A Guide to Managing Redundancies for Small Businesses

Making people redundant is one of the hardest things a small-business owner has to do. It affects people's livelihoods, disrupts teams, and carries significant legal obligations. But sometimes it is necessary — when a business loses a contract, restructures, adopts new technology, or faces a downturn. This guide walks you through managing redundancies for small businesses, step by step, from identifying genuine redundancy to calculating entitlements and handling the aftermath.

The main legal references are gov.uk's statutory redundancy rules and Acas's step-by-step guidance.

What is redundancy?

Redundancy occurs when an employee's role is no longer needed. This is the critical distinction: it's about the role, not the person. If you're really dismissing someone because of performance, attitude, or conduct, that's a different process entirely — and that's what your employment contracts should make clear.

Genuine redundancy situations include:

Business closure: Your company or a location is shutting down.
Reduced need for work: You need fewer people to do a particular type of work (e.g., new software automates a task that used to need three people).
Restructuring: You're reorganising and certain roles are being eliminated or merged.

A common mistake is dressing up a dismissal as a redundancy. It's tempting when you want someone gone but their performance record is weak. Don't. It creates legal risk and undermines trust with your remaining team. A tribunal will see through it.

The redundancy process

Establish a genuine business reason

Before starting any redundancy process, articulate clearly why the role is no longer needed. Write it down.

Can you say: "We lost the NHS contract that required three project managers" or "We implemented new accounting software that handles invoice processing automatically"? That's a genuine business reason.

Can you say: "Sarah isn't pulling her weight on this project"? That's a performance issue, not redundancy. Different process, different rules.

Document the business case: what has changed, why the current staffing level is no longer sustainable, and what alternatives you considered. This is your insurance policy if the process is later challenged.

Explore alternatives before anyone leaves

Before making anyone redundant, genuinely explore whether alternatives exist. This isn't just fairness — it's a legal requirement. Any tribunal examining your process will ask: "Did they really try other options?"

Alternatives include:

Voluntary redundancy: Would anyone in the affected area volunteer to leave in exchange for a redundancy package?
Redeployment: Are there other roles in the business that affected employees could move into?
Reduced hours or flexible arrangements: Would employees accept part-time, compressed hours, or other flexible working options instead?
Natural attrition: Can you achieve the reduction by not replacing people who leave voluntarily?
Temporary measures: A pay freeze, reduced overtime, or temporary layoff might bridge the gap.

You're not required to avoid redundancy at all costs, but you must demonstrate you considered alternatives seriously. If your first instinct is "let's just make them redundant," take a step back. What would you tell a tribunal you explored?

Define the pool and selection criteria

The "pool" is the group of employees from which those to be made redundant will be selected. Get this wrong, and the entire process falls apart.

If only one person does a particular role and that role is being eliminated, the pool is that one person. Simple.

But if several people do similar work and only some positions are being cut, the pool includes all of them. You now need a fair, objective selection process to decide who goes.

When defining selection criteria, use measurable factors:

Skills and qualifications: Relevant to the business's future needs.
Performance: Based on documented records, not subjective opinions.
Attendance: Sickness absence records (but be careful not to discriminate against those with disabilities or pregnancy-related absence).
Disciplinary record: Current warnings or disciplinary outcomes.
Length of service: Can be a factor but shouldn't be the sole criterion (it can indirectly discriminate on age).

Score each employee in the pool against the criteria. Make it transparent, consistent, and documented. Subjectivity is your enemy here.

Have a genuine consultation

Consultation is a legal requirement for almost all redundancies. This is not a box-ticking exercise — it's a genuine two-way conversation.

Consultation means:

Explaining the business situation and why redundancy is being considered
Discussing the selection criteria and how they've been applied
Exploring alternatives to redundancy
Listening to the employee's suggestions and feedback
Allowing them to be accompanied by a colleague or representative

For collective redundancies (a specified number of employees within a defined period), formal collective consultation obligations kick in, including notifying government authorities and extended consultation timelines.

A common mistake: presenting the decision as already made and asking the employee to sign the paperwork. That's not consultation. A tribunal will see through it.

Calculate and pay redundancy entitlements

Employees who meet the qualifying criteria are entitled to statutory redundancy pay. The calculation is based on:

Age: Different multipliers for different age brackets
Length of service: Number of complete years worked
Weekly pay: Subject to a statutory cap

In the UK, the statutory formula is typically:

Half a week's pay for each complete year of service under age 22
One week's pay for each year aged 22 to 40
One and a half weeks' pay for each year aged 41+

Weekly pay is capped at the statutory maximum (check the current figure on gov.uk). Many employers offer enhanced redundancy pay above the statutory minimum. If you do, make the terms clear and apply them consistently.

