Restructuring – key employment considerations when reorganising against the clock

Whilst restructuring processes are often conducted at a fast pace, employers are ordinarily in the driver’s seat when it comes to planning and communications, and they at least generally have some time to prepare and execute a process.

The recent Silicon Valley Bank crisis has been reminiscent of the “run on the banks” that prefaced the 2008 financial crisis, and serves as a stark reminder that an employer may have less control over the process in some cases. Where access to financial deposits in bank accounts is restricted or lost, even just temporarily, costs will need to be reduced at dramatic speed in order to react to market-moving events and secure an organisation’s future survival.

In this article, we consider some of the key considerations for employers to bear in mind in those “doomsday” situations when there is little time to plan, including: (1) collective consultation obligations; (2) employee communications; and (3) what happens to employees in insolvency situations.

Collective consultation obligations – the “special circumstances defence”

• When organisations look to cut costs, headcount reduction is typically one of the most common methods to achieve this. There are however procedural requirements that employers in the UK must follow when effecting redundancies, briefly summarised below.These obligations may also apply when an employer seeks to make detrimental changes to employees’ terms of employment as a way of avoiding mass redundancy.Section 188(1) of the Trade Union Labour Relations (Consolidation) Act (“TULRCA”) provides that an employer is required to collectively consult with appropriate representatives of affected employees if it is proposing to make 20 or more employees at a single establishment redundant within a period of 90 days or less.

   

• If an employer is proposing to make 100 or more employees at one establishment redundant within a 90-day period then the consultation must begin at least 45 days before the first dismissal takes effect.

   

• This is reduced to 30 days, if the employer is proposing to make 20 – 99 employees redundant within the 90-day period.

   

• Failure to comply with these consultation obligations can result in the employer having to make a “protective award” of up to 90 days’ pay for each affected employee.

Some organisations may choose to forgo these obligations and decide that the cost of paying a protective award is a price worth paying for speedy dismissals. However, as we have seen over the last year, in particular with the P&O scandal, this approach can have potentially disastrous public-relations implications for the employer in question.  It is also important for employers to remember that failure to comply with the related but separate obligation to file a form HR1, notifying the Secretary of State of proposed collective redundancies at least 30 (or 45) days before the first dismissal, attracts a criminal penalty and so cannot be “bought out”. 

In any event, to a business facing an existential threat which necessitates the need for rapid (and potentially dramatic) cost-cutting due to immediate and unexpected cashflow issues, the option of paying out an additional sum in the form of protective awards may simply not be available.  There does however exist a potential avenue for employers in these situations to dispense with their full collective consultation obligations, although the threshold to qualify for this exemption remains high.

Section 188(7) TULRCA provides what is referred to as a “special circumstances” exemption.  It states that where there are “special circumstances” which render it not reasonably practicable for the employer to comply with the collective consultation obligation an employer must “take all such reasonable steps towards compliance with that requirement [to collectively consult] as are reasonably practicable in those circumstances”. In effect this provides a defence to claims of failure to inform and consult where there are “special circumstances” which mean that the employer cannot carry out a (full) consultation process.  There is an equivalent exemption from the obligation to file a form HR1.

Whilst there is no statutory definition of “special circumstances” and each scenario is assessed on a case-by-case basis, case law has established that an insolvency situation will not automatically qualify as special circumstances.  Generally, Employment Tribunals tend to reinforce the value of consulting on the impact of redundancies in insolvency situations, irrespective of the fact that redundancies are inevitable.

However, a sudden and existential financial threat to an organisation could potentially qualify as a “special circumstance” where the organisation may cease to exist should redundancies not be effected immediately, without full consultation.

In any case, employers should note that (i) even where there are special circumstances, they must still take such steps towards compliance as are reasonably practicable – doing nothing is unlikely to be an option; and (ii) TULRCA specifically states that “where the decision leading to the proposed dismissals is that of a person controlling the employer (directly or indirectly), a failure on the part of that person to provide information to the employer shall not constitute special circumstances rendering it not reasonably practicable for the employer to comply with such a requirement”.  In other words, it is not a defence for an employer to say that their shareholder or parent company didn’t inform them in good time of circumstances that would necessitate collective redundancies.

