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The True Costs of Redundancy

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In this article, I want to explore the true costs of redundancy. You may be facing the difficult decision to make some of your staff redundant. If so, then you might want to take time to so some careful calculations. This is not always the best way to cut costs and keep your business alive.  A cost-versus-benefit analysis of a redundancy programme might prove interesting.

The benefits for business

The immediate financial benefits for any employer are obvious.  Salaries no longer have to be paid to those people.  You don’t have the employment costs such as tax and national insurance. You save on their pension contributions.  There might also be a saving in management costs.  With fewer people to manage, there could be the option to reduce your management team.  Managers may need to spend less time managing the people who are left.

So what are the true costs of redundancy?

There are also obvious costs to making someone redundant.  If they have over two years’ service they are entitled to a statutory redundancy payment, which can be up to thirty weeks’ pay depending on their age and length of service.  They may be entitled to an enhanced redundancy payment if there is such a clause in their contract of employment. You also have to continue to pay their salary while the consultation is ongoing (which may be weeks or months) and during their notice period.  You might make a payment to them in lieu of notice if you want them to leave sooner or pay for them to be on garden leave if their contracts of employment allow for these. If any unused holiday entitlement is accrued you have to give them that time off before they leave (on full pay) or pay them in lieu.  You must also allow them reasonable time off to seek alternative employment on full pay.

The Hidden Costs

Other expenses may not be immediately obvious.  This may be where you find that the true price of redundancy start to mount up.  These include your time and your managers’ time to plan, prepare and carry out a redundancy programme; the time doing any scoring needed for selection; the time needed for consultation and to plan the remaining workload.  The managers doing this work are likely to be among the highest paid. They will not be productive on other things while they are involved in a redundancy process. In addition, there is your payroll staff’s time work out all of the redundancy and other payment calculations and make the relevant payments, plus your HR team and/or managers’ time writing and providing references. Again, while they are doing this, they are not working on more productive things for your business.

If you recognise trade unions (TUs), your TU representatives will be occupied with the process during this time.  If you don’t recognise trade unions and you are planning more than twenty redundancies, you will have to arrange a secret ballot to elect employee representatives to enable collective consultation.  However many redundancies you are planning, TU representatives or other colleagues might be asked to accompany individuals in any consultation meetings.  All of that costs their time and productivity.

There are many other small things  that form part of the process, including time to  hold meetings, answer questions and consider suggestions.  Even in a well-managed redundancy process, the biggest (and most incalculable) hidden cost is the lost productivity of the workforce.  Productivity levels take time to build up again to pre-redundancy levels.

Potential Extra Costs

If you want people to leave  the work place before their notice period ends or if the reason for the redundancy is a lack of work, you may need to pay them to go on garden leave.  On the other hand, if a customer contract is coming to an end, you may need to pay a retention bonus or other incentive payment to ensure  a redundant employee remains motivated and engaged while they complete any outstanding work.

Some companies provide outplacement services for their redundant employees to help them  find alternative work or train for a career change, which have a cost attached.You may want to provide counselling services to help your employees and their families come to terms with their redundancy or financial advice to help them manage their redundancy pay, pensions, etc. Counselling may not be enough to prevent sickness absence if individuals have anxiety, depression or other stress-related illnesses due to impending redundancy.  Your sick pay bill may go up during this time, not just for those facing redundancy but also for their colleagues who remain in the workplace after they leave.

On the subject of those who stay, training in new skills for people who have had to move into different jobs or pick up unfamiliar work may be necessary. Before considering maing permanent employees redundant, you could also need to end any third-party contractors or temporary agency staff and pay fees to employment agencies.

Do factor in potential costs associated with legal challenges and having to pay lawyers or barristers’ fees to defend such challenge or for a settlement agreement to prevent a court case, not to mention staff time to work on such cases.

Delayed  Costs of Redundancy

Some expenses will crop up later that must be included in the overall figures for redundancy as they arise only as a result of the redundancy programme. They include payment for future advertising of vacancies  and any recruitment if there is an upturn.  You may end up trying to recruit the very skills you let go and paying to train people up into these roles, having  lost the investment in your redundant employees. Depending on how well your redundancy programme was handled, your company’s reputation may suffer leaving you finding it harder to recruit in the future. You may even face resignations as people search for potentially more stable employment.

One final potential cost is in your client base.  If the reputation of your business suffers due to the redundancy, you may lose clients or find it hard to attract new business.

In Conclusion…

Redundancy might seem the ideal solution to a business issue but it is expensive and hugely time-consuming. It often does not bring the required cost reductions. I do suggest that you carefully weigh up all of the implications of redundancy and how long it will take your business to recover from such a move.  Redundancy is not the only answer.  It may seem the simplest and cheapest way forward but look at alternatives before committing to redundancies.

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Jill Aburrow - HR Consultant

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