Redundancy provisions can lead to redundancies

06/05/2010

Labour’s bill to force employers to pay redundancy was defeated in parliament.

That is obviously a relief for employers but it’s also better for employees.

If individual businesses and their employees want to negotiate redundancy provisions they are free to do so but it shouldn’t be forced on all employers.

A former Labour MP told me he’d become very wary of redundancy payments after a business in his electorate collapsed.

It had expanded, taken on extra staff then lost some large orders.

Its medium to long term outlook was bright but it was having short term cash flow problems and its credit worthiness was undermined by the redundancy liability on its balance sheet. The requirement to cover redundancies if it failed was what caused it to fail.

I had a similar experience with  a trust I chaired.

Most of our funding was from government contracts, when policy changed contracts reduced and so did our income. It was a not-for profit organisation and for a couple of years we set the budget, knowing we’d have to dip into reserves to cover the deficit.

By the third year reserves had fallen to little more than the amount we’d need for redundancy. We were forced to make everyone redundant, pay out and start again. Most of those who’d been made redundant were re-employed but their contracts were changed and no longer included redundancy provisions.

It’s better to pay workers fairly and let them make their own redundancy provisions than to pay them less in order to provide cover for redundancies which might not happen, or happen because the business has to cover redundancies.


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