Trading after furlough: Can your charity afford redundancies?

With the furlough scheme ending on 30 September, waves of redundancies are forecast to take place over the coming months – meaning it is vital charities start thinking carefully about their future. However, redundancy does come with its own costs and potential implications on a charity’s solvency, as Frank Bouette, partner at Shakespeare Martineau, explains.

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As government financial support begins winding down, many charities will be beginning to feel concerned about the future impacts of Covid-19.

For some, restructuring workforces and streamlining teams may be required and, in the worst cases, making roles redundant will be one option to save money in the longer term.

Although a difficult decision for employers, it can sometimes appear the most effective solution, especially when work levels are down. However, redundancy does come with its own direct and indirect costs, which can impact both its solvency and future.

Direct costs

The price of redundancy will vary depending on individual circumstances, with scale being a major factor.

Statutory redundancy pay is only available to employees with at least two years’ service and usually equates to between 1 to 1.5 week’s pay – depending on age – for each full year worked. The weekly cap is currently £544, with the oldest and longest-serving employees potentially standing to receive a maximum of £16,320. Remember, this is in addition to their notice pay.

Not all employers offer enhanced redundancy. However, for those that do, this will obviously increase overall costs, particularly if those made redundant have longer service. Don’t forget that enhanced redundancy entitlements can carry over from previous jobs under TUPE transfers, so employers need to profile who they are dismissing and consider the direct payments they’ll need to make – and whether they can afford them.

Considerations

Charities also need to consider the indirect and less tangible costs that can arise, such as a dip in productivity and the possible legal ramifications.

The redundancy process can be time consuming, with managers having to hold meetings with every individual who has been placed at risk. Even those not being made redundant will likely feel the impact, which could, potentially, make them less motivated and result in poorer productivity.

With good legal counsel, charities can ensure they are undertaking a fair redundancy process. However, this does not prevent ex-employees from bringing unfair dismissal claims. Defending these claims will impact a charity’s productivity, morale and comes with substantial associated costs.

Making enhanced redundancy terms conditional upon employees signing settlement agreements is a good way of mitigating these risks, but will obviously only apply to those employers prepared to offer enhanced pay.

They also need to carefully consider the related costs of dealing with redundancies (and any claims that may follow) and the potential future costs of having to rebuild a workforce in the future if needed.

Charities need to ask whether their cash flow will withstand both the direct and indirect costs, and plan for it early; what might seem like a quick win and short-term saving could turn into a long-term headache.

Redundancy alternatives

Reducing the workforce can cost more than expected, so it’s worth looking at restructuring alternatives that don’t rely on decreasing headcount, such as applying for grants or upping fundraising efforts.

It is also worth reviewing any investments to make sure they are generating reasonable returns, as well as taking a look at reserves policies to ensure they are still fit for purpose.

You could also evaluate your space requirements, and consider whether property portfolios are still suitable now agile working practices are more common. Also consider your other overheads and what is and isn’t essential.

Finally, you should review your financial arrangements and, where relevant, assess whether more beneficial rates (for both deposits and any borrowing) are available; as well as look into whether the sale of rental of assets to generate cash is an option. Also consider whether a restructure and financial re-alignment of the organisation now may be of long-term benefit.

Act now

Charities have been significantly affected by the coronavirus pandemic, which has, in some cases, threatened their viability.

Unfortunately, this has led to some organisations having to manage their resources and staff levels from a perspective of ensuring financial stability and survival.

For charities to survive longer term, they will need to act now to avoid the common mistakes made by those before them.

Every organisation is different – sometimes a combination of actions is required to prevent insolvency – so if you’re concerned about cash flow, seek independent advice.

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