Criminal charges on collective redundancies - HR1 failures at CityLink and USC provide stark warning for employers

The Guardian has this week reported that “three former
directors of City Link have been charged with criminal offences” in
relation to its collapse last Christmas (see here).This follows on the heels of the report at
the weekend regarding the chief executive of Sports Direct who is facing
similar charges in light of collective redundancies at former employer USC in
administration (see here).

The financial cost to an employer (or as the case may be in an insolvency, the Government’s National Insurance Fund) of failing to inform and consult in accordance with the applicable legal requirements where collective redundancies are proposed is well known – with each affected employee being able to claim up to 90 days’ actual pay. However, the potential criminal sanctions (and fine) for those failing to comply with the related legal obligation of filing notification of those proposed redundancies with the Secretary of State has until now received less attention. The issues surrounding the demise of City Link and USC, both insolvency situations where the Government’s National Insurance Fund has been left to pick up the cost of compensating staff, perhaps demonstrate the extreme consequences of getting it wrong. However, the publicity surrounding the repercussions for the former directors at those companies serves as a reminder for all of the dangers of failing to comply with the legal obligations in collective redundancy situations.

Under the current statutory requirements:

• Employers should inform and consult with appropriate representatives of affected employees where 20 or more redundancies are proposed at an establishment within a 90 day period. Affected employees are those who are affected by the proposed dismissals or who may be affected by measures taken in connection with those dismissals. Appropriate representatives may, depending on the circumstances, be trade union representatives, existing employee representatives or those elected for this purpose by the affected employees. Failure to comply with these information and consultation obligations leaves an employer vulnerable to a protective award of up to 90 days pay for each affected employee. 
• Employers should also file a form HR1 with the Secretary of State where such redundancies are proposed. The HR1 must be submitted at least:
  • 30 days before the first dismissal if there are between 20 and 99 redundancies;
  • 45 days before the first dismissal where there are more than 99 redundancies.
  Failure to file a form HR1 is a criminal offence attracting a potential unlimited fine (prior to 12 March 2015 it was capped at £5,000). However, where the failure is proved to have been committed with the consent or connivance of or to be attributable to the neglect on the part of any director, manager, secretary or other similar officer of a company, that individual may also be criminally liable, with conviction leading to disqualification under the Company Directors Disqualification Act 1986 for up to 15 years (see here for guidance from the Insolvency Service).
• The HR1 must also be copied to all appropriate representatives who are to be consulted under the collective consultation obligation.
• Notices of dismissal should not be issued until the HR1 notification has been made.  
• An employer who fails to comply with these requirements may seek to rely on a special circumstances defence.  However, case law suggests that this will only be available in very limited circumstances.

It may be that we shall see legal reform on the way the collective redundancy rules operate in insolvency situations. The previous coalition Government issued earlier this year a Call for Evidence (see here) to address concerns over the handling of staff where businesses are imminently facing or in insolvency proceedings, particularly where a business may be reluctant to make any formal notification or announcement that it is in financial difficulties jeopardising its on-going viability further. In such situations the Government may ultimately be left to pick up the financial costs arising from any dismissals which may in some situations be made on almost no notice. The outcome of this consultation is still awaited. In the meantime, as the Guardian has reported “the legal actions… appears to mark a new approach by the Department for Business to criminal proceedings against former directors of companies that have gone bust”. The Government’s clampdown is a reminder of the real personal repercussions where staff dismissals result

The key requirements in a collective redundancy process will be placed under scrutiny by an Employment Tribunal looking at whether an employer has complied with its legal obligations. It is essential for employers who are proposing to redundancies to plan carefully and understand fully its legal obligations and how in practice these will be fulfilled.