Employee communications

Employers facing a difficult financial situation should also keep the importance of clear and consistent communication with their employees at the forefront of their minds.

As seen with recent events, it is often the case that due to the speed with which news travels, employees may find out about crisis situations from the news or social media before they hear anything from their employer. Unchecked catastrophising and rumours can potentially lead to an employee exodus as employees look to resign without warning in order to secure notice pay and any other owed amounts. Employee panic in these situations can lead to a domino effect and transform a short-term problem into a long-term threat to a business if talent departs en masse.

Swift and transparent communication with employees assuring them that, despite what they may be reading in the media, there are various back-up plans in place to ensure the future of a company, may stop twitchy employees from taking flight and help to preserve the company’s long-term future.

The other benefit of clear and consistent communication is that goodwill can often go a long way. If employees are dealt with transparently and reassured (where possible) about their long-term future, they may be more inclined to agree to short-term solutions such as pay reductions or deferment or contract restructuring, that might give a company the financial breathing room required to navigate a short-term crisis.

Insolvency situations

It is also worth bearing in mind the effect on employees of a “doomsday” scenario, being the uncontrolled collapse of a company into insolvency.

The effect of the insolvency on employees depends on the nature of the insolvency process instigated.

If, for example, a company enters compulsory liquidation (by way of a court order on the back of a winding up petition), or the court appoints a receiver over it: (i) the employees’ employment will be automatically terminated, albeit that it is possible for the liquidator to employ the employees during the liquidation where it is intended that the company will continue to trade during the process; and (ii) the employees will usually have wrongful dismissal claims against the company (depending on the provisions of their contracts), although these claims will be unsecured, meaning that full recovery of any awards made against the company is unlikely, and the moratorium on claims against the company will have to be lifted before any such claims can be brought if the company is in liquidation.

Alternatively, in the event of voluntary liquidation (whether solvent or insolvent), administration, or administrative receivership, there is no automatic termination of employment. Any terminations that follow in such processes may give rise to claims relating to wrongful and/or unfair dismissal, depending on the particular circumstances of the scenario and the relevant contracts of employment.

In either case, the insolvent company’s employees will be preferential creditors (paid in priority to general unsecured creditors) in respect of certain unpaid sums owed to them, up to a maximum aggregate sum of £800 for unpaid wages (including sick pay, maternity pay, commissions or bonuses, overtime pay and protective awards), plus accrued but untaken holiday pay and certain pension contributions. Any claims over and above the preferential limit will fall to be treated as unsecured claims in the insolvent estate.

In addition, employers will likely know that the National Insurance Fund (“NIF”) guarantees the payment of certain basic minimum sums owed to employees by their employers, in circumstances where the employer enters insolvency. Such claims are subject to certain statutory maximums and any payments made out by the NIF will give rise to subrogated unsecured claims in the company’s insolvent estate.

If the business of the insolvent company is sold out of its insolvent estate, the employees assigned to that business may transfer over to the purchaser, pursuant to the provisions of the Transfer of Undertakings (Protection of Employment) Regulations 2006, with the purchaser picking up the majority of the outstanding liabilities owed to the employees (save for those covered by the NIF).  These can be delicate, complex, and rapidly evolving scenarios and, whilst insolvency is often a point of last resort, companies should seek advice and be appraised of their potential options, and the impact these may have on their workforce, as early as possible.  Similarly, those interested in buying the assets of an insolvent business must carefully assess the workforce implications, including in particular the extent of any employment-related liabilities they are likely to acquire.  

Conclusion

The recent SVB collapse and its impact on technology businesses in the UK has shown that crises can arise suddenly and develop rapidly.  Employers will of course hope that they can weather these storms, but it pays to be familiar with the obligations that may arise, and to be as prepared as possible.

Should you want more information in relation to the impact of insolvency on employees, or the statutory limits referred to above, please do not hesitate to get in touch.