By Daniel Pollard - 19 October 2020
UK employers consulted with staff on nearly half a million redundancies during the pandemic - roughly 1.5% of the working population. The true number will have been much higher as small-scale redundancies are not captured by government statistics. The furlough scheme will have given many employers an opportunity to pause but as the scheme comes to an end, employers face some tough choices.
Over recent months we have seen a huge amount of creativity from our clients in finding ways to minimise redundancies. We share 12 possible strategies adopted by our clients and some thoughts of our own to help reduce cost without compulsory lay-offs.
1. Claim Government Help
This is perhaps an obvious point but with the government reportedly pumping £14bn into the economy each month this must be the first item on the list.
The main “furlough scheme” has now been closed to new entrants and will end on 31 October 2020 but support for employers remains:
Larger businesses only qualify if their turnover is adversely impacted by Covid-19. The scheme is extended to run for 6 months.
2. Cut Pay
A large proportion of our client base have implemented pay cuts in one form or another. In the case of employees placed on furlough, many were asked to agree to a 20% reduction in pay and so 20% has been typical of the reductions in pay that we have seen.
However, with employees working at home and with reduced commuting costs there is scope for almost all employees to accept some reduction without any change in their “take home” pay.
The key issues to consider are:
3. Reduce Benefits
Reducing the level of benefits or removing certain benefits entirely is likely to be far more palatable to the majority of employees than a pay cut. There is some empirical evidence to suggest that employees do not fully value the benefits they receive. We suspect that many will not immediately notice modest adjustments to the level of coverage in place for health insurance and the like.
Often (but not always) contracts contain flexibility to allow employers to reduce the level of coverage or withdraw it entirely and so it is far less likely to require employee consent or any form of quid pro quo.
4. Natural Wastage
As an alternative to redundancies many employers are:
For large companies, who are subject to the changes to the “IR35” rules on intermediaries, which are now due to take effect in April 2021 reducing their contractor population has some additional benefits. Not only does ending these contracts eliminate a compliance burden but the current situation makes it easier to integrate contractors with essential skills into the regular workforce at realistic pay rates. Read more about the changes to IR35 here.
5. Time Off
This is a variation on the theme of “Pay Cuts” but offers a quid pro quo in the form of reduced working time.
The key point here is that these arrangements may be positively valued by certain staff – either those with caring commitments, those wanting to reduce their workload and (if and when travel becomes possible) those who want to take time away. It will be necessary to consider and be clear about the extent to which these arrangements are temporary and which are permanent.
When considering sabbaticals, the main decision to make is if the employment will come to an end (with some form of offer to engage) or if the employment will continue (with a defined return date).
6. Voluntary Exit Package
Ok, we hooked you in on the basis that this article wasn’t about redundancies (i.e. reductions in force). But hear us out!
To our mind, there is a huge difference between compulsory and voluntary redundancies, from a cultural, practical and legal perspective.
Considering some of the concerns:
The biggest attraction though is that redundancy payments of up to £30,000 can usually be free of UK income taxes. That means that it is significantly less expensive to pay a months’ severance than a months’ wages.
Some employers are offering voluntary redundancy also in conjunction with preferential re-employment policies. Provided the redundancy is not a “sham” there are no legal issues with policies that favour former staff but advice should be taken on the detail. These policies have the great advantage for employers of being able to re-hire skilled staff and to employees to quickly reintegrate with the workforce.
7. North Shoring
We are likely to have a renewed interest in moving workplaces to less expensive real estate and/or to less expensive areas of the country. This is usually meant to refer to the great “northern” powerhouse cities of Manchester, Sheffield, Leeds and Liverpool but other options include the South West, Wales, Scotland and Northern Ireland.
The reason that this is so attractive is that office costs in Central London are around £50-60 per square foot with comparable space in Cardiff, Leeds or Newcastle costing closer to £15-20 per square foot. What might not be immediately obvious to a US based CFO is that hidden behind these numbers is the huge differential in residential housing costs between these cities. With families in the UK spending between 18-33% of their income on housing, staff based outside of the most expensive areas of Greater London can achieve the same or better standard of living with substantially reduced salary levels.
As a result of structure problems with labour mobility in the UK, it has historically been hugely expensive for employers to relocate staff and most relocations work on the basis of hiring “locally” with the absolute minimum number of senior/skilled staff to move.
Probably the largest cost associated with relocating staff, is the fact that in the UK a very large proportion of skilled/professional employees own their own homes and will incur a large stamp duty charge on the purchase of a new home. (For our US readers: This is a tax that will be alien to you - it is basically a transaction tax paid by a buyer on the purchase of property).
