Need to Make an Employee Redundant? What Small Business Owners Must Know

Deciding to make an employee redundant is one of the hardest calls a small business owner can face. Cash flow pressure, a lost contract, a restructure, or technology changes can all force quick decisions. The legal risk usually starts when the process is rushed. Common mistakes include treating redundancy like a performance issue, choosing the person first and inventing the business reason later, or skipping consultation because the business is under pressure.

If you need to make an employee redundant in the UK, the detail matters. A genuine redundancy situation does not remove the need for a fair process. You still need to define the role change, identify the selection pool, consult properly, look at suitable alternative work, and calculate notice and redundancy pay correctly. This guide explains what small business owners should check before they act, where founders often get caught, and how to reduce the risk of unfair dismissal and wrongful dismissal claims.

Overview

A redundancy can be lawful if the business reason is genuine and the process is fair. For most SMEs, the main legal pressure points are whether there is a real redundancy situation, whether consultation was meaningful, and whether the employee was selected using fair criteria.

• Confirm the business reason fits redundancy, such as workplace closure, reduced need for employees to do particular work, or a reorganisation that genuinely changes roles.
• Identify the right pool for selection rather than assuming one person must go.
• Use objective selection criteria and keep written records of scoring and decision making.
• Consult with affected staff before you make the final decision.
• Check for suitable alternative roles, even if they are lower paid, part time, or involve retraining.
• Calculate notice, accrued holiday, and statutory redundancy pay where the employee qualifies.
• Take extra care where maternity, family leave, disability, part time status, or whistleblowing issues could make the dismissal discriminatory or automatically unfair.
• Do not rely on a settlement conversation alone to fix a weak redundancy process.

When UK Businesses Use NDAs

The real issue here is not an NDA, it is whether redundancy is the correct legal route for the business change you are making. Small businesses usually use redundancy when they no longer need as many employees doing a particular kind of work, when they are closing a site, or when they are reorganising roles in a way that genuinely reduces headcount or changes job requirements.

Redundancy is about the job, not the person. If the problem is misconduct, capability, poor performance, or a personality clash, redundancy is usually the wrong process. This is where founders often get caught, especially where a business owner wants to remove one employee quickly and uses “restructure” as shorthand.

What counts as a genuine redundancy?

Under UK law, redundancy typically arises where:

• the business closes altogether
• the business closes the workplace where the employee works
• the need for employees to carry out work of a particular kind has ceased or reduced

That third category is where many SMEs operate. You may have lost a major client, automated part of the role, merged teams, or decided not to replace work that has dried up. A genuine reorganisation can amount to redundancy, but only if the role requirement has actually changed.

Founder examples

A café group loses a corporate catering contract and no longer needs two kitchen prep roles. A digital agency combines account management and project coordination into one senior role after revenue falls. A retailer closes one location and moves stock online, reducing in store staffing needs.

Those situations may support redundancy. Compare that with a business owner who wants to dismiss one employee because deadlines are missed, but labels the decision a “restructure”. That is likely to create legal risk if the role still exists and the real concern is performance.

When redundancy is not the best fit

Before you sign a letter or announce changes to the team, check whether another process is more appropriate. The main alternatives may include:

• performance management, where the role is still needed but the employee is underperforming
• disciplinary action, where there is alleged misconduct
• agreed variation to hours, pay, or duties, where the employee may accept changes voluntarily
• temporary lay off or short time working, but only if the employment contract allows it or the employee agrees

Choosing the wrong label can make the dismissal easier to challenge. Employment Tribunal claims often turn on what was really happening in the business, not what the letter was called.

Legal Issues To Check Before You Sign

If you are planning to make an employee redundant, fairness depends on both the reason and the process. Even where the business case is strong, skipping consultation or using weak selection criteria can undo the decision.

1. Is there a real business reason?

Write down the commercial reason before you speak to the employee. Keep it specific. A vague statement like “the business is changing” is not enough.

Your records should explain matters such as:

• what has changed in the business
• which work has reduced or disappeared
• why the role is affected
• whether the role will still exist afterwards, and if so, in what form

This helps you stay consistent during consultation and reduces the risk of shifting explanations later.

2. Who is in the selection pool?

The pool is often one of the most disputed parts of a redundancy. You need to ask which employees do the same or similar work, or could reasonably be considered for the remaining work. It is not always lawful to treat the pool as a “pool of one” just because one person seems the obvious choice.

For example, if three administrators do overlapping work and only two roles are needed after a restructure, it may be unfair to select just one employee without considering the wider group. On the other hand, if a unique role genuinely disappears, a pool of one may be easier to justify.

3. Are your selection criteria objective?

Selection criteria should be as measurable and evidence based as possible. Founders often rely on broad opinions such as “best fit” or “positive attitude”, but those can look subjective and discriminatory.

Criteria may include:

• skills and qualifications relevant to future business needs
• performance, where supported by appraisals or clear records
• disciplinary record, if documented and applied consistently
• attendance, but with care so disability related absence, pregnancy related absence, or family leave does not unfairly count against the employee

Keep the scoring notes and written records. If you are challenged later, your paperwork matters.

4. Have you consulted properly?

Consultation must be genuine, not a done deal. The employee should understand that redundancy is proposed, not final, and should have a chance to comment on the business case, pool, scoring, and alternatives.

In a small business, consultation is often informal in style, but it still needs structure. Good practice usually includes:

• an initial meeting explaining the proposal and why the role is at risk
• written confirmation of the proposal and any scoring or role changes
• time for the employee to ask questions and make suggestions
• a further meeting before a final decision is made
• the right to appeal once the decision is confirmed

If 20 or more employees may be made redundant at one establishment within a 90 day period, collective consultation rules can apply, with additional obligations and minimum timescales. SMEs sometimes miss this because redundancies happen in stages.

