Ask the Expert: Layoff and Short-time Working – An Old-Fashioned Clause Making a Comeback?

For this month’s Ask the Expert, I caught up with our HR Consultant, Paula, and asked her the question I always find gives us the best ideas for this feature: “What are you talking to clients about at the moment?”

Her answer surprised me a little – lay-off and short-time working.

It is not something we advise on every day and, in many respects, the terminology feels rather old-fashioned. Lay-off and short-time working provisions have traditionally been associated with industries with strong trade union histories, particularly manufacturing and engineering, where fluctuations in available work were perhaps more commonplace.

Many modern employment contracts do not contain these clauses at all.

However, as Paula explained, when businesses find themselves facing a temporary reduction in work, increasing costs or an uncertain order book, these provisions can suddenly become very relevant indeed.

We saw exactly that at the beginning of the COVID pandemic. Before the furlough scheme was introduced, employers were desperately looking through employment contracts to establish what they could do if they simply did not have enough work for their employees. For some businesses, lay-off and short-time working clauses became extremely important.

So, could we be about to see them becoming relevant again?

I asked Paula to talk me through it.

Let’s start with the basics. What do we actually mean by “lay-off” and “short-time working”?

Paula: The terminology can be confusing because when people hear the words “laid off”, they often assume we mean that someone has lost their job. In this context, that isn’t what it means at all.

A lay-off is when there is temporarily not enough work available and, as a result, an employee is not required to work some or all of their normal contractual working days. For example, an employee who normally works five days per week may temporarily be required to work only four days (the fifth day is a “lay-off” day). The employment relationship continues during this period; the employee has not been dismissed, and their continuity of employment is not broken.

Short-time working is when an employee continues to work their normal working days, but their working hours are temporarily reduced due to insufficient work. For example, an employee who normally works five days per week may continue to work five days, but work fewer hours on some or all of those days.

The important word in both cases is temporary. These aren’t intended to be permanent arrangements. They are essentially mechanisms that can help an employer respond to a short-term shortage of work while retaining its workforce. ACAS itself describes lay-off and short-time working as options that can help employers avoid redundancies, although they should generally be regarded as a last resort.

Why would an employer choose this rather than simply making redundancies?

Paula: Because sometimes the underlying problem isn’t that the business needs fewer employees permanently. It may simply have less work right now.

That distinction is really important.

Imagine a business loses a major contract but has another significant piece of work expected to start six or eight weeks later. Making experienced employees redundant, paying redundancy and notice payments and then recruiting again two months later may make very little commercial sense.

Lay-off or short-time working can give the business some breathing space.

It also means the employer retains people who already know the business, its customers, systems and processes. Recruitment is expensive and time-consuming, and experienced employees are not always easy to replace.

Of course, that doesn’t make lay-offs or short-time working easy for employees. A significant reduction in someone’s income is going to have a very real impact on them and their family. That is why communication and careful management of the situation are so important.

Can an employer decide to do this if work suddenly dries up?

Paula: No, and this is probably the most important point for employers to understand.

An employer cannot simply announce, “We haven’t got enough work next week, so everyone is staying at home without pay.”

You need to establish that you have the contractual right to do it.

The right might be expressly included in the employment contract, or, in some circumstances, there may be an established custom and practice, a relevant national industry agreement, or a collective agreement with a recognised trade union. Alternatively, the employer and employee can agree a temporary contractual change.

Without an appropriate contractual right or agreement, employees would normally remain entitled to their contractual pay even if the employer doesn’t have work for them.

That is why I always say to clients: before you do anything, find the contract.

Don’t assume the clause is there. Don’t assume that because you remember seeing it in one employee’s contract it must be in everybody else’s. Businesses often have employees who joined at different times and are working under different versions of contracts.

We need to establish the contractual position before deciding which options are available.

This is where it becomes interesting, because it isn’t necessarily a clause we routinely see in modern employment contracts, is it?

Paula: No, not necessarily.

It is much more familiar in certain sectors than others, and, as you say, historically it is something we associate with heavily unionised industries where employers needed a mechanism to deal with peaks and troughs in production.

But the commercial world has changed enormously.

Businesses today are dealing with supply chain disruptions, fluctuating customer demand, rising employment costs, and economic uncertainty. There may also be unexpected events completely outside the employer’s control – a flood, fire or major equipment failure, for example – which temporarily prevent normal operations.

