What you need to know about Lay-Off Clauses

The unpredictable nature of the current economic market, combined with ever increasing running costs has meant that a lot of businesses are considering implementing or using existing lay-off provisions in their contracts of employment. In this article, we discuss what lay-off clauses are, and consider the advantages and disadvantages of using them.

What is a lay-off clause?

A lay-off clause is a provision in a contract of employment that states, in the event of a downturn in work or unforeseeable circumstances, the employer will not give the employee any work or pay (save for Guarantee Pay, see below) for a period of time whilst retaining them as an employee.  Lay-off clauses can offer a temporary solution to unforeseen issues with workflow and they are regularly used by employers as an alternative to redundancy.

An employer must have the contractual right to lay off the employee on an unpaid basis in order to do so. Therefore, unless the employee is on a zero hours contract, laying them off without pay in the absence of a contractual provision for doing so will likely expose the employer to claims of breach of contract, unlawful deductions of wages, and possibly also constructive dismissal.

Although it is regularly wrongly presumed to mean the same thing, a lay-off is not the same as redundancy! Redundancy is a termination of employment (following a fair procedure) as a result of a redundancy situation facing the business.

Statutory Guarantee Pay

Employees who have been laid off are entitled to Guarantee Pay, the maximum statutory amount at the time of publication is £31 a day (or their actual daily pay if this is lower) for 5 days in any three month period. This equates to a maximum of £155. In order to be entitled to the pay, the employee must have been employed for at least one month, be available for work, not refuse any reasonable alternative work and not be laid off as a result of Industrial Action.

What are the advantages of utilising lay-off clauses?

• Can be used immediately and in a situation where an unforeseen issue has caused an immediate downturn or cessation of work;
• Can provide urgent cash flow relief by saving on unnecessary wage costs;
• May save a business from facing insolvency issues or having to make staff redundant as a result of a situation that is likely to be only temporary;
• There is usually no upper limit on how long lay-off can be used for (however, certain periods can trigger an employee’s right to redundancy pay, see disadvantages below).

What are the disadvantages of utilising lay-off clauses?

• Can result in employees being entitled to seek a redundancy payment if they are laid off for 4 consecutive weeks or 6 weeks in a 13 week period;
• Using lay-offs can cause a great deal of uncertainty and financial concerns for employees, especially if it is unexpected and/or likely to be lengthy. As a result, employees may seek out and secure alternative employment which could result in the loss of skilled labour;
• Lay-offs can put any remaining staff under extreme pressure if there are significant portions of other work to be done during the lay-off period;
• If not all staff are able to be laid off, selecting staff without a fair process could result in allegations or claims of discrimination, constructive dismissal or other unfairness by employees;
• News of lay-off use can result in negative publicity for the business and can damage their reputation. Other businesses such as suppliers or customers who become aware a business has laid off staff may have commercial concerns and this could be detrimental.

Take Away

Given all of the above, lay-off clauses are not a perfect solution to a sudden downturn in business and the drafting and use of lay-off clauses is something businesses should consider carefully and take prompt legal advice on before acting.

If you have any questions about navigating the use of lay-off clauses, or any other query related to Employment Law, please feel free to get in touch with our Employment team.

Find out about CFR HR, our fully outsourced solution that provides businesses with expert HR consultancy and employment law support.

This article has been produced for general information purposes and further advice should be sought from a professional advisor.