• International Workplace
  • 4 April 2018

Collapsing businesses: the duty to engage and consult

Business failures have been much in the news of late, with the sad consequence that many jobs have been put at risk as a result. 5,500 jobs have been endangered by the closure of Toys’R’Us and Maplin stores. Carillion job losses stand at just under 2,000 and counting. It is in the nature of such collapses that it has become difficult for employers to control the course of the business, but the courts and tribunals have consistently made it clear that the failure to follow due process with regard to declaring redundancies will be regarded as inexcusable.

Where an employer proposes to dismiss as redundant more than 19 employees at any one establishment within a 90-day window, it has an obligation to inform The Insolvency Service and to consult employee representatives about its proposals. Where dismissals are spread geographically or over a period of time it may be possible to stay below the threshold at which these obligations are triggered, but otherwise the employer must engage with the employee representatives, be they a recognised union or other staff representatives. Time must be set aside for consultation with a view to reaching agreement on an agenda that includes ways of avoiding redundancy and mitigating the consequences, however unlikely this may seem at first sight. Dismissals must not take effect within a window of 30 or 45 days from the start of consultation, dependent upon whether the proposal is to dismiss more than 99 employees. From the point of view of the business, struggling with unsustainable payroll costs, this is an unwelcome restriction on its ability to cut its losses, yet the law insists on due process nevertheless. Whether the situation is recoverable is not the point; this legislation is all about allowing the employees to have a degree of input into how the situation is managed.

We have been reminded of this recently by the Employment Appeal Tribunal, considering the failure of the Keeping Kids Company charity (Keeping Kids Company v. Smith and others UKEAT 0057/17). The charity ceased operations in August 2015, when a government grant was withheld due to safeguarding concerns, but difficulties were manifest rather earlier than that.  In June 2015, an application for a grant was submitted along with a business plan that envisaged the workforce being cut in half. When operations subsequently ceased, the question was asked why consultation had not commenced when the June plans were formulated, as these amounted to a proposal to declare redundancies. The charity tried to wriggle off the hook, arguing that the redundancy proposals were not sufficiently specific, but the Tribunal was having none of it. The practical message is clear – that a failure to engage promptly in consultation once proposals to declare redundancies are formulated is a dangerous course, particularly if the employer subsequently loses control of events. The penalties just make a bad situation worse – tribunals can award payments of up to 90 days pay per employee affected by the failure to consult. In a big business failure these sums can be substantial.

A lifeline is thrown out by the “special circumstances“ exception within the legislation, but this has consistently been interpreted narrowly. In the KKC case it was argued that the unexpected withdrawal of funding was a special circumstance which should excuse the employer from the requirement to consult. Were such arguments to win the day, many a collapse would fall into this “get out” category, but this has rarely been accepted as an excuse.

Awards made by the tribunal are discretionary and it is clear that the greater the attempt to comply with the collective consultation rules, the lower any award is likely to be, even if the consultation falls short of what is required as a matter of law. The pragmatic advice is, therefore, to encourage compliance and, if this cannot be achieved, to do as much as is possible in the circumstances.

It must not be assumed that the employer is out of the woods of employment law liability merely by complying with these collective consultation requirements. The bill for redundancy payments can be magnified considerably at an individual level where redundancies are mishandled. Additional compensation of up to £83,682 per redundant employee can be awarded where a redundancy dismissal is unfair. Central to the defence of the employer’s position is consultation at an individual level, listening to individual concerns and handling contentious issues such as selection for redundancy and opportunities for redeployment in an equitable manner.

It must be easy to overlook some of these obligations in the hurly-burly of a collapsing business, but the law expects engagement with employees and their representatives, respect for individual dignity and equitable treatment in a difficult environment. The mantra for employers is to engage and to consult. The penalties for failure to do so are considerable and add costs which are both unwelcome and unavoidable to a financial position which is already perilous.

Michael Ryley is a Partner at Weightmans LLP.