Increasing redundancy payouts could backfire on small businesses

The Forum of Private Business (FPB) is warning that a plan to increase redundancy pay to help workers laid off as a result of the recession could backfire, forcing businesses to close rather than attempting to recover and grow, adding to unemployment and leaving the taxpayer to pick up the bill.

The Statutory Redundancy Payment (Amendment) Bill, which is having its second reading in the House of Commons on Thursday, 13 March 2009, has been tabled by Chorley MP Lindsay Hoyle, who is the Governmentís Assistant Minister for the North West. It proposes increasing the maximum weekís pay used to calculate Statutory Redundancy Pay by 43%, from 350 to 500.

ìThe proposal, apparently to protect workers, is misguided because it would increase unemployment by forcing many businesses to close that might have survived had statutory redundancy pay been left alone,î said the FPBís Chief Executive, Phil Orford. ìInevitably, this would also increase the burden of social security on the taxpayer and become a downward spiral of further unemployment and economic deterioration.î

Should the Bill become law, the increased costs of having to make staff cuts would make it much more difficult for a business owner to turn a struggling company around. Many businesses would be left with no alternatives to closing completely, leading to a further loss of jobs. The Government would be left to pay the additional redundancy costs out of the public purse.

In February 2009, 27% of calls to the FPBís Member Helpline related to redundancy, up from 16% in September 2008. Calls about short-time working, or reducing staff hours, comprised 6% of overall calls. Again, this was a significant increase from September 2008, when there were almost none.

The latest figures from the Office of National Statistics (ONS) show that unemployment continues to increase. For the three months to December 2008, the number of unemployed people increased by 146,000 to reach 1.97 million, the highest since the three months to August 1997. Small businesses employ almost 50% of the UKís private sector working population. Based on data from the previous recession in the 1990s and current trends, the FPB estimates that as many as 200,000 small businesses could be forced to close over the next 18 months.

Mr Orford added: ìAt present, small businesses are struggling to find innovative ways to cut costs yet keep hold of their valued, skilled staff. The last resort is to have to make redundancies. Increasing redundancy pay would be a further blow to their chances of surviving, and a serious impediment to growth.î

FPB member Keith Chetwynd started R K Engineering, in Atherstone, Warwickshire, which supplies hydraulic parts for vehicles, 28 years ago. He estimates he has lost 70% of his business compared to a year ago, when he employed 33 staff. Now he is down to 18 employees. Many have to work reduced hours.

ìThis is incredible. Itís about time some of these politicians came into the real world,î said Mr Chetwynd. ìThis is the worst time that I or anybody I know in business has experienced. Recently, I had the option of knocking it on the head, stopping trading and paying people off but I took the other option and carried on. Now Iím wondering why.î

He added: ìWhy put myself through the strain and extra borrowing in order to keep people employed. It would be easier for me to close down. I donít know how they could come up with something like this, especially at a time like this. The lunatics are running the asylum.î