Statutory redundancy pay: qualifying rules
Elizabeth Stevens of Steeles (Law) LLP begins a series of articles on statutory redundancy pay with an overview of the qualifying rules. For an employee to qualify for statutory redundancy pay, the statutory definition of redundancy must be satisfied.
Introduction
With redundancy very much on the agenda, it is important that employers are aware of the rules relating to employees' entitlement to statutory redundancy pay.
The most recent figures issued by the Office for National
Statistics (on
its website) show that
The statutory scheme for making redundancy payments was established in 1965 under the Redundancy Payments Act 1965. This legislation created a national redundancy fund (since abolished), out of which employers were paid a rebate for every redundancy payment they made. This Act was repealed and replaced by the Employment Protection (Consolidation) Act 1978, which, in turn, was replaced by the Employment Rights Act 1996. Part 11 of the Employment Rights Act 1996 sets out the statutory provisions relating to redundancy payments.
Qualifying rules
For an individual to be entitled to statutory redundancy pay, he or she must have been continuously employed under a contract of service (ie he or she must have been an employee) for a period of not less than two years ending with the "relevant date" (see below). The employee must be dismissed by reason of redundancy within the meaning of s.139 of the Employment Rights Act 1996. To fall within this statutory definition, the dismissal must be wholly or mainly attributable to:
- the fact that the employer has ceased or intends to cease to carry on the business for the purposes for which the employee was employed or it has ceased or intends to cease to carry on that business in the place where the employee was so employed; or
- the fact that the requirements of the business for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place where the employee was employed, have ceased or diminished or are expected to cease or diminish.
A dismissal for redundancy can include termination of the employment contract with or without notice, as well as the expiry of a fixed-term contract. Since 1 October 2006, there has been no upper age limit on the entitlement to statutory redundancy pay.
To establish whether or not an employee has sufficient continuity of service to qualify for a statutory redundancy payment, it is necessary to establish the relevant date. The relevant date is also used to calculate an employee's statutory redundancy pay entitlement. Where the contract is terminated with notice, the relevant date is the date on which the notice expires. If the contract is terminated without notice, or where a fixed-term contract expires, the relevant date is the date on which the termination takes effect. However, if the employer does not give the employee his or her entitlement to statutory notice, the relevant date is postponed to the date on which statutory notice would have expired, had it been given.
Function v contract test
The statutory definition of redundancy can present some difficulties in practice, particularly in circumstances where the job an individual has been doing is redundant, but under the contract of employment he or she can be required to perform other duties. Is the existence of a redundancy situation dependent on what the individual has actually been doing (known as the "function test") or what the contract of employment states that the individual can be required to do (known as the "contract test")? Although this question may be relevant in the context of an employee's entitlement to statutory redundancy pay, it can arise in unfair dismissal cases, where the employer is maintaining that the reason for dismissal was redundancy.
Two key decisions have established that the distinction between the function test and the contract test is erroneous and that neither is determinative of whether or not a redundancy situation has arisen. Instead, according to the Employment Appeal Tribunal (EAT) in Safeway Stores plc v Burrell [1997] IRLR 200 EAT, a three-stage process applies:
- Was the employee dismissed?
- Had the requirements of the business for employees to carry out work of a particular kind ceased or diminished, or were they expected to cease or diminish?
- Was the employee's dismissal caused wholly or mainly by that state of affairs? The terms of the employee's contract are relevant only at this stage, to decide whether or not the dismissal resulted from the redundancy situation.
This approach was subsequently endorsed by the House of Lords in Murray and another v Foyle Meats Ltd [1999] IRLR 562 HL, which dealt with the issue of the "bumping" of an employee who would not otherwise have been made redundant. This case confirmed that a redundancy situation arises where there is a diminution in the employer's need for employees to carry out work of a particular kind, but it is not necessarily the case that it needs to be the work of the individual who is made redundant, provided that the diminished need for employees is the reason that he or she is being made redundant.
This means that, if an employer decides to retain the services of an employee whose role is redundant due to a diminishing need and moves him or her to an alternative role, making the employee in that role redundant (referred to as "bumping"), the bumped employee will be entitled to a statutory redundancy payment, even though it is not his or her role that is redundant.
Geographic v contract test
A similar difficulty is presented in circumstances where an employee is no longer required to carry out the work for which he or she has been employed at the normal place of work, but the contract contains a mobility clause. Is the definition of redundancy satisfied by reference to where the employee has been working (known as the "geographical test"), or by where he or she can be required to work under the contract of employment (the "contract test")?
There has been conflicting case law on this point. However, the decision of the Court of Appeal in Home Office v Evans and another [2008] IRLR 59 CA suggests that, if the employer is contractually entitled to instruct employees to relocate and provided that it operates the mobility clause properly, the employees are not redundant for the purposes of the statutory definition. Therefore, they are not entitled to a statutory redundancy payment. However, if the employer chooses not to operate the mobility clause, the employees are redundant and will be entitled to redundancy payments (subject to offers of suitable alternative employment (see below)).
Reorganisation
A reorganisation involving changes to the workplace structure will not necessarily create a redundancy situation within the strict legal definition of the term. This will depend on the facts of the case. This was recognised by the EAT in Corus and Regal Hotels plc v Wilkinson EAT/0102/03, where it stated that "the mere fact of reorganisation is not in itself conclusive of redundancy or, conversely, of an absence of redundancy". The employer had restructured the way in which its hotels were supervised and maintained that the employee had been dismissed for redundancy. The employment tribunal found that, following the reorganisation, the employer had required the same work to be carried out. While the identity of those carrying out the work might change, and the employees might do different tasks to those that they had done previously, the tribunal was unable to establish that the requirements of the business for employees to carry out the work had ceased or diminished. The EAT upheld the tribunal's decision.
Alternative employment and trial periods
A redundant employee who is offered alternative employment has a right to a statutory trial period of four weeks under s.138 of the Employment Rights Act 1996 (which can be extended for a pre-determined period with a specified end date if retraining is required for the employee to carry out the job). If either the employer or the employee decides during this period that the alternative employment is not working out, the employee is usually still regarded as redundant and is entitled to be paid statutory redundancy pay. The entitlement to statutory redundancy pay is lost if the employee continues to work in the new role beyond the four-week (or extended) period.
However, if an employee unreasonably refuses an offer of suitable alternative employment (whether or not he or she undertakes a trial period), he or she will lose the entitlement to be paid statutory redundancy pay (s.141 of the Employment Rights Act 1996). Establishing whether or not alternative employment is suitable is a two-stage test.
First, the job offered must be objectively suitable for the employee, taking into account factors such as the status and pay of, and skills required for, the role.
However, even if the role is objectively assessed as suitable, it might still be reasonable for the employee to refuse the offer. This involves a subjective consideration of the particular employee's own circumstances. A recent EAT decision illustrates this point. In Readman v Devon Primary Care Trust EAT/0116/11, a nurse who had been employed in a community setting for the majority of her long career was held not to be unreasonable in refusing an offer of a suitable alternative job, carrying out many of the same tasks and with the same pay as previously, in a hospital setting. This meant that she was still entitled to be paid statutory redundancy pay.
Next week's topic of the week article will look at how statutory redundancy pay is calculated and will be published on 13 February.
Elizabeth Stevens is a professional support lawyer in the employment team at Steeles (Law) LLP (estevens@steeleslaw.co.uk).
Further information on Steeles (Law) LLP can be accessed at www.steeleslaw.co.uk.
