Managing Staff Costs During Recession - The Viable Alternatives to Redundancy

The recessionary climate has forced many businesses to cut costs and trim excess capacity. All too often this means staff redundancies. In a survey conducted by Speechly Bircham, employment lawyers, and Kings College London of over 300 senior HR professionals, the overwhelming consensus among the HR managers was in favour of considering alternatives to a redundancy programme. What are these viable alternatives and their pros and cons.

Alternatives to redundancy can be categorized into three main types:

1. alternatives which do not directly affect employees (eg recruitment freezes, reduction in the use of agency staff)
2. alternatives which affect employees but only on an individual and usually voluntary basis (eg sabbaticals, reduction in working hours, redeployment)
3. alternatives which have a collective impact on employees (eg pay freezes, pay reductions, outsourcing certain functions).

Alternatives which do not impact on employees

A recruitment freeze is often implemented as a precursor to any further steps to reduce costs, although in isolation, it may not be enough to weather the storm.

However, a freeze is not without difficulties. During the last recession, many large firms found they had cut their recruitment back too far and were short on resource when the upturn came. Graduate recruitment is often the first area to be targeted even though this is essential for ensuring a constant stream of new talent entering a company.

Reducing the number of temporary or agency workers is also often favoured by organisations. However, employers should check the employment status of so-called temporary or agency staff before dismissing them. In the UK, the successive use of two or more fixed term contracts over four years or more results in permanent status.

Voluntary measures which affect employees individually

There are two main types of options which can be offered to employees on a voluntary basis: the first involving changes to working hours or duties (for example, unpaid leave or paid sabbaticals, reduced working hours or redeployment); the second involving changes to compensation and benefits (for example, salary sacrifice, deferred payment of salary or a reduction in contractual benefits).

Since these are voluntary changes, they require goodwill on the part of the employee and must be handled sensitively by the employer. The employer should not be seen to be putting any 'pressure' on employees to volunteer for the changes or this could result in constructive dismissal claims. It is also usually safer for employees to offer the changes to everyone so as not be seen to be targeting certain groups.

There are drawbacks associated with offering voluntary measures to employees. Employees undertaking a sabbatical may not return to work but prefer to pursue their 'life dream'. Some employees may prefer to be made redundant than accept a sabbatical or reduced hours as their insurance will cover them in a redundancy situation.

Flexible working can improve efficiency but its' introduction requires additional administration and processes as well as management skills.

Compulsory measures which affect employees collectively

As a last resort, employers may be faced with no choice but to make changes to employees' terms and conditions of employment on a collective and compulsory basis.

Given that this approach requires varying the terms and conditions of employees' contracts of employment, an employer can either obtain the consent of its employees to the change (or obtain the consent of the trade union if it is recognized for collective bargaining purposes) or, if consent is not forthcoming, dismiss employees and re-engage them on new terms and conditions.

Organisations may choose to outsource a function or an activity. Outsourcing may be a good short term measure to reduce employee costs since at the end of the contract those employees who are dedicated to the services being transferred will transfer back to the company. However, when an outsourcing arrangement ends, therefore, the employer will most likely be faced with an influx of employees, whether it wants them or not.

Bonus scheme changes can be useful in reducing costs. However, the law on bonus schemes is complex and care should be taken to determine if a scheme is contractual or discretionary. Schemes which appear discretionary can become contractual over time. It may be difficult for an organisation to argue that a guaranteed bonus is not fully payable unless it is expressly stated that the bonus is conditional upon certain financial targets of the company being reached.

In conclusion

The current climate is encouraging employers to "think outside the box" as to ways to reduce their costs. Employers that previously were reluctant to accept flexible working requests are now encouraging their entire workforce to go part time. "Lay offs" which were once the preserve of heavy industry in the 1970s are becoming the fashion for 21st professional service firms who are using the more attractive term "sabbatical". For employees who manage to keep their jobs, there will be a huge opportunity to engage in flexible working which is likely to be retained once the upturn comes. An employer that embraces flexible working in the downturn will find it hard to convince a tribunal in the upturn that client demands mean that a blanket refusal to consider flexible working can be justified.