Employers are only able to reimburse relocation costs of up to £8k on a tax-free basis and have to “gross up” the excess for tax. To illustrate the point, an employee who purchases a house to the value of £500k will have to pay £15k in stamp duty and will (conservatively) incur another £15k or so in moving costs. Reimbursing £30k in moving costs will cost the employer close to £47k once grossed up for tax.
Until 31 March 2021, homes up to £500k benefit from a stamp duty holiday, which reduces the £47k cost in our example to a far more manageable £15k.
If there ever was a time to relocate staff in or around the UK then the time is now.
8. Office Closure / Reduce Office Overhead
Currently it seems that half of our clients are considering reducing their footprint and the other half are taking the opportunity to negotiate with landlords over more space and lease extensions. There are a myriad of issues to consider here for those downsizing:
See our working from home policy checklist for analysis.
9. Create Churn
The legendary Jack Welch, CEO of General Electric, is famed for the practice of “letting go” the bottom performing 10% of its workforce each year. We make no comment on the business case for or the morality of this policy but found the write up in the Harvard Business Review on Jack hugely interesting for those who have time to read it. The reality though is that faced with the current economic pressure, we are seeing clients take a long hard look at the talent in their business to ensure that they have the best team on which to rebuild and/or to take advantage of the many opportunities that the current disruption creates.
Redundancy programs (reductions in force) risk unsettling strong performers, sending the wrong signal to the wider market and potentially requires collective consultation. Instead, a renewed focus on performance and culture allow employers to “manage out” staff and to encourage others to seek opportunities elsewhere.
This can take several forms:
Legally, employers need to state the reason for dismissal and follow the process applicable to each reason. Substantively there is often a very fine line between performance/capability and redundancy as “the reason” for dismissal but the processes applicable to each are radically different. For this reason, it is important to be clear what the driver is. A reside to reduce headcount is likely to point towards redundancy. A desire to improve the performance of the workforce and to remove poor performers is likely to point towards to performance/capability.
10. Defer Pay
The most obvious quid pro quo for accepting a pay cut is some form of understanding the sum forgone will be repaid as some form of bonus when the good times return.
The easiest way to deal with this is a retention bonus or a cash based long-term incentive plan.
These are simple and straightforward to implement. The main issues to consider are:
Whilst cash plans are simple to document they do not allow for any tax efficiency. As an alternative, employers may take to tax favoured or other equity-based incentive arrangements.
Even if none of the tax favoured incentive arrangements are suitable where management participate in equity growth then management can potentially receive capital gains tax treatment rather than income tax treatment. As capital gains are taxed at a marginal rate of 20% compared to 42% or 47% for higher and additional rate taxpayers this results in a substantial efficiency.
11. Pay Less Tax - a company Tesla anyone?
Wow that got your attention!
The notion of a company car was popularised during the 1960s, 70s and 80s a result of the relatively favourable tax treatment of non-cash benefits (perks). In recent years, the Government has penalised drivers of all but the most efficient company cars. As a result, company cars have rather gone out of fashion with most employees who would once have been eligible and are instead opting to take cash.
That has all changed. For the 2020-21 tax year there are no “benefit in kind” tax changes for employees provided with a fully electric company car.
The tax charge will increase to 1% of the new list price from 2021-22 and 2% of the list price for 2022-23. That means an additional rate taxpayer will face an annual tax bill of just £324 and £648 for each of the next two years to drive a £72,000 Tesla S. That might cost an employer £640 a month to provide a benefit that would require an employee to earn £1500 a month to pay for. The same logic applies to far less vehicles.
If that sounds a little too flash then more mundane suggestions include:
12. Reward Flexibility
One of the biggest quid pro quos for many of our clients has been a sense that “we are in this together” and that that employees want to work together to avoid compulsory redundancies. As a result, we have seen a tremendously high and unexpected level of buy in from staff.
This does however beg the question – what can employers do if not everyone is on board?
The lawyers answer would usually be to consult, to terminate on notice and offer re-employment on revised terms.
Another possible approach may be to use “willingness to share the pain” as one of the criteria for selection in any future redundancy program. Whilst there is no caselaw on this subject, the author’s view is that this ought to be fair provided it is clearly communicated at the relevant time, each individual case is considered on its merits and appropriate consultation has taken place.
We would love to hear from clients and contacts with any other ideas, suggestions or comments on this article.
Please get in touch with your usual GQ|Littler contact or Daniel Pollard to share your thoughts.