Last in first out: fair redundancy?

When making redundancies, part of the requirements on employers is to ensure fair selection criteria are identified and used so as to avoid acting unfairly and unlawfully.

The ‘last in first out’ method was once one of the most common ways of selecting employees for redundancy, but does it remain a valid and lawful way of deciding which employees to dismiss?

What is the last in first out method?

There are various different ways of identifying a pool for redundancy selection and whom to make redundant, including the last-in-first-out method (LIFO).

The LIFO method involves selecting employees on the basis of their service. This means that those with the shortest length of service will be selected for redundancy first, or scored the highest, while those with a longer service time with their employer will be selected last or scored the lowest.

Is LIFO fair and lawful?

When making redundancies you must always follow a fair procedure, without discriminating against certain individuals or groups. Relying on length of service redundancy selection criteria can theoretically be lawful where fairly applied, although in many cases it can constitute indirect discrimination that requires objective justification in order for the discrimination to be fair.

Under section 19 of the Equality Act 2010 indirect discrimination is defined as where “a person (A) discriminates against another (B) if A applies to B a provision, criterion or practice (PCP) which is discriminatory in relation to a relevant protected characteristic of B’s”.

A PCP is discriminatory in relation to a relevant protected characteristic of B’s if:

• A applies, or would apply, it to persons with whom B does not share the characteristic
• It puts, or would put, persons with whom B shares the characteristic at a particular disadvantage when compared with persons with whom B does not share it
• It puts, or would put, B at that disadvantage, and
• A cannot show it to be a proportionate means of achieving a legitimate aim.

Put more simply, under the 2010 Act the LIFO method could indirectly discriminate against an individual, or group of individuals, by reason of:

An employee’s age: where last-in-first-out can indirectly discriminate against young people who have less opportunity to acquire a long service record when compared to older employees

An employee’s sex: where last-in-first-out can indirectly discriminate against women because women tend to have shorter periods of employment than men, mainly by reason of breaks for childcare.

Both age and sex are protected characteristics under the 2010 Act, although in limited cases these factors may not be relevant. This could be where the entire pool of staff at risk of redundancy are female or anyone selected for redundancy is older than the youngest within that pool.

In the case of Allan v Oakley Builders and Groundwork Contractors Ltd [2019], the employment tribunal found that the pool of administrative staff to be made redundant was all female and Mrs Allan was the oldest of the pool. Accordingly, there was no difference in treatment because of age or sex and so the claims for discrimination and unfair dismissal were dismissed.

The tribunal also stated: “While last in first out is not everyone’s first choice these days it cannot be said to be an irrational method to choose. It is an entirely objective criterion. It avoids the employer having to judge people”.

However, where there is a risk of indirect discrimination when applying last-in-first-out as a selection criterion, the employer will still be required to objectively justify this treatment as being proportionate in achieving a legitimate business aim, such as rewarding loyalty or maintaining a stable workforce.

What are the risks of the last-in-first-out method?

In the past many employers have adopted a policy of making redundant those with the shortest length of service. This is because the last-in-first-out method is both objective and simple to apply. However, given current equality and anti-discrimination legislation, this approach has become problematic and is now largely discredited as a sole means of selection for redundancy because of its potential to discriminate.

That said, the risk of discrimination does not mean that this approach should be avoided altogether. Instead, it should not generally be used as the only measure to decide whom to dismiss in a redundancy situation, especially where issues of either indirect age or sex discrimination are potentially relevant.

An employer can significantly lessen the effects of potential discrimination by applying additional criterion to the redundancy selection process alongside last-in-first-out. In this way, provided other suitable criteria are used in a balanced way, the employer can still make the overall process fair and non-discriminatory.

By way of example, an employee’s skills and performance could be used to provisionally select candidates to be made redundant, where the LIFO method could be applied in a tiebreaker situation between two candidates who otherwise score equally on the other criteria. Although the simplicity of the basic last-in-first-out approach would be lost here, the employer would be retaining the best skills and abilities within its workforce to meet any future challenges.

