balanced costs

The True Costs of Redundancy

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.

Redundancy is, sadly, a business norm in these days.  Many people have faced redundancy one or more times in their working lives and it is always damaging for them.  But it is often very damaging for their employer as well.  It is really expensive and rarely brings the desired cost savings.

The benefits for business

The immediate benefits for any employer are obvious.  Salaries no longer have to be paid to those people.  You don’t have any employment costs such as tax and national insurance for them. You save on their pension costs.

There might also be a saving on management costs.  If there are fewer people to manage, then you might be able to reduce your management team.  You might find that managers need to spend less time managing the people who are left (although this is debateable).

Some employers think that redundancy is a painless way to dismiss someone who might be “difficult”.  Maybe someone is not performing very well. Or an employee might have a huge amount of time off sick.  You may even have a disruptive employee, or someone whose attitude is not what you would like.   Redundancy can seem an easy way to part company.

But this is not what redundancy is for and there are strict legal constraints which might prevent you parting with the “right” person.

So what are the true costs of redundancy?

There are some very obvious costs of making someone redundant.  For example, if they have over two years of service you have to pay Statutory Redundancy Pay of up to 30 weeks of pay, depending on their age and length of service.  And there may be some enhanced redundancy payment if there is such a clause in their contract of employment.

Of course you also have to continue to pay them whilst the consultation is ongoing and during their notice period.  Or you might pay them in lieu of notice pay if you want them to leave sooner.

If they have accrued any holiday entitlement and not used it, then you have to either give them that time off before they leave (on full pay) or pay them in lieu of their unused holiday pay.

There are other small costs, such as allowing them reasonable time off to seek alternative employment, which has to be on full pay.

The Hidden Costs

Then there are many hidden costs as well.  This may be where you find that the true costs of redundancy start to mount up.

Things like your own and your managers’ time to prepare for redundancy come under this heading.  And your time to do any scoring which is needed for selection.  Then there is the time needed for consultation and to plan the remaining workload.  The managers who are doing this work are likely to be amongst your highest paid people. They will not be productive on other things whilst they are involved in a redundancy process.

In addition, there is the time that your payroll staff will take to do all of the redundancy and other payment calculations, and to make the payments.  Again, while they are doing this, they are not working on more productive things for your business.

If you recognise Trade Unions, then your TU representatives will not be doing much other work during this time.  If you don’t recognise Trade Unions, and you are planning more than 20 redundancies, then you will have to appoint employee representatives so that you can do collective consultation.  And, 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 on other things.

There are many other small things – time to write references, time to answer questions, time to consider suggestions.  A redundancy process leads to a huge loss in productivity, however well it is managed and handled. And productivity levels take time to build up again to pre-redundancy levels.

Potential Extra Costs

There are also many more potential costs in a well-managed redundancy programme.

If you want to get people out of the work place before their notice period ends, then you may need to pay garden leave.  This might be the case if the reason for the redundancy is a lack of work.

Some companies provide outplacement services for their redundant employees, to help them to find alternative work or to do some training for a career change.  This, of course, has a cost attached to it.

You may want to provide counselling services to help your employees and their families come to terms with their redundancy.  Or you may want to provide financial advice to help them manage their redundancy pay, pensions, etc.

Counselling may not be enough to prevent some sickness absence, where individuals have anxiety, depression or other stress related illnesses due to pending redundancy.  So your sick pay bill might well go up during this time.  And this may not just affect those facing redundancy, but their colleagues who remain in the workplace after they leave.

On the subject of those who are left behind, you may well need to provide some training in unfamiliar skills for people who have had to move into different jobs or pick up unfamiliar work.

Before considering redundancies, you are likely to have had to end any contractors or agency temporary staff. This may involve payment of some fees to employment agencies.

And then, of course, you may face legal challenges and end up having to pay costs to defend any such challenge, or a settlement agreement to prevent a court case.  Not to mention staff time to work on such cases, and potential legal advice.

Delayed  Costs of Redundancy

When you are calculating the true costs of redundancy, there are some costs later down the line which will crop up as a result of your redundancy programme.  These must be included in the overall cost of redundancy, as they  only arise as a direct result.

This includes things like future recruitment costs if there is an upturn.  You may end up trying to recruit the very skills you let go during your redundancy programme.  You might have to then pay to train people up into these roles, because you have lost your investment in your redundant employees.

Depending on how well your redundancy programme was handled, you may find that your company reputation has suffered and that you find it harder to recruit in future as you have a bad name as an employer.

The disruption during the redundancy programme will have an incalculable effect on cost and you will definitely have to spend time and money to support your remaining employees (survivors).   They will have lost productivity and will need time to settle.  You may even find you face some resignations as people search for potentially more stable employment.

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

In Conclusion…

I am not saying that you should not embark on redundancies, if that is what your business needs to to, but I am suggesting that you should look very carefully at the true costs of redundancy and how long it will take your business to recover from such a move.  It is worth giving serious consideration to alternatives to making people redundant as a cost-cutting exercise.   It rarely cuts costs!

If you think this article is useful and you would like more advice on dealing with this  – or any other people-related issue in your business – please join our mailing list, or contact us for further guidance.

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