ACAS specifically recognises that employers may need to consider lay-off or short-time working where there is insufficient work or where a business has temporarily had to close due to an emergency.

So, although the language may feel old-fashioned, the underlying problem it is designed to address certainly isn’t.

We mentioned COVID earlier. I remember suddenly having lots of conversations about lay-off clauses in March 2020.

Paula: Absolutely. Before furlough became the obvious route, businesses were looking at every possible contractual mechanism available to them.

COVID was probably the first time many employers had ever looked properly at the lay-off and short-time working provisions buried in their contracts.

It demonstrated why having well-drafted contracts matters. A contractual clause can sit unused for years – perhaps even decades – and then suddenly become incredibly important when something unexpected happens.

Hopefully, we will never experience anything quite like that again, but businesses do face periods where work temporarily falls away. Having options available can make an enormous difference.

Interestingly, we’re talking about this now, because ACAS has recently updated its guidance on lay-off and short-time working. Do you think that’s significant?

Paula: I think the timing is certainly interesting. ACAS refreshed its guidance in April this year, setting out much more clearly how lay-off and short-time working operate, when employers can use them, the rules around guarantee payments, and what happens if the arrangement continues long enough for an employee to potentially claim a redundancy payment.

I wouldn’t necessarily read too much into ACAS updating its guidance – guidance is reviewed and refreshed from time to time – but it does feel quite timely. These are provisions that many employers probably haven’t thought about for years, yet here we are advising clients about them again.

Angela: And perhaps that’s particularly interesting when you look at the wider direction of employment relations. We’re seeing much greater emphasis on trade unions and collective employee rights again, while employers are also dealing with increased employment costs and, in some sectors, uncertainty and fluctuating workloads.

Paula: Exactly. It feels as though some of these older employment concepts may become more relevant again. That doesn’t mean we’re predicting a return to the industrial relations landscape of decades ago, or suggesting that ACAS is expecting widespread lay-offs. But it is a useful reminder that these provisions exist for a reason.

Sometimes employment law does seem to go full circle. A clause that has sat largely unnoticed in an employment contract for years can suddenly become incredibly useful when the commercial circumstances change.

If the contract does contain the clause, does that mean the employer should simply impose it?

Paula: I wouldn’t recommend approaching it like that.

Having a contractual right is one thing; deciding how to exercise it reasonably and effectively is another.

We would still encourage employers to speak to employees and explain what is happening. Tell them why the business is considering a lay-off or short-time working, what alternatives have been considered, how long you currently anticipate the arrangement lasting and when it will be reviewed.

Employees are far more likely to understand a difficult decision if they understand the problem the business is trying to solve.

There may also be alternatives. Employees might agree to take some annual leave, temporarily reduce their hours, take unpaid leave or work differently for a period. ACAS recommends considering alternatives before using lay-off or short-time working.

Sometimes a conversation produces solutions the employer hadn’t considered.

What happens to pay during a lay-off?

Paula: This is another area where employers need to be careful.

If there is no contractual provision allowing unpaid or reduced-pay lay-off or short-time working, employees would generally remain entitled to their normal contractual pay.

Where there is a contractual right to lay employees off without their normal pay, eligible employees may instead be entitled to statutory guarantee pay for days when no work is provided.

At the moment, the statutory maximum is £41 per day for up to five days in any three-month period, meaning a maximum statutory payment of £205 during that period. If the employee normally earns less than £41 per day, they receive their normal daily rate instead. There are also eligibility requirements, including having at least one month’s continuous employment and remaining reasonably available for work.

It isn’t a substitute for somebody’s normal salary, and employers shouldn’t think of it as such. It is a limited statutory protection.

Presumably holiday continues to build up while someone is laid off?

Paula: Yes. The employment relationship is continuing, so employees will generally continue to accrue their holiday entitlement during periods of lay-off or short-time working.

Again, that reinforces the point that this is not a termination of employment. The employee remains employed; there is simply a temporary reduction or absence of work.

Is there a maximum amount of time somebody can be laid off?

Paula: There isn’t a general statutory maximum period, although the contract may contain its own provisions about duration. However, employers need to be aware of a very important consequence if lay-off or short-time working continues.

An eligible employee may acquire the right to claim a statutory redundancy payment if they receive less than half a week’s pay for either four consecutive weeks, or six weeks within a thirteen-week period where the lay-off or short-time working occurs intermittently.

