Are Redundancies Inevitable for Struggling Businesses?

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A growing number of UK businesses are closing, and many more are struggling. There was a 23% increase in businesses closing down in the first quarter of 2022 compared to 2021, and hundreds of thousands more are at risk of failure.

It will come as no surprise that inflation and energy prices are key concerns for struggling businesses, with the end of government support during the pandemic also likely a factor. All of these things are outside of business owners’ control, so instead, they must look to the things they can control if they want to avoid insolvency.

Payroll is typically the biggest single cost for a business, so when looking to cut costs, making redundancies may seem like the quickest, easiest option. But is it the best thing to do to save a business? Or could cutting employees actually do more harm than good? And, if you do not want to make redundancies, what are the other options?

In this article, we cover the basics you need to know about using redundancies to save a business, the alternatives you should consider and our view on how to ensure you make the right choices for your business’s long-term viability.

When making redundancies may be the right choice for your business

If your business is not making enough money to cover its costs or is not as profitable as you need it to be, making people redundant can let you cut costs and boost your profits. But is it right for your situation?

Key signs that redundancies might be worth considering include:

  • You do not have enough work to keep all of your team busy
  • Certain employees’ skills are no longer required, e.g. because you no longer offer a particular service

If you are planning to make redundancies, it is important that you follow a proper redundancy process with clear, valid reasons for which people you let go. This avoids the risk of employment claims from disgruntled former employees.

The risks with making redundancies

Before making redundancies, it is essential to consider the risks. You can then be confident you are making the right choice and ensure you take proper precautions to minimise those risks.

Key things to think about include:

  • The cost of redundancy payments – do you have cash in the business to cover these?
  • Loss of expertise – will you be letting go of skills you may need in the near future?
  • Reduced capacity and earning potential – will you still have enough people to service the work you are anticipating in the next three months, six months, year etc.?
  • Employment claims – you must make sure you conduct a fair redundancy process as the cost of a successful claim for an unfair redundancy could wipe out any savings you make

Before making redundancies, we strongly recommend seeking expert legal advice. This helps to make sure you are making the right choice and that you follow a fair redundancy process.

Alternatives to redundancies for struggling businesses

Pausing or slowing down recruitment

One of the least contentious ways to slim down your workforce is by pausing or slowing down recruitment. Not only can this avoid your payroll increasing, but it can help to reduce it over time if you do not fill positions left vacant when people leave.

The downside to this approach is that it can be relatively slow. It could also leave you with vacancies in key roles, which you may be unable to avoid filling.

Moving employees to different roles

Moving underutilised employees to different roles that have more value can allow you to avoid redundancies while increasing your revenue in more profitable areas.

A key challenge here is whether the people you need to move have the necessary skills. If not, you need to be realistic about how much training they will need and how much this will cost your organisation.

You may also need to provide the employee with a new employment contract, in which case this may require negotiation with the employee.

Reducing salaries, cutting overtime and bonuses or reducing working hours

Anything that impacts your employees’ earning is bound to be contentious but, in some cases, it may be the only alternative to redundancies.

Where this involves changes in the agreed terms of people’s employment, you will need them to sign a new employment contract and this is not something you can compel them to do. Getting staff to agree to reduced terms is likely to be challenging, so it is important to be honest about the situation and the alternatives if this cannot be agreed.

It is absolutely critical to get expert employment law advice before raising the issue with your team or attempting to negotiate a change to the terms of their employment. Failure to do so could lead to issues such as employees resigning then making claims for constructive dismissal.

Reducing the cost of freelancers and other outsourced service providers

If your business uses freelancers and other outsourced services, it may be possible to cut their use or renegotiate prices to bring these costs down.

Speak to our employment solicitors about redundancy

Longmores’ team has specialists in employment law, so are perfectly placed to guide employers through  making difficult staffing decisions if your business is struggling.

To discuss how we can help your business if you are considering redundancies, or changes to staff contracts, salaries and hours, , please get in touch, and we will be happy to advise.

We also have a team of experienced commercial solicitors who provide advice to business leaders about selling businesses (or parts of them), restructures, mergers and demergers.

Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.