Unfair Dismissal vs Redundancy: What Every UK Small Business Owner Needs to Know
Unfair Dismissal vs Redundancy
The line between a genuine redundancy and an unfair dismissal is thinner than most employers realise. Cross it, even accidentally and you face a tribunal claim that could cost you £14,000 or more. This guide explains the difference clearly and tells you exactly what to watch out for.
The fundamental difference
Redundancy and unfair dismissal are both ways an employment can end, but they are legally and financially very different.
Redundancy is a fair reason for dismissal under the Employment Rights Act 1996. When handled correctly, it gives the employer the right to end an employment without liability for unfair dismissal, provided the statutory process is followed and redundancy pay is made.
Unfair dismissal occurs when an employer ends an employment without a fair reason, without following a fair process, or both. An employee who successfully claims unfair dismissal can be awarded compensation by an employment tribunal. The basic award mirrors the statutory redundancy pay calculation. The compensatory award covers actual financial loss and is currently capped at the lower of £115,115 or 52 weeks' pay.
The average successful unfair dismissal claim results in an award of around £8,000 to £14,000. For a small business, that is a serious financial hit — before you factor in legal costs and management time.
When does redundancy become unfair dismissal?
A redundancy that is handled incorrectly, or that was not a genuine redundancy in the first place, can be found by a tribunal to constitute unfair dismissal. The most common scenarios are:
1. The role was not genuinely redundant
This is the most fundamental error. If an employee is dismissed "for redundancy" but the role continues to exist — whether done by a new hire, a contractor, or redistributed to other employees — that is not redundancy. The Employment Rights Act 1996 defines redundancy by reference to the diminishing need for employees to do work of a particular kind. If the need has not diminished, the dismissal is not redundancy.
Employers sometimes make this mistake not through dishonesty but through poor planning. They restructure a role significantly and assume this makes it redundant. In fact, unless the work ceases to be required, it is not a redundancy — it is a potentially fair dismissal for some other substantial reason, which requires its own distinct process.
2. The selection was unfair
Where multiple employees do the same or a similar role and only some are made redundant, a selection process must be carried out. If the selection criteria were:
Applied inconsistently
Not documented
Discriminatory (directly or indirectly)
Manipulated to achieve a predetermined outcome
...the redundancy is likely to be found unfair, even if the business reason for the redundancy was genuine.
The classic manipulation scenario is where an employer decides who they want to keep before designing the selection criteria, then reverse-engineers criteria that score the preferred employees highly. Tribunals are experienced at identifying this pattern.
3. Consultation was not genuine
UK employment law requires meaningful consultation before a redundancy is confirmed. This does not mean going through the motions. It means genuinely engaging with the employee about:
The business reason for the redundancy
Whether the role is genuinely redundant
Whether the selection process was fair (if applicable)
Whether there are alternatives to redundancy
Whether there is suitable alternative employment available
If an employer issues an at-risk letter on Monday and a confirmation letter on Wednesday, any tribunal will question whether consultation was genuine. A few days is rarely sufficient for meaningful consultation, and tribunals look at the substance of what happened, not just whether a meeting was held.
4. Suitable alternative employment was not offered or considered
Before confirming a redundancy, an employer must genuinely consider whether any suitable alternative employment exists within the business. Suitable means broadly comparable in terms of pay, status, skills required, and location.
If a suitable alternative role exists and was not offered to the employee, the redundancy is likely to be found unfair. If the role was offered and unreasonably refused by the employee, the employer's position is protected. But the offer must be made.
5. A protected employee was selected
Employees with certain protected characteristics have additional protections that affect when and how they can be made redundant. The highest-risk situations involve:
Employees on maternity leave: Employees on maternity leave have a right of first refusal for any suitable alternative vacancy if their role is made redundant. Failing to offer them the alternative role before offering it to others makes the redundancy automatically unfair and potentially discriminatory.
Pregnant employees: Selecting a pregnant employee for redundancy, or making a role redundant because the employee is pregnant, is both unfair dismissal and automatic unfair dismissal, meaning the two-year qualifying period does not apply.
