How To Make Employees Redundant Before Selling a Business (with Buyer Safeguards)

1. Redundancy Policy and Process

• The seller should follow their Redundancy Policy if it exists.
• The buyer should review the policy and ensure it was followed, including:
  • Proper consultations with employees.
  • A fair appeals process.
• Any failure to follow the redundancy process correctly could result in claims against the new owner (if liability transfers), so verifying compliance is essential.

2. Use of Voluntary Redundancy and Selection Pools

• Voluntary redundancy can help avoid compulsory redundancies, but it must be done fairly and without discrimination.
• The buyer should ask for confirmation from the seller that:
  • Selection “pools” were used (i.e., grouping roles that are similar for redundancy purposes).
  • Selection criteria (such as performance, length of service, or skills) were applied consistently and fairly.
• Poor redundancy practices could lead to unfair dismissal claims, which may transfer to the buyer.

3. Statutory Redundancy Pay

• Employees with at least two years of service are entitled to statutory redundancy pay.
• The statutory redundancy pay cap is £700 per week (current limit).
• The buyer should confirm that:
  • The seller accounted for redundancy payments correctly.
  • Any enhanced redundancy packages (if offered) are clearly documented to prevent post-sale disputes.

4. Consider TUPE (Transfer of Undertakings)

• If the business sale involves a transfer of undertakings under TUPE regulations, employees’ rights and liabilities may transfer to the buyer.
• TUPE prohibits redundancies solely due to the transfer itself. Redundancies connected solely to the sale may be deemed automatically unfair dismissals.
• Redundancies before the transfer must be based on legitimate economic, technical, or organizational (ETO) reasons. These reasons may include:
  • A need to reduce the workforce due to financial pressures.
  • A business reorganization unrelated to the sale.
• If redundancies cannot be justified with valid ETO reasons:
  • Affected employees could bring unfair dismissal claims.
  • The buyer may inherit these claims unless agreements or indemnities are in place.

5. Ensure Redundancy Liabilities Remain with the Seller

To ensure redundancy liabilities remain with the seller, the buyer should take the following steps:

a. Include Indemnities in the Sale Agreement

• The sale agreement should include specific indemnities where the seller agrees to cover:
  • Claims related to redundancies made prior to completion.
  • Claims of unfair dismissal, wrongful dismissal, or discrimination resulting from the redundancy process.
• Example clause:
  “The Seller shall indemnify the Buyer against all losses, costs, or claims arising from any redundancies made before the completion date.”

b. Clearly Define the “Pre-Completion Period”

• The sale agreement should specify that any redundancy liabilities up to the completion date remain the seller’s responsibility.
• Ensure there is a clear cut-off date for any pre-completion redundancies.

c. Conduct Due Diligence on Redundancies

• The buyer should review the seller’s redundancy process by requesting:
  • Employee consultation records.
  • Documentation of appeals or grievances.
  • Evidence of redundancy payments made.
• This helps ensure the seller has complied with its legal obligations and reduces the risk of post-completion claims.

d. Warranties from the Seller

• The buyer should seek warranties from the seller confirming:
  • All redundancies were handled lawfully.
  • No employee claims related to redundancy are pending or anticipated.
  • The redundancy process complied with TUPE where relevant.

e. Transitional Arrangements

• In some cases, the buyer may negotiate for the seller to delay key redundancies until after completion to avoid potential disputes.

6. Communication with Employees and Stakeholders

• Employees must be kept informed of the sale and any planned redundancies to prevent uncertainty and disengagement.
• Ensure that the seller has maintained records of meetings, provided support (e.g., notice periods, counseling), and followed the consultation requirements.

7. Protect Against Undisclosed Liabilities

• The buyer should review the seller’s legal advice related to redundancies to check for potential issues.
• If risks are identified, the buyer can negotiate:
  • A price reduction to reflect potential claims.
  • An escrow arrangement to cover future claims.

Example Indemnity Clause for Redundancy Liabilities

“The Seller shall indemnify and hold the Buyer harmless from and against any and all claims, losses, damages, or liabilities (including legal fees) arising out of or in connection with any redundancy or termination of employment carried out before the completion date.”

Conclusion

Redundancies made before a TUPE transfer that are connected solely to the sale could lead to unfair dismissal claims if not properly justified.

Buyers can mitigate risks by including indemnities and warranties in the sale agreement, conducting due diligence, and ensuring any redundancies comply with legal obligations.

Proper handling of redundancies is essential to avoid inheriting claims and liabilities post-completion.

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Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible. After this call, we can then email you a scope of work, fee estimate, and confirmation of any other points or information mentioned on the call.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.