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Making redundancies, debt recovery worries

Failure To Offer Furlough Before Making Someone Redundant Could Be Unfair Dismissal13th Aug 2021

by Hugh Reid on 13th Aug 2021

Contact Hugh Reid

Updated: 13 August 2021

Redundancies More Likely As Companies Struggle To Repay Loans

More than 350,000 UK small businesses can’t repay the government loans they used to help them survive the worst of the Covid-19 pandemic, a new study warns.

Worsening cash flow and shocks to supply chains are making redundancies ever more likely, says the YouGov poll:

  • 18% of companies polled plan to make redundancies
  • 16% can’t afford to pay their existing staff due to the impact of loan repayments.

Companies that fail to offer furlough before making staff redundant are risking unfair dismissal claims.

Need To Make Redundancies?
Talk To An Employment Solicitor First

Impact Of Covid-19 Furlough On Unfair Dismissal Claims

In one recent case (Mhindurwa v Lovingangels Care Ltd), an employment judge held that employers have a duty to actively consider furlough when making someone redundant.

And – unless you have a reasonable explanation for not furloughing the employee – the redundancy dismissal is unfair.

In the Mhindurwa v Lovingangels Care case, the claimant was a care assistant. She had just over two years’ employment at the time of her dismissal.

She had been employed to provide live-in care for an elderly woman who, in February 2020, moved into a care home. This made the claimant’s role redundant.

In May 2020, the claimant asked to be furloughed. But her employer refused, saying there was no work for her, and made her redundant in July 2020.

Employment Judge Gumbiti-Zimuto said the dismissal was unfair: “I am of the view that in July 2020, a reasonable employer would have given consideration to whether the claimant should be furloughed to avoid being dismissed on the grounds of redundancy.”

And here’s an interesting detail…

Furloughing The Employee Would Have Been Legally Impossible – But She Still Won Her Case!

Chancellor Rishi Sunak extended the furlough scheme in an announcement on 29 May 2020.

Under that extension, the old scheme was closed to new entrants on 30 June 2020. At that time, employers had until 10 June 2020 to register employees for furlough under the new scheme.

But the claimant in the case highlighted above wasn’t made redundant until July 2020. So at that time, it would have been legally impossible for the employer to furlough her as an alternative to dismissal!

However, the rules have now changed so the judge’s approach remains valid.

And this case is likely to get quoted at future tribunals – so beware! We expect to see many more cases like this when the furlough scheme ends in September.


Update, 13 August 2021: In another case following the Mhindurwa v Lovingangels Care Ltd decision, an employment tribunal said that making an employee redundant – even though a furlough scheme existed – was not unfair.

In that case, Handley v Tatenhill Aviation Ltd, the tribunal said the employee was not have been unfairly dismissed because his employer decided to make him redundant – even though the company could have furloughed him for longer. (Though the employee was unfairly dismissed for another reason.)

Handley v Tatenhill Aviation Ltd: "Furlough...Does Not Render The Dismissal Unfair"

In the Handley v Tatenhill Aviation Ltd case, the claimant was a flying instructor. On 15 March 2020 he developed Covid-19 symptoms. He stayed at home self-isolating for two weeks.

On 7 April 2020, the claimant was told the flying school – part of a larger aviation business – was closing due to the pandemic. He would be placed on furlough. But then on 22 May 2020, the claimant was told he would be made redundant on 10 August 2020.

The claimant appealed, saying:

  • it was not a genuine redundancy situation
  • he had been assured during furlough that he would be able to return to work as normal
  • there were deficiencies in the redundancy process, that it was not transparent.

But the employer rejected his appeal.

Here's what the tribunal said: "It is for an employer, not the Employment Tribunal, to decide how to structure its business and whether to make redundancies.

"I accept the respondent’s evidence that it needed to cut costs irrespective of the furlough scheme, and that it wanted to use the furlough scheme to pay some of the costs of making the redundancy.

"The nation was in unprecedented uncertainty at the relevant time, and it is not for me to step into the shoes of the employer and substitute my view for that taken by the employer at the time.

"The decision to dismiss the claimant notwithstanding the existence of the furlough scheme does not, in my view, render the dismissal unfair."

The tribunal ruled that Mr Handley's dismissal was unfair procedurally (not because of furlough). For the record, the claimant did not receive any compensation. He had already received a statutory redundancy payment.

What These Two Cases Tell Us, How Employers Should Proceed

Where do these two judgments leave employers? What should they do when faced with two different rulings in a matter of days?

The lessons here are clear (even if the future is not):

  • Case law on this matter is still very much in a state of flux. That is to be expected given the huge uncertainties created by the pandemic. So don't expect immediate clarity anytime soon...expect more cases with differing decisions.
  • Always get your paperwork right. In Handley v Tatenhill Aviation Ltd, the dismissal was procedurally unfair (not as a result of the redundancy/furlough question).
  • We strongly recommend that you take legal advice before making employees redundant because case law is changing so quickly.  

Making Employees Redundant 

Under the Employment Rights Act 1996, you can make an employee redundant if the dismissal is wholly or mainly attributable to one or more of these four reasons:

  • the employer ceases to carry on the business in which the employee was employed
  • the employer ceases to carry on that business in the place where the employee was employed
  • the needs of the business for the employees to carry out work of a particular kind ceases or diminishes
  • the needs of the business for the employees to carry out work of a particular kind in the place where the employee was employed ceases or diminishes.

These definitions will help to determine:

  • whether or not a dismissal is fair
  • whether or not the employee is entitled to a redundancy payment.

As an employer, you must always follow the proper procedures when making employees redundant. Get it wrong and you could face claims for unfair dismissal.

We always advise employers to go down the settlement agreement route. This costs a bit more money – but it can save a great deal in legal costs should you need to defend any claims.

Are You Owed Money By Companies That Can’t Repay Their Loans?

Our Debt Recovery Manager Eric Holt helps companies facing a hole in their finances because their debtors can’t or won’t pay up.

Is the phased withdrawal of furlough support having an impact yet?

Eric said: “We act for a vast range of clients’ businesses – large and small. Very few of them have mentioned having seen an impact at this time. However, I’ve also spoken with a number of insolvency practitioners who we also work alongside…and they all seem to believe that a bubble is very close to bursting.

“Common sense suggests that the number of companies in financial difficulties is likely to increase after September. We’re already seeing an increase in residential tenancy evictions.”

It’s vital to act early – before your debtor’s financial position worsens and they have even less chance of paying you what you’re owed.

Act quickly and decisively…but not hastily. Otherwise you risk throwing good money after bad if the debtor has no property, no other high value assets or has only limited savings.

Importantly, don’t take your eye off the ball. Don’t let recovering your existing debts distract you from securing good business going forward with other (more reliable) customers.

Never forget that prevention is better than cure: get as much information as you can about companies before you trade with them. Fail to do so and you risk yet more bad debts.

Get Expert Legal Advice

Is your business being impacted by the impending end of furlough? Will you need to make redundancies? Contact Employment Law Solicitor Hugh Reid at our Poole office.

Is your company struggling with cash flow issues because you’re owed money? Need expert help with recovering debts? Contact Debt Recovery Manager Eric Holt at our Fleetsbridge office.

This document is not intended to constitute and should not be used as a substitute for legal advice on any specific matter. No liability for the accuracy of the content of this document, or the consequences of relying on it, is assumed by the author. If you seek further information, please contact Managing Partner Neil Andrews at Coles Miller Solicitors LLP.