contracts and cut all benefits running. Usually associated with complete breaks from work, they don’t provide the same flexibility to bring employees back from time to time if required.

Pay reductions – voluntary or enforced

We have seen many employees agreeing to take temporary pay reductions but still working the same number of hours. Typically, periods have been set at three months, reviewable by both parties but there’s nothing to stop organisations seeking to agree permanent changes in salary levels too.

Imposing pay cuts can only be achieved through entering a “dismiss and re-engage” procedure.  Even following a process brings with it the risk of unfair/constructive dismissal or wrongful dismissal and for employees who decide not to leave, unlawful deductions from wages claims.  In addition, if more than 20 employees are likely to be dismissed under a dismiss and re-engage procedure, you will need to give at least 30 days of notice before the first dismissal can be implemented.

Reduced working week and pay reductions – voluntary or enforced

Similar to pay reductions above but with the employee benefitting from reduced time at work, these can also be reached by voluntary agreement or enforced following a carefully followed procedure.

Conclusion

Given most of the options above require a form of consultation with employees and elected representatives, some involving statutory minimum periods before they can be implemented, employers need to start contemplating what they intend to do with employees returning from furlough and giving employees time to consider their options and prepare for any further salary reductions. Careful planning will also be required with the support of your HR team to minimise the risk of litigation claims, if you need further assistance Vero HR offer professional payroll solutions.

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