They must also have at least two years’ continuous service to qualify for statutory redundancy pay.

There is a formal procedure the employee has to follow, and strict timescales apply.

This is one of the reasons I would strongly recommend that employers seek advice if a lay-off or short-time working begins to extend beyond the very short term. What may have started as a temporary solution can reach the point where employees acquire additional rights.

So an employer could use lay-off to try to avoid redundancies and then find that an employee can actually claim redundancy anyway?

Paula: Potentially, yes, which is why employers need to understand the rules.

If an eligible employee serves notice that they intend to claim redundancy, the employer has seven days to respond. The employer can serve a counter-notice if it reasonably expects that normal working will resume within four weeks and that there will then be at least thirteen consecutive weeks of work.

It becomes quite technical at that stage, so it isn’t something I would suggest an employer tries to navigate without advice.

The bigger message is that lay-off and short-time working can buy a business time. Still, they cannot necessarily be used indefinitely to avoid dealing with a longer-term redundancy situation.

What about choosing who is placed on short-time working or laid off? Can the employer simply choose whoever it wants?

Paula: Employers need to be very careful here too.

There may be a genuine operational reason why certain roles are affected, and others aren’t, but the selection needs to be fair and capable of explanation.

An employer also needs to make sure that its decisions are not discriminatory. For example, you wouldn’t want a manager deciding that employees with young children should be placed on short-time working because “they’ll probably appreciate the extra time at home”, or selecting older workers because it is assumed they can afford the reduction in income. Even decisions made with apparently good intentions can create discrimination issues. ACAS expressly warns employers that employees must be selected fairly and must not be treated differently because of a protected characteristic.

The starting point should always be the business requirement: where has the work reduced, which roles are affected and what is the fairest way of managing that reduction?

Do you think this is something employers should now consider putting into their contracts?

Paula: I think it is certainly worth considering as part of a wider review of contractual flexibility.

That doesn’t mean every employer will ever use it, and it certainly shouldn’t be viewed as an easy way of reducing someone’s pay whenever business is quiet.

But one of the lessons we continually learn in HR is that circumstances change.

A business might never envisage needing a lay-off clause when things are going well. But employment contracts are there partly to establish what happens when circumstances aren’t quite so straightforward.

Having a clause gives the employer an option. Not having one may mean that option simply isn’t available when it is needed.  It is a standard in our contracts of employment!

What I wouldn’t recommend is suddenly inserting a clause into existing employees’ contracts and assuming that resolves the problem. Introducing a new contractual right to lay employees off without normal pay is a significant change to terms and conditions. It would need to be handled properly, with consultation and agreement. ACAS confirms that employees can agree to change their contracts to include lay-off or short-time working provisions, but the contractual change still needs to be agreed.

Finally, what would you say to an employer whose order book has suddenly dropped and who is wondering whether lay-off or short-time working could help?

Paula: Speak to us before making any announcements to employees.

The first thing we would want to understand is whether this really is a temporary reduction in work or whether the business is facing a more permanent change.

We would then look at the employment contracts and establish what flexibility already exists. From there, we can consider the alternatives and work out the most appropriate approach.

Lay-off and short-time working can be extremely useful tools in the right circumstances. They can give a business valuable breathing space and, importantly, may help preserve jobs that could otherwise be lost.

But they need to be used carefully. The contractual position, pay, employee selection, communication and the potential right to claim redundancy all need to be considered.

Final thoughts

Talking to Paula about this reminded me just how cyclical employment law can be.

Lay-off and short-time working can sound like terminology belonging to another era – perhaps more at home in the days of heavily unionised workplaces and traditional manufacturing industries than in a modern SME employment contract.

Yet we only have to think back to those extraordinary first weeks of COVID to remember how quickly an apparently obscure contractual clause can become incredibly relevant.

And perhaps that is the real lesson for employers.

Employment contracts aren’t simply documents we issue when somebody joins the business and then forget about. They are there to protect both parties and to provide a framework for dealing with situations that, hopefully, will rarely arise.

With businesses continuing to face uncertainty, fluctuating demand and increasing employment costs, lay-off and short-time working may be terminology we start hearing rather more often.

If your business is experiencing a temporary reduction in work, or you are reviewing your employment contracts and want to understand whether lay-off and short-time working provisions would be appropriate, speak to your HR adviser before making changes or commitments to employees. There are options available, but getting the contractual and procedural position right at the outset can make an enormous difference.