Over the next two months, DCA Accountants and Business Advisors will be publishing a series of articles aimed at helping entrepreneurs cut their cost base. First, we have decided to look at a significant cost that’s also painful to cut: labour.


When revenue is shrinking, the first instinct many entrepreneurs have is to let an underperforming member of the team go. However, when people act on a whim or in a gung-ho manner in relation to making redundancies, it can prove costly. In one case I’ve seen, in fact, a business owner let someone go without giving the required verbal or written warnings, and without giving notice. They suffered a claim for six months worth of wages.


Lay the Groundwork

The track record for employers in winning at Labour Court hearings is poor. That’s partly because the onus is on employers to prove their actions were fair rather than on the employee to prove otherwise, and partly because employers don’t lay adequate groundwork before acting.


It’s very important that you have a strong case behind you, outlining the reasons why you let a particular person go. This is particularly true if you’re breaking from previous practice in selecting people for redundancy. For example, if you’ve previously operated a ‘last in, first out’ policy and then decide to select a person for redundancy who has been with the company longer, you may well need to justify that decision.


If you are letting someone go for performance reasons, for example, HR experts will recommend that you prepare a matrix on each employee incorporating a range of different issues in relation to performance, including attendance, punctuality, their ability to complete tasks promptly and their communication skills. There are a number of different grading systems through which a person can be measured. Similarly, if you’re selecting a person for redundancy based on their skill set relative to other employees, you should conduct a similar assessment on the skills in your team.


Whoever you select for redundancy, you need to be mindful of that person’s statutory redundancy entitlement and the minimum notice period that should apply. You should also discuss possible alternatives, including a reduction in pay or hours worked.


Other Cuts

In fact, a voluntary pay cut is a way to reduce your labour costs with less of a legal minefield. It’s advisable, if you’re keen for an employee to stay on but cannot afford to retain them, that you meet with your employee and show him or her the financial reasons why you’re seeking a cut. It’s important that employers are pro-active, and communicate clearly with staff members. That could include showing them the level of turnover that they generate if there’s a significant drop, or a drop in the margins that the business is generating. Give your proposal the best possible chance of being received amicably by being professional and open. If you’re trying to make significant savings, you may well need to have this conversation more than once. While it’s unpleasant, taking a pay cut is a considerably smaller blow for an employee than redundancy, and there’s much less red tape – an employee taking a voluntary pay cut simply needs to sign a new contract of employment to reflect that.


Another alternative to redundancy is reducing the hours worked by employees or even instituting a job share scheme. This has the benefit of giving your employees something back – more free time – for a reduced pay packet. You will often find that, with existing staff members, there’s considerable slack to implement a job-sharing system or reduced hours. If it’s monitored carefully and implemented well, staff can carry out the same tasks in a reduced period of time, costing the company less money. Implementing this should include a look at every employee’s job description, sitting down to look rationally at what they are doing for your business and how many hours of work are needed each week to do it. Again, be open and frank about the situation, and get new contracts of employment drawn up and signed in advance.


Cutting back on labour costs is not easy – it causes difficulty for your employees and, if done incorrectly, can result in expensive mistakes. But, even though employees might not thank you at the time, it is far better for them if you face up to an unsustainable situation and address labour costs rather than letting it slide and going out of business.


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