Lay offs and short-time working during economic uncertainty

As the UK moves beyond the General Election, and the Labour party settles into its new office, businesses find themselves at a crossroads. The economic outlook remains uncertain including with fluctuating demand and workforce availability. Operational viability will always be key for businesses but needs to be balanced with employee welfare and ensuring some level of stability for the future. Laying off employees and making use of short-time working arrangements are concepts that businesses were forced to adapt to in recent years in the wake of the pandemic but in this article we look at what these actually mean and how they might present potential solutions for you in the current landscape.

What is the legal definition of a lay off or short-time working?

Laying off employees means that the employer provides employees with no work (and no pay) for a period while still retaining them as employees; short-time working means providing employees with less work (and less pay) for a period while still retaining them as employees.

Unlike dismissal, it is a temporary solution to the problem of no or less work and one that enables an employer to reduce their overheads in response to, for example, an unexpected downturn in its business.

Do we need a contractual right to lay off or put employees onto short-time working?

An employer can only impose lay offs or short-time working if they have an express contractual right to do so. The rights of an employee will therefore differ, depending on whether or not their employer has the contractual right to lay them off or put them on short-time working.

Unless the contract provides otherwise, the employee who is laid off or put onto short-time working will be entitled to their full pay. Therefore, it is important to consider careful drafting when adding such a clause to an employment contract, or when coming to an agreement with the employee.

What if we don’t have a contractual right?

You will be in breach of contract if you lay off employees or put them on short-time working without the contractual right to do so. You would potentially be at risk of claims for any losses flowing from that breach, unlawful deductions from wages, constructive dismissal and/or statutory redundancy payments.

However, the absence of a contractual right to lay off or put employees onto short-time working does not mean you have no options. It would still be open to you to seek agreement from your employees to implement what would, in effect, be temporary variations to their contracts. It is important that employees are given a free choice whether or not to accept such variations but equally, that they understand the circumstances in which you are seeking the variations and the implications of them not being agreed, i.e. that the business may have to make compulsory redundancies. Depending on the circumstances, your employees may prefer to have fewer hours and less pay then face the prospect of having no job.

There are limited circumstances in which a right to lay off or implement short-time working can be implied but employers need to meet strict tests relating to custom and practice – take advice if you think this might apply to your industry.

If we do have a contractual right, how do we go about exercising it?

It is important that you check the wording of your contractual right. Ideally, an express contractual right to lay off or put in place short-time working won’t have a notice provision attached to it, as this makes it more difficult to respond to rapidly changing circumstances or emergencies. If you do have a notice provision but circumstances don’t allow you to give that notice, what are the risks? An employee arguably would have a claim for breach of contract for the full pay they would have earned during the notice period. It may be that you can reach agreement with your employees on a variation to that notice period but otherwise, you will need to weigh up the immediate need to cut costs against the possibility of a claim further down the line.

Can we choose to lay off or implement short-time working for some staff but not all?

Yes, you do not have to adopt the same approach for all staff. It may be that certain roles are still required more than others. However, if you are laying off or implementing short-time working for some but not all employees within a particular role type or team, we would recommend using a short selection matrix. The approach would be similar to a redundancy selection exercise using a series of criteria to score against. The best criteria are those that are easily evidenced by your records. However, you can also use those that relate to the depth and breadth of skills and experience of an employee – understandably you want to keep those that are of most value to the business. As in a redundancy process, you can use more subjective scoring criteria (such as attitude, willingness to take on new roles or new skills and so on) if you need to, provided you apply this consistently and it is scored by two managers. Do take advice on this if you are uncertain as this could be an area that employees feel disgruntled about and so want to challenge.

If we seek voluntary agreement to temporary changes and employees refuse, can we use that to score them less favourably in a redundancy selection exercise at a later date?

We would advise against this. Individuals will have very different circumstances and there may be entirely understandable reasons why a particular individual may not have felt able or willing to agree to a proposed variation of contract. If you take that refusal into account in a subsequent redundancy exercise, you risk that process being unfair. It would be better to limit yourself to more usual redundancy selection criteria.

When might an employee become entitled to a statutory redundancy payment in a lay off or short-time working scenario?

There are statutory definitions for ‘lay off’ and ‘short-time working’ but if these are met, an employee can claim a statutory redundancy payment (SRP).

