05 Nov 2025
7 MIN
READ
Running a small business can be challenging at times. And during tough times, you may need to make difficult decisions - particularly regarding employment and redundancy.
AXA’s guide helps breakdown the legal process for making an employee redundant in a small business, while supporting your employees.
What is redundancy and when does it apply?
Redundancy is the process of dismissing an employee because their role is no longer needed.
Common reasons for redundancy may include:
- Company downsizing
- A specific role no longer being required
- Closure of a department
- Company restructure
- Change of business direction
- The business has become insolvent or bankrupt
Legal requirements for small business redundancies
Under UK employment law, there are clear guidelines to help you handle redundancy fairly and responsibly. These rules are designed to protect employees’ rights while also supporting your business needs.
DID YOU KNOW?
The Employment Rights Act 1996 is the legal framework which governs the redundancy process in the UK.
Employer obligations
As an employer, you have a responsibility to treat all of your employees fairly throughout the redundancy process, while also making sure that you adhere to any legalisation and laws in place.
Key obligations include:
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Fair selection process:
You’re legally required to use objective criteria when considering who is at risk of redundancy. You also have a legal duty to avoid discriminating against your employees based on: age, gender, race, any other protected characteristics.
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Appropriate consultation:
You should consult all affected employees, informing them of the reasons for redundancy, while answering any queries or concerns they may have.
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Notice period:
Employees must have received the appropriate notice period as outlined in their contract, or by law.
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Redundancy payments:
You’ll need to work out statutory redundancy pay amounts for eligible employees. This is calculated based on age, length of service, and their weekly pay.
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Alternative employment:
Consider offering suitable alternative roles within the organisation where possible.
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Documentation:
Keep detailed records of the redundancy process, including consultations, decisions made, and reasoning.
Employee rights
As outlined above, your employees have the right to:
- A fair selection process
- Appropriate notice
- Redundancy pay (where applicable)
Additionally, they have the right to appeal, and the right to be protected against unfair dismissal.
How laws differ for SMEs
If you’re planning to make 20 or more employees redundant within any 90-day period at one location, you’ll need to follow certain collective consultation rules.
For fewer than 20 redundancies, there aren’t any strict legal obligations, but it’s still a good idea to consult with your employees and their representatives. Doing so helps build trust and can prevent misunderstandings - plus, it shows you’re handling the process fairly.
Not doing so could potentially lead to claims of unfair dismissal, so it’s always best to keep the lines of communication open.
How to make someone redundant in a small business
The redundancy process step-by-step
1. Identify at-risk roles
The first step in fairly managing redundancy is to identify which roles are at risk. To do this, you’ll need to review your current operations, finances, workforce and the future direction of the business. This includes looking at areas like:
- Business goals and needs
- Daily operations and efficiency
- Financial performance and growth
- Workload volumes
- Legal and contractual considerations
2. Consulting with employees
Why is it important to consult with employees?
1
Allows for meaningful discussions
Holding meaningful discussions with your at-risk employees shows that you’re treating them with respect and fairness, which is a legal requirement – as well as good practice.
2
Demonstrates a fair process
Carrying out thorough consultations can help prevent claims of unfair dismissal or discrimination, as it shows you’re following a fair process.
3
Allows employees the chance to be heard
During consultation, employees have the chance to make suggestions or offer solutions to help avoid redundancy altogether.
4
Provides employees with clarity
Consultation discussions can help give employees clarity around the reasons for redundancy, the process involved, and their rights as an employee.
3. Providing notice
Providing proper notice and effectively managing disputes are crucial steps in the redundancy process. As a small business, it’s important to communicate clearly and transparently with your employees to help maintain trust, while saying legally complaint.
4. Managing disputes
Try and keep in mind that your employees are adjusting to the prospect of losing their jobs. And while there be some disagreements or difference of opinions, you should try to handle any disputes with understanding and compassion.
Here’s some tips to help:
Make sure your employees feel comfortable enough to voice any concerns
Provide a fair opportunity for employees to challenge decisions
Aim to resolve issues amicably through open conversation
In cases of more serious disputes, consider involving external mediators or legal advice to reach a fair resolution
Keep detailed records of all communications, meetings, and decisions made during the process
Alternatives to redundancy
The decision to let employees go isn’t an easy one. Before going ahead, it’s important to consider possible alternatives, such as:
- Job sharing
- Reduced hours
- Redeployment
- Voluntary redundancies
- Unpaid leave
- Limit or pause overtime hours
Handling redundancies fairly
Transparent communication
Transparent communication helps maintain trust and morale, even during challenging times. Employees are more likely to feel valued and understood if they know they’re being heard and listened to. Make sure your team feels comfortable sharing their thoughts and concerns throughout the process.
Supporting employees
As a small business owner, you’re likely to form closer relationships with your employees, especially in comparison to larger companies with hundreds of staff. This puts you in a unique position to offer more personalised support, guidance, and empathy. Use this to your advantage to help your employees navigate the transition of redundancy smoothly.
Redundancy pay
How much redundancy pay is due to employees?
The amount due to employees who qualify is generally worked out based on:
- Age
- Weekly pay
- Length of service
You’ll normally be entitled to statutory redundancy pay if you’re an employee and you’ve been working for your current employer for 2 years or more.
The statutory redundancy pay includes:
The pay is calculated based on a maximum of 20 years’ service
You get half a week’s pay for each year you worked under age 22
You get one week’s pay for each year you worked from age 22 up to 41
From age 41 onwards, you receive 1.5 weeks’ pay for each year of service
Note: The amounts are based on your lower weekly pay or the government’s pay cap, which updates yearly.
PLEASE NOTE:
While statutory redundancy pay is a legal requirement, there are some exceptions or variations depending on employment contracts or specific circumstances. Always consider consulting legal advice or HR specialists for specific guidance.
Insurance cover during redundancies
During a redundancy process, having the right insurance can help provide valuable protection for your small business.
Some common types of cover include:
Employer’s Liability Insurance:
This is a legal requirement in the UK if you run a business with employees. This insurance covers claims made by employees if they suffer illness or injury related to their work, including issues arising during redundancies. This can help protects your business from legal costs and compensation claims.
Business Interruption Insurance:
If redundancies lead to a temporary halt in your business operations, this insurance can help cover lost income and ongoing expenses such as rent, wages, and bills. Helping your business to stay afloat during transitional periods.
You can find more information about the types of business insurance here.
As a small business owner, you’ll often need to make tough decisions, like handling redundancies during challenging times. It’s important to remember that this can be a difficult experience for those affected and can have a big impact on their daily lives and well-being.
Approaching the situation with understanding and compassion goes a long way. Treating your employees with care and respect throughout the process helps foster trust and shows you value their contributions, even in tough circumstances.
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