Employees who have recently raised a grievance or blown the whistle: If an employee is selected for redundancy shortly after raising a formal complaint, the timing alone will raise questions about the genuine nature of the redundancy.
Automatic unfair dismissal: the higher-risk category
Certain dismissals are automatically unfair regardless of the employer's reason or the fairness of the process. They include dismissal connected to:
Pregnancy or maternity leave
Whistleblowing
Asserting a statutory right (such as the right to minimum wage or rest breaks)
Trade union membership or activities
Acting as an employee representative in a redundancy or TUPE consultation
For automatically unfair dismissal claims, the employee does not need two years of continuous service to bring a claim. This is a critical distinction. An employee on their first day of work cannot normally bring an unfair dismissal claim, but they can bring an automatically unfair dismissal claim if the dismissal falls into one of the protected categories.
The two-year qualifying period
An employee must generally have two years of continuous service to bring an unfair dismissal claim. Employees with less than two years of service can still be dismissed, and the employer is not required to follow a full redundancy process to the same standard.
However, this does not mean employees with less than two years of service have no recourse. They can still claim:
Wrongful dismissal (breach of contract, for example if notice was not given correctly)
Discrimination
Automatic unfair dismissal (if the protected categories above apply)
Unlawful deduction from wages
What does "fair process" mean?
Even where a genuine redundancy exists and the selection was objective, an employer can still lose an unfair dismissal claim if the process was not fair. The Employment Rights Act 1996 requires that the dismissal is within the "band of reasonable responses" — a broad test, but one that sets a genuine floor.
A fair process for individual redundancy includes at minimum:
A written at-risk notification before any decision is made
A meaningful consultation period
A consultation meeting at which the employee can ask questions and raise alternatives
Genuine consideration of any alternatives raised by the employee
Genuine consideration of suitable alternative employment
A written outcome confirming the decision and the reasons
A right of appeal
Skipping any of these steps, or going through them as a formality rather than genuinely, creates risk.
What are the financial consequences of getting it wrong?
If a tribunal finds in favour of the employee, the award has two components:
Basic award: Calculated using the same formula as statutory redundancy pay. For an employee with 10 years of service earning £643 or more per week, this could be up to £9,645.
Compensatory award: Covers the employee's actual financial loss: lost earnings, loss of benefits, and future loss of earnings if they have not yet found a new job. Capped at the lower of £115,115 or 52 weeks' pay.
In addition, if an employer fails to follow the ACAS Code of Practice on Disciplinary and Grievance Procedures (which applies to consultation processes), a tribunal can increase the award by up to 25%.
You also face the management time spent dealing with the claim, potential legal fees if you instruct a solicitor to represent you, and the stress of the process.
The practical test: ask yourself these questions
Before proceeding with a redundancy, run through this checklist:
Is the role genuinely disappearing from the business?
If there is a selection pool, have I applied objective, documented criteria consistently?
Have I checked my criteria do not disproportionately affect any protected group?
Has the employee been genuinely consulted, with time to ask questions and raise alternatives?
Have I genuinely considered any alternatives the employee suggested?
Have I checked whether any suitable alternative employment exists?
Does the employee have any protected characteristics that require additional care?
Have I issued all letters in the correct order with appropriate time between them?
Is the financial calculation correct, including redundancy pay, notice pay, and holiday pay?
Have I offered a right of appeal?
If the answer to any of these is no or not sure, address it before proceeding.
When to get specialist advice
For the majority of straightforward individual redundancies, a well-structured process guide is sufficient. You should seek specialist HR or legal advice if:
The employee has a protected characteristic
The employee has raised a grievance recently
The redundancy involves a selection pool of more than five people
The employee has previously threatened legal action
You are in any doubt about whether the role is genuinely redundant
The employee is being paid above the statutory cap and the financial stakes are high
The cost of an hour of specialist advice is a fraction of the cost of defending a tribunal claim.
Redundly walks UK small business owners through the correct redundancy process and flags potential risks before you act. Generate a complete, legally structured process pack in 15 minutes from £149 at redundly.co.uk.