Protecting your enhanced severance scheme

Some employers pay only the statutory minimum entitlement on a redundancy dismissal, but others recognise that redundancy is a no-fault reason for termination and try to do something to sweeten an otherwise bitter pill. Maybe this is no more than paying in lieu of notice without deduction of tax (for so long as this remains possible – see our post on revisions to the severance pay tax regime and maybe it is some wholly gratuitous additional compensation.

If it is the latter, beware the risk that repeated use of the same enhancement formula may lead to employee arguments that it has become a custom and practice entitlement, i.e. theirs as of right and no longer a matter for the employer’s discretion. This is much easier for the employee to allege than to prove (see our analysis of the current leading case on the point). Nonetheless, there are some basic steps which your company can take to reduce this risk even further:

  1. Make all enhanced redundancy payments conditional on the completion of a settlement agreement. That way the settlement agreement becomes part of the custom and practice argument also, so if the employee insists on the money, the employer is entitled to the waiver of further claims in the settlement agreement in return.
  2. Vary the payments from time to time, ideally to a level below your norm, since a sum above it still allows the employee to claim that he should get it. This does involve treating some people less favourably than others. However, on the assumption that you do not choose them on the grounds of some Equality Act protected characteristic, there is very little they can do about it. Do be aware that your chosen victims will of course be tremendously brassed off about this, and therefore more tempted than most to have a crack at you in the Employment Tribunal. Ideally, therefore, you should pick those whose redundancy selection and process is most beyond reproach.
  3. It may be that you do actively want to maintain consistency of severance payments, perhaps to reassure those who remain as much as to cushion those asked to leave. In those circumstances the application of the formula used in the past should be expressly re-approved by the company’s senior management each time. This is true whether the redundancy is an individual or a collective exercise. Are there any reasons which might justify departing from that standard formula? If so, what are they? Is the Company doing more or less well than when the formula was last used? What is current market practice? Is the individual particularly deserving (or the contrary) based on his past service? Does he have any parallel claims which might justify a greater sum on a nuisance value basis, or is it a particularly obvious case where he could make no possible legal challenge? Are there any employment relations considerations which suggest a variation? Has the individual turned down what you think is a suitable alternative role and so brought his redundancy upon himself? A careful written consideration of these factors (but NB paragraph 5 below) leading to what is to all intents and purposes a fresh decision to use the usual formula should avoid any suggestion that the enhancement is thought of as automatic.
  4. An obvious point, but still sometimes overlooked – make sure that all written and oral references to the enhanced figure are expressly without prejudice and clearly stated to be both discretionary and conditional on a suitable settlement agreement. If you do have to commit the formula to paper as part of a policy or collective bargaining agreement then, as above, ensure that any relevant terms and conditions are right there with it. These could include the completion of a settlement agreement, the non-refusal of any suitable alternative vacancy, a tax indemnity and the employee not resigning or being dismissed on conduct grounds before the redundancy process finishes.
  5. But in all of this, please do remember that the records which you so carefully create to show your consideration of the relevant factors will be disclosable if the employee sues – so therefore you should avoid anything in them to the effect that you are proposing to pay X a little more because you think he might have other claims he could win, or that you are offering Y less because he made a lot of fuss about something irritating which could later turn out to be discrimination or whistle-blowing.