Cost Savings Following Furlough – The Importance of Planning Ahead

Cost Savings Following Furlough – The Importance of Planning Ahead

Key Contact – Claire Knowles

Author – Mark Alaszewski

The Coronavirus Job Retention Scheme (the Scheme) has dominated employment law discourse over the past few weeks and has now both launched and been extended. The Scheme provides temporary support for businesses, lasting from 1 March until 30 June, but employers already need to start thinking about what happens afterwards.

The 30 June is coming around fast and there are so many things we simply cannot predict – Will the lockdown still be in effect? Will the Scheme be extended? How long will it take for business to rejuvenate? Employers need to prepare themselves to make difficult decisions in the interest of the business’ survival. The most important of these is the dismissal or retention of staff.

Cost of Dismissals

Dismissing employees may appear to be a quick and simple way of reducing business expenditure. However, each employee is entitled to receive certain payments on being dismissed such as:

  • notice pay;
    • outstanding accrued annual leave; and
    • redundancy pay if the position is being made redundant.

Businesses experiencing cash flow issues should begin considering who they can afford to dismiss efficiently and, if redundancies will be necessary, how they can mitigate these costs. Furlough leave also offers a novel way in which employers can reduce dismissal costs.  Employers can serve notice during the period of Furlough leave so that notice runs concurrently with furlough up to 30 June 2020, allowing the Scheme to contribute towards notice pay costs.

Similarly, the government have confirmed that annual leave can be taken during furlough leave. This suggests that it may be permissible to require employees to take most or all of their outstanding leave balance during the Furlough leave period so that there is a reduced balance to pay out in lieu.  Acuity’s employment team have developed a redundancy costs calculator which can help clients make informed and efficient decisions. Please contact adam.mcglynn@acuitylaw.com for more details.

Legal Risk

Employers should bear in mind that all dismissals come with legal risk and that when dismissing for redundancy employers need to act reasonably which should at a minimum involve a fair selection process, individual consultation and consideration of alternative employment. Acting overly harshly during the redundancy process is likely to increase employee resentment and the possibility of legal claims. These include unfair dismissal claims (for employees with over 2 years continuous service) but also discrimination claims which can arise during redundancy selection.

Where employers are contemplating making 20 or more redundancies within a 90-day period collective consultation obligations also apply.

  • Employers must set out a process to appoint either union or elected representatives.
    • Businesses considering 20-99 redundancies have a minimum of 30 days consultation.
    • Businesses considering 100+ redundancies have a minimum of 45 days consultation.
    • This means they will need to begin by 18 May to conclude by 30 June 2020.
    • Breaches could lead to up to 90 days’ gross pay for each employee made redundant.

Employers contemplating large scale redundancies are advised to initiate collective consultation as soon as possible as the consultation periods set out above are minimum periods and in practice timescales are likely to be much longer, particularly where employee representatives have to be elected and compulsory redundancies are likely.

Cost Savings – Without Redundancies

Redundancies may not always be necessary. Workload may not have decreased enough or may be expected to recover quickly. Alternatively, cashflow issues may mean the employer simply cannot afford to dismiss certain employees. Once again employers should consider cost saving strategies now in preparedness for employees’ return from furlough leave.

Reducing salary is a relatively simple way to reduce expenditure. In the unusual circumstances of Coronavirus employees may be more receptive for negotiating reductions to salary or working hours. Businesses may also be able to negotiate a reduction of enhanced benefit packages such as company sick and holiday pay.

Where employees are unwilling to agree to proposed changes an employer may need to terminate employee contracts and offer re-engagement on new terms. When considering termination and re-engagement of at least 20 employees the collective consultation obligations described above will apply. If an employee refuses to accept the new terms they will be dismissed and will be entitled to notice pay and any outstanding holiday (but not a redundancy payment). Negotiations should, therefore, begin as soon as possible to avoid delay if consultation or dismissal costs become necessary.

These rather unique few months can also be used to fundamentally review the working practices of the business. This unprecedented period of lockdown may catalyse a revolution in the way people work, bringing with it a range of opportunities to reduce expenditure and develop more efficient ways of working. Adopting agile working practices can reduce on-site employees, allowing businesses to downsize their workspace, renegotiate leases, and/or revisit insurance policy premiums. Fewer employees attending work can also reduce travel expenses, car allowances, on-site utilities, expenses for food and drink, and other fees without sacrificing the employee’s output.

These are uncertain times and there are difficult decisions ahead, but this too shall pass and the businesses already planning for the future will be best placed to emerge confidently. We at Acuity are here to help you navigate and realise those plans.

For more information, please contact our employment team.

Claire Knowles – Partner

Mark Alaszewski – Associate

Rebecca Mahon – Solicitor

Adam McGlynn – Trainee Solicitor

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