Adam Bernstein hosts a monthly look at one of the legislative aspects that most affect your business, how it is run and how it can be more profitable. This month, Dawn Lobley takes a look at changing redundancy law.

A recent decision by the European Court of Justice in the case Junk v Kühnel means that employers now have to reconsider their consultation obligations when making collective redundancies or face the risk of hefty tribunal awards.

Under UK law, employers’ consultation obligations in collective redundancy situations are contained in Section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 - known as TULRCA. Employers must consult appropriate employee representatives when proposing to dismiss, as redundant, 20 or more employees at one establishment within a period of 90 days or less.

Employers are obliged to collectively consult “in good time” which must in any event be for a minimum period of 30 days (where the redundancies will affect more than 20 employees at one establishment) or a minimum period of 90 days for large scale redundancy programmes (affecting 100 or more employees at the same establishment within 90 days).

Prior to the ECJ decision of Junk v Kühnel, the practice commonly adopted by employers was to give employees notice in the early stages of a redundancy programme so that all, or as much as possible, of the collective consultation obligations could be discharged during the notice period.

So where an employer, for example, is closing a business with 40 affected employees, the employer could give notice at the start of the redundancy programme on January 1 to expire at the end of January. The employer could consult with the affected employees during this 30-day period in the knowledge that the consultation would run concurrently with all or part of employees’ notice periods.

However, the case of Junk v Kühnel puts an end to the practice of running consultation obligations concurrently with employees notice periods. Mrs Junk was employed as a care assistant by a German company which fell into financial difficulties in February 2002. Insolvency proceedings were commenced and a liquidator (Mr Kühnel) was appointed in May 2002.

On June 19 2002 the liquidator informed the company’s works council that as a consequence of the company’s closure he intended to terminate all the remaining contracts of employment with 3-months notice. Mrs Junk bought a claim in the German court. Part of her claim was that her employer had failed to discharge its duty to consult with her prior to terminating her contract of employment. The Labour Court of Germany referred two questions to the ECJ for a preliminary ruling:

1. Should “redundancy” be interpreted as meaning the notice of dismissal or the termination of the employment relationship upon expiry of the period of notice?

2. If redundancy refers to the notice of dismissal, does the consultation and notification procedure have to be concluded before notice of dismissal is given?

The UK government submitted observations to the ECJ arguing that “redundancy” must refer to the point at which employment relations come to an end, rather than when notice of potential redundancy is given.

This view reflected the practice generally adopted by employers in the UK. The ECJ did not agree. It ruled that “redundancy” for these purposes means when the employer gives notice of termination as opposed to when employment ceases on expiry of that notice.

Following Junk, an employer can, therefore, no longer be satisfied that they are complying with their consultation obligations by giving notice to terminate an employee’s contract to expire at the end of the 30 or 90 day consultation period. Employers will now need to consider the best approach to take in discharging their collective consultation obligations or risk being found liable for protective awards amounting to up to 90 days’ uncapped pay for each employee.

Using the earlier example, an employer looking to close its business and make 40 employees redundant, will now need to consult for 30 days commencing January 1 before issuing notice at the end of January.

Depending upon individual contractual terms and length of service, the employer then has the option of issuing notice or making a payment in lieu of notice (PILON). Either option has drawbacks. Where there is no contractual right to make a PILON, employers will be in breach of contract by not allowing employees to work their notice period.

This may not be attractive to employers wanting to rely on restrictive covenants or where there is a risk of further claims by employees as a result of the breach.

Employers wanting an expedient process to address business problems in situations where they do not want to make a PILON, will be faced with the inevitable practical and financial burden of having employees working notice periods in circumstances where they may be under extreme financial pressure.

Dawn Lobley is a solicitor in the Human Resources Group of the law firm Eversheds.