To claim an SRP the following requirements must be met:

• an employee must have two years’ continuous service (calculated up to the last day of the week of lay off or short-time working on which they are relying);
• they must have spent the necessary length of time on lay off or short-time working (or a combination of the two), namely:
  • four or more consecutive weeks; or
  • a total of six weeks (of which no more than three are consecutive) in any period of 13 weeks.

For these purposes, a week ends on a Saturday unless the employee’s pay is calculated weekly, by reference to a day other than a Saturday, in which case a week ends with that other day.

• The employee must serve written notice of their intention to claim. That notice must be given on (not before) the last day of the last week of lay off or short-time working on which the employee relies or within four weeks of that last day. This is a strict limit that tribunals have no discretion to extend.
• An employer can contest a claim on the basis that there is a reasonable expectation of a return to normal working within four weeks of the date of service of the employee’s notice of intention to claim. For these purposes, normal working means at least 13 continuous weeks without further periods of lay offs or short-time working. An employer must serve a counter-notice within seven days from service of the employee’s notice of intention to claim. Again, this is a strict time limit that the tribunal has no discretion to extend.

Note that a counter-notice is the only substantive defence available to an employer in these circumstances; the only other defence would be to argue the employee has failed to meet all of the requirements of the statutory scheme.

• If the employer serves, and does not withdraw, a valid counter-notice, the employee must apply to the tribunal to decide their claim at a hearing.
• If the employer does not serve (or serves and withdraws) a counter-notice or a tribunal upholds an employer’s claim, the employee must resign with notice.

The “relevant period” within which an employee must give notice of resignation depends on how the employer responds to the employee:

• if, within seven days of service of the employee’s notice of intention to claim, the employer fails to serve a counter-notice, the relevant period is three weeks after the end of those seven days;
• if, within seven days of service of the employee’s notice of intention to claim, the employer serves, but subsequently withdraws, a counter-notice (by giving notice in writing), the relevant period is three weeks after service of the notice of withdrawal; or
• if, within seven days of service of the employee’s notice of intention to claim, the employer serves, and does not subsequently withdraw, a counter-notice and the tribunal upholds the employee’s claim, the relevant period is three weeks from the date the tribunal notifies the employee of its decision. This time limit continues to apply even if the employer appeals the tribunal’s decision.

The actual amount of notice required to be given by an employee depends on the terms of their contract. An employee will need to give a minimum of one week’s notice but if the employee’s contract requires a longer notice period then this will need to be complied with.

Provided the employee is ready and willing to work, they will be entitled to receive full pay for one week of their notice period, even if no work is provided by the employer in that week.

How do we calculate a statutory redundancy payment?

In principle, the SRP is calculated in the normal way: length of service v age multiplier v week’s pay.

For employees who have been laid off or placed on short-time working, however, further consideration needs to be given to certain elements:

• Entitlement to a SRP is assessed as at the ‘relevant date’. For these purposes, the ‘relevant date’ will be the last day of the period of lay off or short-time working.
• A week’s pay is calculated as at the ‘calculation date’. For these purposes, the ‘calculation date’ is the date on which, working backwards from the relevant date, the employer would have had to give notice to comply with statutory minimum notice requirements.
• A ‘week’s pay’ is calculated in the normal way and by reference to an employee’s normal earnings, disregarding the short-time working. It is capped at £700 per week (as of 6 April 2024).

Are there any other payments employees might be entitled to?

Subject to certain conditions employees might be eligible for a statutory guarantee payment (SGP) for up to five “workless days” in a three-month period. This will apply if they have not been provided with work by their employer because of either of the following:

• there is a reduction in the requirements of the employer’s business for work of the kind which the employee is employed to do; or
• there is any other occurrence which affects the normal working of the business in relation to this type of work.

To be eligible the employee must also:

• have one month of continuous employment with the employer;
• reasonably ensure they are available to work;
• not unreasonably refuse any suitable alternative work; and
• not have been laid off due to industrial action.

The SGP is limited to £38 a day (as of 6 April 2024) (subject to a maximum of five days or £190 in any three months). It could be lower than this as there is a calculation required to ascertain the actual rate paid but for most employees they will get the maximum daily rate.

Please note that an employee does not need to be laid off or on short-time working to receive an SGP so if you agree temporary contract changes, without relying on a contractual clause, then they may still be entitled to payment of SGP on request.

If you would like further information or to discuss the topics raised in this article, please contact our Employment team who will be happy to help.