Can the construction industry afford to make redundancies?

The last 18 months have been a considerable challenge for the construction industry, with restrictions leading to reduced productivity, delays and fewer projects. As a result, main and subcontractors have had to make a number of difficult decisions, as Kate Onions, a partner in the construction team, and Nicola Holton, legal director in the restructuring and insolvency team, at law firm Shakespeare Martineau, point out.

As the furlough scheme tapers off, further difficult decisions may need to be made. One of those decisions may be to consider making redundancies to reduce overhead costs. However, careful consideration should be given to embarking on redundancies, as there is a range of associated costs which could potentially place companies under even more financial strain.

If redundancies are unavoidable, businesses need to ensure they consider any additional unexpected costs, such as redundancy pay, holiday entitlement and the legal requirements of large-scale dismissals before they begin the process.

Depending on the circumstances and scale of the redundancies, for example, whether it is one employee or a considerable number of people, the costs of the process will vary. How many redundancies are to take place is a key consideration, as companies will want to avoid being left with a skeleton workforce. There’s also the threshold of 20 people to bear in mind, as once this is hit, collective redundancy consultation obligations will be triggered, and trade unions will become involved if the organisation recognises them. If there is no union recognition, employee representatives will need to be appointed for consultation purposes. Failing to comply with these obligations can attract expensive penalties imposed by an employment tribunal.

Statutory redundancy pay is the first cost for construction companies to consider. Available only to employees who have been working at the business for at least two years, this will total around a week’s pay (depending on age) for each full year worked. If an organisation operates an enhanced or ‘contractual’ redundancy pay scheme, where extra payments are written into the employees’ contracts, the terms of such a scheme would need to be checked as they may apply to all employees irrespective of length of service. Such schemes can significantly increase overall costs for the company, particularly if there are multiple employees entitled to them. Subject to the terms of the particular scheme, enhanced redundancy pay can also carry over from previous jobs (i.e. earlier roles), so employers must ensure that they are aware of each employee’s circumstances.

Notice periods, notice pay and pay in lieu are further elements that should be kept in mind. In general, the more senior a worker is, the longer their notice period, with the maximum statutory notice limit set at 12 weeks (although this can be longer if contractually agreed between the parties). As a result, even if a company goes ahead with the redundancy process, it often won’t see the cost savings until some months later. There is the option to skip the notice period, if there is a contractual right to do so, however the employee will still need to be paid in lieu, which could lead to a large initial payout. Failing to do so would give rise to wrongful dismissal and breach of contract claims.

The redundancy process’ impact on time and productivity is another key consideration. It can often be an incredibly time consuming for everyone involved, as sit-down meetings will be required with every individual undergoing the process. With many projects already on the back foot due to materials and labour shortages, as well as delays caused by Covid, it could prove difficult to allocate the management time required to speak to each worker, particularly if multiple redundancies are being made. Now more than ever, all hands on deck are needed to ensure projects are completed on schedule.

Employees often feel less motivated when a company is going through this type of restructure. For an industry that relies on work being done efficiently, this could lead to a noticeable drop in productivity, and potentially unhappy clients. Word of mouth and reputation in the marketplace is vital for construction companies, so this is a risk that must not be glossed over. Such processes can also have an adverse effect on staff morale, with ‘survivor syndrome’ potentially affecting staff not selected for redundancy for months to come.

Aside from cost and time impacts, there are also legal ramifications to think about. Seeking legal advice can help to ensure a fair redundancy process is carried out. However, that does not remove the possibility of unfair dismissal claims. Opting for an enhanced redundancy agreement can prevent potential claims in exchange for better redundancy terms, provided this leads to employees signing settlement agreements to waive their rights to bring any claims.

Construction companies should remember that redundancies are not their only choice when it comes to improving cash flow. Employers might first want to consider whether there are any self-employed contractors whose contracts can be terminated without the risk of an unfair dismissal claim. Although not technically a redundancy, with no obligation to pay a statutory redundancy payment, it does of course still involve dismissing a person from their role.

Cutting costs in other areas, such as benefits or medical insurance, can be a less severe alternative. Nevertheless, these can also have an impact on the morale of the workforce, so must be carefully considered. Exploring alternative options such as lay off, a temporary reduction in pay or hours, or job shares are typically issues to be explored when demonstrating that redundancies are reasonable in the circumstances. Consulting employees before making any drastic changes could help to retain their trust.

Reviewing balance sheets can also help employers to identify any costs or overheads that might be reduced, such as unused company vehicles or office rent. Particularly for the construction industry where most work is carried out off-site, reviewing contract terms for office spaces can be a potentially simple way to lower overheads. This could involve renegotiating rent, downsizing or getting rid of a physical workspace altogether, with the pandemic demonstrating that most office workers can effectively work remotely.

Should the business’ financial situation be more unstable, a comprehensive refinancing project could be required. By reviewing the interest rates of any business overdraft facilities or exploring invoice financing, more cash can be freed up. Reviewing company assets, for example, machinery or stock, to see if they could be used to raise capital, could be another way to ease the financial pressure.

Redundancy can feel like the only choice for businesses under financial strain. However, the range of costs associated with the process, and any alternative options, must be considered before going ahead. Redundancies are never easy, so gaining legal guidance before starting the process can help construction companies to assess the route that’s best for them.