Prosecution sends out warning over collective redundancies

Posted on
The first known prosecutions of former directors for failure to notify BIS about collective redundancies sends out a warning to company directors, insolvency practitioners and HR staff alike.

The recent prosecutions of former directors of USC and City Link are important reminders of the statutory requirements to consult with employees – directors of collapsed companies ignore them at their peril.

The prosecutions arose because of the failure to notify the Department for Business Innovation and Skills ("BIS") about the proposed collective redundancies when their businesses failed. Although failure to submit the correct information in time (usually using form HR1) has been a criminal offence for over 20 years, these are the first known prosecutions, and they send out a warning to company directors, insolvency practitioners and HR staff alike.

Where 20 or more employees are proposed to be made redundant 'at one establishment' within a period of 90 days or less, employers are under a legal obligation to:

  • consult with appropriate representatives (i.e. recognised trade unions if there are any, and elected employee representatives if not) about the redundancies (30 or 45 days before the first dismissal takes effect, depending on the number of redundancies), and
  • give the Secretary of State and trade unions/employee representatives notice in writing (again 30 or 45 days before the first dismissal takes effect) with certain information about the proposed dismissals.

It is this second requirement, to notify BIS, that has resulted in the prosecutions. Failure to notify BIS is a criminal offence. Previously the maximum fine on conviction was £5,000, but as of 12 March this year, the fine is now unlimited. Not only that, but directors (or, by extension, insolvency practitioners) can be prosecuted personally as well as a business. If the offence is proved to have been committed with the "consent or connivance of, or to be attributable to neglect on the part of, any director, manager, secretary or any other similar officer…or any person purporting to act in any such capacity" that person can be prosecuted and punished accordingly. This could result in disqualification as a director for up to 15 years.

Failure to comply with the first requirement, to consult properly, can lead to a 'protective award' in the Employment Tribunal of up to 90 days' actual pay per affected employee (there is no statutory cap on such pay). This could be a hefty bill and in most cases is a strong incentive to conduct proper consultation. Of course, if the business is insolvent, it may well be the National Insurance fund that ultimately picks up the bill.

For both requirements, employers can argue in their defence that there are 'special circumstances' meaning it is 'not reasonably practicable' for the employer to comply. However case law shows that this rarely succeeds, and even when it does, it does not absolve the employer of all responsibility to consult.

Why now?

This appears to have been the first time that BIS has brought a criminal prosecution under this part of the collective redundancy legislation (section 194 of the Trade Union and Labour Relations (Consolidation) Act 1992). The reason for it may be an increasing concern that directors in charge of some businesses going into insolvency are prepared to ride roughshod over the rights of employees, the ultimate cost of which is often borne by the state. However, earlier this year the Insolvency Service published a call for evidence on the practical issues surrounding consultation with employees where a business is facing insolvency. The Government has not yet published its Response to the feedback, but it is clear that it wants to take action to ensure that the rules work practically in insolvency situations, and that all parties know what to do. The prosecutions, which also coincide with the removal of the limit on the fine that may be imposed, could be part of a wider initiative to ensure that the rules are workable, and that businesses are forced to comply with them as far as possible.

What do directors, insolvency practitioners and HR staff need to do?

Directors need to know the requirements of collective redundancies, as they will know more about any proposed redundancies or potential insolvency much earlier than anyone else in the business. It is vital that they communicate this information to HR as soon as possible, so that HR staff can start to progress with the necessary formalities ahead of consultation.

Insolvency practitioners need to be alive to the issues, and the fact that failure to comply could result in a further set of legal proceedings, as well as the personal liability that they, or the directors they are advising, may incur (not to mention the impact on employees themselves).

HR staff should ensure that directors and other managers of the business are aware of the legal requirements as a matter of routine, and not just when the company starts to encounter difficulties. Often the collapse or rescue of a business is determined over a short period, with HR staff in the dark and compliance with collective redundancy legislation coming as an afterthought (it is reported that staff at USC were given 15 minutes' notice of redundancy).  

These prosecutions have caused some shockwaves in the HR community. Whilst most HR professionals would be aware of their duty to notify BIS and would comply with it, this might not be the case where the business has collapsed and insolvency professionals brought in. The willingness of the Government to prosecute in such cases, the unlimited fines, as well as the personal liability of directors and the potential sanction of disqualification, should mean that complying with the formalities of the legislation will take on a new significance.