In fact, in addition to its potential discriminatory effects, LIFO is now also largely discredited as a sole means of selection for redundancy as it can often mean: “a relatively recent employee who is a stellar performer of great value to the future of the business may have to be sacrificed for a timeserver nearing retirement with no enthusiasm for his or her employment” (Allan v Oakley Builders).

Alternative redundancy selection criterion

As a potentially discriminatory measure, employers should be extremely cautious about using the last-in-first-out method as a sole criterion. However, when used alongside other criteria, LIFO will be deemed a more proportionate means of achieving a legitimate aim.

Here the starting point is to consider other criteria that are largely objective and measurable, and do not in themselves discriminate against certain individuals or groups. Potential discrimination could be on the grounds of any protected characteristic under the 2010 Act including age, disability, gender reassignment, sex, sexual orientation, marriage and civil partnership, race, religion or belief.

A fair basis upon which to select people for redundancy could include:

• An employee’s skills, qualifications and/or aptitude
• An employee’s standard of work and/or performance
• An employee’s disciplinary record
• An employee’s attendance record, although you would need to discount any pregnancy and maternity-related absences to avoid indirect sex discrimination, as well as any disability-related absences to avoid indirect disability discrimination.

In adopting a fair approach you are not limited to these examples, and not all of your criteria need to be objective. That said, if you do decide to use qualitative criteria you should still have supporting evidence, such as HR records and recent appraisals, to avoid any potential complaints of bias.

Further, although it is open to you as an employer to identify and apply appropriate criteria in line with the skills you want to retain in your organisation, if you weight criteria to reflect the most important factors, last-in-first-out should not be weighted more highly than any other criteria.

What are the LIFO redundancy pay entitlements?

If you make an employee redundant, regardless of the method for redundancy selection that you adopt, they may still be entitled to either a statutory or contractual redundancy payment, depending on the terms of their contract.

This means that even in the absence of an occupational redundancy pay scheme, an employee will be entitled to the basic statutory minimum, subject to having accrued 2 years’ continuous service.

The statutory redundancy pay rates are based on an employee’s age and length of employment, where a qualifying employee will be entitled to the following:

• 0.5 week’s pay for each full year of employment aged 18-22
• 1 week’s pay for each full year of employment aged 22-40
• 1.5 weeks’ pay for each full year of employment aged 41 or more

The maximum statutory redundancy payment is capped at £538 per week for a total length of 20 years (£16,140 max), although where you are looking to lose several employees at once, the potential cost of redundancy can be significant.

In this context, adopting a last-in-first-out approach can appear to be an attractive way of making cost savings. This is because LIFO can often disproportionately penalise younger employees among the most recent arrivals where younger people, due to their shorter service and age bracket, are more likely to be entitled to lower redundancy pay.

However, costs concerns alone cannot be grounds to justify discrimination, regardless of the economic needs of your business. In the case of LIFO, you cannot justify age discrimination by simply saying it would be cheaper to discriminate than to not discriminate.

In these circumstances, even though costs can still be taken into account as part of the justification process, an employer would need to combine their need to minimise the costs of a redundancy exercise with other considerations.

What alternatives to redundancy are available?

Prior to selecting people for redundancy on a compulsory basis, you may first want to consider offering voluntary redundancy. Voluntary redundancy can often be an effective means of cutting costs to enable a business to stay afloat, while minimising stress and maintaining morale during difficult times.

If, of course, there are insufficient volunteers, this may still lead to compulsory redundancy, although it will at least show that you have explored all other options before considering the forced loss of jobs. This could include offering alternative suitable employment, or flexible working or reduced hours.

If you are unable to operate or no longer able to provide your employees with work due to the coronavirus crisis, you may also want to consider furloughing workers as an alternative to redundancy. Under the Coronavirus Job Retention Scheme, employers who furlough workers can apply to the government to pay up to 80% of their wages (capped at £2,500). The purpose of the scheme is to incentivise employers to retain employees on their payroll, rather than making them redundant during the crisis.

However, when furloughing some but not all workers, as with redundancy, you should adopt a fair and non-discriminatory selection procedure to avoid any risk of complaints of bias. By seeking expert legal advice from an employment law specialist in relation to either redundancy or furlough selection procedures, this can help to minimise your exposure to litigation at a later date.

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Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.