According to press reports this weekend, the Chief Executive of Sports Direct is the latest (and most high-profile) executive to be hit by court proceedings concerning alleged failure to comply with redundancy notification procedures - in his case in his former position at fashion retailer, USC.

As these and other reports confirm, there is clear evidence that the Government is increasingly proactive in pursuing organisations and their senior personnel who fail to file the requisite redundancy notification form (HR1) on time, even where the business falls insolvent and administrators or receivers are appointed last minute.  It would also appear that there is very little scope, if any, to claim special circumstances, even in such a scenario.

Directors of businesses finding themselves in financial difficulties, including those who manage to secure new posts elsewhere, could find the spectre of such claims re-emerges months later if they are not vigilant.

A breach of statutory requirements

It is a statutory requirement that, in addition to obligations to inform and consult with affected staff over redundancies, where a sufficient number of employees are affected, employers also notify the Secretary of State. This obligation arises where 20 or more redundancies are proposed at any establishment within a 90 day period. It involves submission of a standard form, HR1, the timing of which varies according to the number of redundancies so that, where 20-99 redundancies are proposed, at least 30 days must elapse between form submission and the first dismissal or, for larger-scale redundancies involving potentially 100 or more employees, a period of 45 days applies.

Failure to comply with these requirements is a criminal offence, attracting potential penalty of unlimited fine. The extent of financial penalty is a cause for concern in itself but the prospect of a criminal conviction and record is likely to be just as significant, given the consequential practical and legal implications for directors.

A trap for the unwary

In a well-planned and anticipated redundancy exercise, compliance with this particular notification requirement will form an integral part of an organisation’s planning strategy.  However, where redundancies arise in the context of financial difficulties and, in particular, insolvency proceedings, directors can face a very different scenario. What if an investor, creditor or prospective purchaser of a struggling business pulls the plug unexpectedly, causing inevitable staff reductions, if not business collapse? What if a pre-packaged administration sale of parts of the business and certain assets (a “pre-pack”) will generate the best return for creditors but this precludes widespread notice being given to third parties until a deal is completed, in order to preserve “going concern value in the business?

Legally, neither scenario affects the statutory obligation to submit the HR1 form or the required timeframe. Directors –or even insolvency practitioners who are appointed (whether to effect business sale or closure) –can find themselves unable to meet the stringent requirements or to postpone consequential dismissals.

Recent events suggest that directors and any appointed insolvency practitioners can now expect to receive letters from BIS, calling them to interview, as something of a matter of course and significant change in government approach. What is more, since the offence is of a criminal nature, any such interview will necessarily be conducted under caution, whilst BIS seeks to investigate the failure to file an HR1 in time. BIS are particularly interested to know about the events in the days running up to the redundancies and why a form HR1 was not filed sooner Furthermore, government approach appears to be one of strict liability, leaving limited scope for justification.

This is not the first occasion on which BIS has tried to set a precedent of robust enforcement but, in response, directors should be on their guard –particularly those in distressed businesses.

Issues to bear in mind…

Inevitably, each situation in which the statutory requirements are not met will vary and warrant particular scrutiny on the facts. However, the hardened approach by BIS does suggest businesses should be acting earlier and in a more anticipatory manner, wherever possible.

Specifically, directors should be aware of the risks and the potential for individual liability should be on everyone’s agenda. Directors should:

  • Consider whether to file a form HR1 earlier. It is acknowledged that in most cases involving a “pre-pack”, for example, giving early notice will be impractical but the risk of BIS investigation should always be noted;
  • Keep a careful record of the reasons for deferring the filing of form HR1: such records should show that the position remains under constant review and how the decision to defer will benefit other stakeholders (including, ideally, employees);
  • Be demonstrably proactive at the earliest opportunity, even if a technical breach is unavoidable.