Redundancy: A step-by-step guide

As the downturn continues to cut a swathe through the Australian business community, more and more entrepreneurs and managers are facing up to one of the toughest questions of all – is it time to make some staff members redundant? 

 

It can be a difficult and heart-breaking decision, particularly in smaller companies where a business owner may be close to their tight-knit team. However, businesses that fail to respond to changing conditions and cut labour costs will put themselves at risk of failure.

 

But the process has to be more than a random cull – employees must know at the end of it that they have not just drawn the short-straw.

 

To help ensure you go about redundancy in a strategic, ethical and legally responsible way, SmartCompany has talked to a range of experts and prepared a step-by-step guide.

 

How do I know it is the right time to cut?

 

Matthew Field, director of the enterprise advisers division at accounting firm PKF, says there are some obvious indicators that it is time to look at your staffing levels – and some more subtle signs.

 

Financial measurements are the key things to examine, including cashflow, debt levels and particularly overheads.

 

“Your accounts and financials will tell a story. Your KPIs will sing out when its time to act,” says Field. “When you find your overheads are spiralling out of control, it’s time to look at changing the size of your business.”

 

Some less obvious signs will be your banker taking a more active interest in your affairs (they’re scared you’re in danger of going under, leaving them with another bad debt) or staff jumping ship (they’re also scared you are going under and are moving to safer jobs).  

 

Finally, you might get the sense that a certain staff member simply doesn’t have enough work to do anymore. But Field cautions against being hasty based on a hunch.

 

“You always need to keep in mind that there can be seasonal reasons the good times will return. You don’t want to cut your nose off to spite your face.”

 

But when you do decide to act, move swiftly and decisively. As Field points out, this is not the time to try and nurse a loss-making division or product line along.

 

How do I decide who should go?

 

Field is advising clients to look hard at their business, and decide which products, services or business divisions are working and which are not. If you’ve decided to cut a business division or close an office in a particular location, it will be pretty obvious which staff to cut.

 

If the redundancy candidates are not as obvious, you will need to figure out which roles are most important in keeping cash coming in the door. Most firms will cut non-revenue generating staff first, and usually being with redundancies in the administration department.

 

But be very careful about making customer-facing positions such as sales or customer service roles redundant. Cut these jobs and your sales will fall, which will only add to the problem. 

 

What are my legal obligations?

 

Peter Vitale, workplace law expert and principal at CCI Victoria Legal, says the keys to meeting your legal responsibilities are proper preparation and documentation.

 

And while businesses with less than 100 employees are exempt from unfair dismissal (at least until the Rudd Government’s Fair Work regime comes into force in July) Vitale says it is important things are handled properly.

 

“It’s still important for your reputation in the market place and your reputation with your other employees to treat people with dignity and respect.”

 

To remain exempt from unfair dismissal actions, SMEs need to prove they have “genuine operational reasons” to make someone redundant.   

 

“Employers need to demonstrate that economically or structurally they no longer have a need for certain positions or a certain number of employees. You need to prove you’re not manufacturing a redundancy situation to deal with disciplinary reasons or to cover up some other discriminatory behaviour,” Vitale says.

 

Common operational reasons for a redundancy may include the closure of an office or division, the restructuring of a division or financial problems.

 

Vitale says companies have become lax about documenting these reasons in recent years because of the unfair dismissal provisions.

 

But he advises managers to put the work in by preparing documentation to back up your claims, including financial reports where necessary. Vitale even suggests writing reports on the strengths and weaknesses of individual employees.

 

There’s a very good reason for doing this work – just because you’re exempt from unfair dismissal doesn’t mean an employee that has been made redundant can still bring a claim of unlawful termination if they believe they have been discriminated against for reasons such as disability, race or gender.

 

In these cases, the burden of proof lies with the employer. This makes unlawful dismissal cases very hard to win without the right documentation and evidence.

 

Employers also need to remember their obligations under workplace agreements. These may include an obligation to call for voluntary redundancies first, an obligation to try and redeploy redundant workers, and an obligation to consult with the union about major staffing changes.

 

Severance pay and notice periods

 

Two other things you must have before you step into discussions with the employee in question is information about their severance pay and notice period.

