With reports suggesting that 35% of small firms are considering scaling back or closing, many business owners are facing an uncomfortable reality: workforce reductions may become necessary in 2026.
Rising National Insurance contributions, increases to the National Living Wage, higher business rates, and wider employment law reforms are creating sustained pressure, particularly for retail and hospitality employers.
But while redundancy can protect a business financially, getting it wrong can cost far more than keeping the role.
Here’s what you need to know.
1. Redundancy Must Be Genuine
Redundancy is only lawful if it meets one of three statutory definitions:
Business closure
Workplace closure
Reduced requirement for employees to carry out work of a particular kind
It is not redundancy if:
You’re dismissing someone for performance issues
You want to replace them with a cheaper employee
You’re resolving a personality conflict
If the role still exists and is simply being filled by someone else, you risk an unfair dismissal claim.
2. Avoid Discrimination Risks
If more than one employee does similar work, you must use a fair and objective selection process.
This typically involves:
Identifying a “selection pool”.
Applying measurable criteria (skills, qualifications, performance history).
Scoring consistently.
Keeping written evidence.
⚠️ High-risk mistakes include:
Using absence records without adjusting for disability or maternity leave.
Selecting part-time staff unfairly.
Targeting higher earners.
Even small procedural errors can result in tribunal claims.
3. Consultation Requirements: It’s Not Optional
Consultation is a legal requirement, even if you’re only making one person redundant.
Individual Consultation
You must:
Inform the employee their role is at risk
Explain the reasons
Discuss alternatives
Allow them to respond
Consider their feedback genuinely
This is not a tick-box exercise.
Collective Consultation
If you are proposing 20 or more redundancies within 90 days, additional legal rules apply, including minimum consultation periods and notifying the government.
Failure to follow collective consultation rules can lead to a protective award of up to 90 days’ pay per employee.
4. Suitable Alternative Employment
You are legally required to consider suitable alternative roles within your business.
If an employee unreasonably refuses a suitable alternative role, they may lose their right to redundancy pay.
However, determining what is “suitable” can be legally complex and highly fact-specific.
5. Redundancy Pay & Notice Entitlements
Eligible employees are entitled to:
Statutory redundancy pay (based on age, length of service, and weekly pay cap)
Notice pay (statutory or contractual, whichever is greater)
Accrued but unused holiday
Miscalculations here often trigger disputes.
6. The Risk of Unfair Dismissal
Employees with two years’ service can claim unfair dismissal.
Common tribunal risks in redundancy cases include:
No genuine redundancy situation
No meaningful consultation
Biased selection criteria
Failure to consider alternatives
Poor documentation
Tribunal awards can include:
Basic award (similar to redundancy pay)
Compensatory award (loss of earnings)
Legal costs
Reputational damage
In 2026’s tighter financial climate, the last thing most SMEs can afford is an avoidable claim.
Why Small Businesses Are More Exposed
Larger organisations often have internal HR teams and legal departments to manage restructures carefully.
Small businesses, however, often rely on the owner or finance lead, increasing the risk of:
Procedural shortcuts
Emotional decision-making
Inconsistent documentation
Non-compliant letters or meeting processes
The cost of correcting mistakes later is significantly higher than getting it right the first time.
Need an urgent support?
If you’re facing:
A potential restructure
A role that may become redundant
Pressure to reduce headcount quickly
Concerns about unfair dismissal risk
HR Hub Plus provides Ad-Hoc HR Support designed specifically for situations like this.
That means:
Independent third-party support for consultations
Legally compliant documentation
Selection matrix guidance
Redundancy letters and scripts
Risk assessment before action is taken
No long-term commitment. Just expert guidance when it matters most.