Statutory redundancy pay is usually tax-free up to a threshold. Amounts above that threshold are subject to tax. Make sure your payroll system calculates this correctly. The final pay also includes payment for accrued but untaken holiday, based on your statutory leave entitlements.

Notice and final pay

Redundant employees are entitled to their contractual or statutory notice period, whichever is longer. During the notice period, they should be given reasonable time off to look for new work or arrange training.

You can require them to work their notice, place them on garden leave, or make a payment in lieu of notice — depending on the circumstances and their employment contract.

The final pay includes:

Pay up to the termination date (including notice pay)
Payment for any accrued but untaken holiday
Statutory or enhanced redundancy pay
Any other contractual entitlements

Supporting the people affected

Redundancy is stressful for everyone: the person losing their job, you, and your remaining team. Support them:

Communication: Be honest, clear, and compassionate. Skip the corporate euphemisms.
Practical support: Offer references, help with job searching, or outplacement support if budget allows.
Remaining team: Address their concerns directly. Explain the situation, acknowledge the impact, and discuss the plan going forward. They're wondering if their job is next.

Pay attention to employees returning from parental leave or on other protected absences — ensure the redundancy process does not discriminate against them. If you have questions about how this intersects with parental leave transitions, get advice.

Common mistakes to avoid

Making it personal. Redundancy is about the role, not the person. If your selection is influenced by personal preferences or who you like, you're not managing a genuine redundancy. A tribunal will spot this.

Inadequate consultation. Presenting the decision as already made and asking the employee to sign is not consultation. Neither is a five-minute chat where you do all the talking.

Poor documentation. Without clear records of the business case, selection criteria, scoring, and consultation, you cannot defend the process. Document as you go.

Ignoring collective consultation rules. If you're making redundancies that trigger collective consultation obligations, ignoring them costs you penalties and protective awards.

Not genuinely exploring alternatives. A tribunal will examine whether you really considered alternatives. If you went straight to redundancy without exploring options, the process is vulnerable.

Frequently Asked Questions

Q: Is redundancy the same as being fired?

No. Redundancy is about the role no longer being needed. Being fired (dismissal) is usually about the person — their performance, conduct, or breach of contract. The processes are different, and the legal protections are different. Don't confuse them.

Q: Do I have to make a redundancy payment?

If the employee qualifies (usually 2+ years of service for statutory redundancy), yes. You're legally required to pay statutory redundancy. Many employers also offer enhanced redundancy as a goodwill gesture. If you do, make the terms clear.

Q: Can I make someone redundant and then hire someone else to do the same role?

Not immediately. If you make someone redundant and then advertise the same role within a few months, it looks like you fabricated the redundancy. A tribunal will scrutinise this heavily. If the business need genuinely changes, wait a reasonable time and document the changed circumstance.

Q: What if someone disagrees with their selection?

They can appeal the decision. You should have a clear appeal process — ideally, reviewed by someone who wasn't involved in the original decision. Listen genuinely. If they raise a valid point, be willing to reconsider.

Q: Do I need an HR person or a lawyer to manage this?

For a small business with one or two redundancies, you don't necessarily need to hire external help. But you do need to follow the process carefully. A good HR software platform can guide you through the steps and help with documentation. If you're unsure, seek advice — the cost is small compared to the risk of an unfair dismissal claim.

Q: What happens if I get it wrong?

If a tribunal finds the redundancy was unfair, the company can be ordered to pay compensation — ranging from statutory amounts to significant sums if there are aggravating factors. Invest the time upfront to get it right.

Q: Can someone refuse redundancy?

An employee cannot refuse redundancy. Their role is being eliminated, not their performance. However, they have the right to a fair process and fair pay. If they think the process was unfair, they can bring a claim to an employment tribunal.

Q: Should I mention redundancy in employment contracts?

Yes. Your employment contracts should acknowledge that redundancy is a possibility and outline the statutory or enhanced redundancy terms. This doesn't change the legal requirements, but it shows transparency and sets expectations.

The bottom line

Redundancy is never easy, but a fair, well-documented process protects both the business and the people affected. Follow the steps: establish a genuine business reason, explore alternatives, define the pool and selection criteria fairly, consult genuinely, calculate the payments correctly, and treat people with dignity throughout.

When you look back on the process — and you will, because it's the kind of decision that stays with you — you want to know you handled it as well as it could have been handled. That's the standard to aim for.