 

Severance pay conditions are often set out in an employee’s contract or workplace agreement. If so, make sure you meet those obligations.

 

The federal award also sets out minimum severance payment standards. The sliding scale provides four weeks pay for employees who have been with a company for one to two years, right up to 16 weeks pay for employees who have been with a company for 10 or more years.

 

Notice periods are more problematic. Again, you’ll need to check your employee’s contract or agreement for any obligations you must meet. The federal award provides another sliding scale, from one week of notice for those staff who have been working for less than one year through to four weeks for staff who have served for more than five years.

 

But regardless of the notice period an employee is entitled to, you need to make a decision about how long you want them to hang around for.

 

As harsh as it might sound, some staff – particularly those with access to key customer data or other crucial records – will need to be escorted from the building immediately, to ensure those assets are protected.

 

In other cases, it might be appropriate to give the employee a day or a few weeks notice to allow them to say their goodbyes.  

 

Simon Davie, director of outplacement firm Sliding Doors, says two weeks notice is common, as it allows enough time for a thorough handover.

 

But remember, even if you want the staff member to leave immediately, you will still need to pay their salary for the full notice period to which they are entitled.

 

Preparing your script

 

This is not going to be an easy conversation, and Davie says it is essential to prepare a script.

 

There are three key elements to concentrate on:

•-         Why the redundancy is happening: Explain briefly why the role is being made redundant, using the information you have gathered in analysing the business and coming to the decision.

•-         What are the consequences for the staff member. Explain the details of their severance package, their notice period and any other formalities.

•-         Immediate next steps. Explain what is going to happen directly after your conversation. Will an outplacement consultant come and talk to them? Will they be escorted from the building? Should they take the rest of the day off?

 

The dreaded conversation

 

Now comes the really hard bit. Obviously managers need to take a professional, respectful and compassionate stance – this is likely to be one of the more traumatic moments of the staff member’s life.

 

Davie says it is important to watch your language. Keep things as impersonal as possible. Rather than saying “you’ve been made redundant” say “your role has been made redundant”.  That might sound like semantics, but Davies argues that it helps emphasise the fact this is a business decision, not a personal one. 

 

“It is important that they see that the process has been very thorough and has been done for business or financial reasons.”

 

His other tip is to keep the meeting relatively brief. “There can be a tendency for these sort of things to become long meetings, as people feel they need to give a lot of information. Keep it simple and stick to your script.”

 

Do I need to provide outplacement services?

 

Offering a sacked staff member the use of outplacement services can have a number of benefits, aside from the obvious assistance it will provide to the staff member. Your remaining staff, customers and suppliers will see you as a considerate and respectful employer, and it might also help ease any guilt you might be feeling.

 

But it does cost money. Davie says outplacement services start at around $1000 per staff member and can go as high as $10,000 for senior executives, depending on the time involved (some companies limit the outplacement service to a three-month period) and the level of service.

 

What do I tell my other staff?

 

The question of how to address remaining staff is a vexed one. While you clearly need to tell staff something, deciding how much information to release is not easy. Do you explain each redundancy in detail? Do you just make some general comments about the state of the business? How do you maintain morale after such as difficult event?

 

Davie suggests gathering staff together shortly after the departing employees have been talked to – the longer you leave it, the more rumour and speculation will spread through the organisation.

 

He suggests using a similar script to that used in the discussion with the redundant staff member, outlining the reasons for the redundancies and highlighting that the company has acted for business reasons, not personal ones.  It is also important to reassure remaining staff members by explaining that the departing staff member had been properly looked after.

 

“Having those conversations with staff as early as possible really helps in the long term. Sometimes the people who are still around are the most affected. They’ve lost friends or they’ve been given more work – we even see some ‘survivor guilt’ creep in.”

 

After the dust settles

 

Entrepreneurs should be prepared for a few awkward moments over the weeks following redundancies, particularly if the staff member in question is serving out a notice period. But however you are feeling, hiding away in your office until the departing employee has left sends a terrible message.

 

“I still think the involvement from the leader is important to show again that the person hasn’t been ostracised and this is a business decision, not a personal one,” Davie says.