5. Have you considered alternatives to dismissal?

You should actively look for ways to avoid dismissal. The law expects employers to consider suitable alternative employment where available.

This may include:

• a different role in the business
• reduced hours
• job sharing
• redeployment to another location, if realistic
• trial periods in an alternative role

An employee does not have to accept an unsuitable role. Equally, an unreasonable refusal of a suitable alternative job can affect redundancy pay rights in some cases. Suitability depends on the role, status, pay, hours, location, and the employee’s skills and circumstances.

6. What payments are due?

Before you confirm dismissal, calculate all termination payments carefully. At a minimum, you may need to pay:

• notice pay, unless you require the employee to work their notice and they do so
• accrued but untaken holiday pay
• statutory redundancy pay, for eligible employees with at least two years of continuous service
• any enhanced redundancy pay promised under a contract, policy, or past custom and practice

Get the dates right. Length of service, age, and weekly pay all affect statutory redundancy calculations, subject to the statutory cap in force at the time.

7. Could discrimination or automatic unfair dismissal issues arise?

This is where redundancy processes can become risky very quickly. A technically neat scoring exercise will not protect you if the real reason is connected to a protected characteristic or protected act.

Take extra care where the employee is:

• pregnant or on maternity leave
• on adoption leave, paternity leave, shared parental leave, or parental leave
• disabled, where selection criteria may disadvantage them
• part time or fixed term, where less favourable treatment rules may apply
• a whistleblower
• involved in trade union activities
• raising health and safety concerns

Some employees on family leave may have priority rights in relation to suitable alternative vacancies. This area is technical, so it is worth checking before you finalise the outcome.

8. Should you use a settlement agreement?

A settlement agreement can be useful where both sides want certainty and there is a clean financial package on offer. It can waive certain claims if the legal formalities are met and the employee receives independent legal advice.

What it cannot do is turn an unfair process into a fair one by itself. Before you rely on a verbal promise or a quick “without prejudice” conversation, remember that settlement discussions have limits and should be handled carefully.

Common NDA Mistakes

The most common redundancy mistakes are practical, predictable, and avoidable. Small business owners usually get into trouble when they move too fast, use the wrong process, or fail to document why the role is changing.

Picking the employee before defining the role change

If your notes and emails show that you decided who would leave first and worked backwards, the process will be harder to defend. Start with the business rationale and role analysis, then assess the pool and selection method.

Using subjective scoring

Criteria such as “team fit”, “energy”, or “loyalty” are difficult to evidence. They can also mask bias. If you use performance, make sure there is a paper trail rather than a general impression.

Skipping meaningful consultation

Some employers hold one meeting, announce the outcome, and call it consultation. That is not enough. The employee should have a real chance to influence the result before the decision is final.

Ignoring alternative roles because they are not perfect

You should consider vacancies across the business, not just obvious matches. A role can still be suitable even if some training is needed. This is particularly relevant in smaller teams where duties often overlap.

Overlooking family leave and disability issues

Attendance scores can be risky where absences are linked to disability or pregnancy. Timing can also create problems. A redundancy decision made soon after maternity leave, a flexible working request, or a health and safety complaint may attract closer scrutiny.

Getting notice and pay wrong

Underpaying notice, forgetting holiday accrual, or miscalculating statutory redundancy pay can lead to separate claims even if the dismissal reason itself was genuine. Check the employment contract as well as the statutory minimums.

Relying on informal conversations

Founders often try to handle difficult exits quietly and kindly, but undocumented phone calls and corridor conversations create problems later. Confirm proposals, meeting notes, scores, and outcomes in writing.

Assuming short service means no risk

Employees generally need a qualifying period to bring an ordinary unfair dismissal claim, but short service does not remove all risk. Discrimination, whistleblowing, and some automatically unfair dismissal claims do not depend on the same service threshold.

Missing collective consultation triggers

If redundancies are planned across the business, keep an eye on numbers and timing. Collective consultation rules can be engaged even where decisions are made over several weeks rather than all at once.

FAQs

Can I make one employee redundant if I only want to remove that role?

Possibly, but only if the role genuinely disappears or materially changes. If other employees do similar work, you may need to include them in a wider selection pool.

How much consultation is enough in a small business?

There is no single script, but the employee must be told redundancy is proposed, given information about why they are at risk, allowed to comment, and consulted before a final decision is made. One meeting with a pre decided outcome is risky.

Does an employee always get redundancy pay?

No. Statutory redundancy pay generally applies only to employees with at least two years of continuous service, although the contract or workplace policy may offer more generous terms.

Can I offer a settlement agreement instead of a full redundancy process?

You can explore a settlement, but it should not be used as a shortcut for a weak process. If the employee does not agree, you still need a fair reason and fair procedure for dismissal.

What is the biggest legal risk if I get redundancy wrong?

For many SMEs, the biggest risks are unfair dismissal, discrimination, and notice or pay claims. The cost is not just compensation, it is also management time, stress, and disruption to the wider team.

Key Takeaways

• Redundancy must be based on a genuine business reason, not a problem with a particular employee.
• A fair process usually requires a sensible selection pool, objective criteria, meaningful consultation, and consideration of alternative roles.
• Written records matter, especially for the business rationale, scoring, consultation notes, and payment calculations.
• Extra care is needed where pregnancy, family leave, disability, whistleblowing, or other protected issues may be in play.
• Statutory redundancy pay, notice pay, and holiday pay should be checked before dismissal is confirmed.
• A settlement agreement can help in some cases, but it does not automatically fix a flawed redundancy process.

If you want help with consultation steps, selection criteria, redundancy pay calculations, or settlement agreements, you can reach us on 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.