How small businesses can avoid costly redundancy mistakes in 2025

With unemployment edging higher and economic uncertainty intensifying, many small businesses are finding themselves under growing financial pressure. Rising operational costs, increased National Insurance contributions, and anticipation surrounding the upcoming Budget are leaving employers with difficult decisions to make. Among them, redundancy remains one of the most significant—and most legally sensitive—areas to navigate.

As the labour market shifts, it has become more important than ever for employers to ensure that any redundancy process is fair, transparent, and fully compliant with employment law. Cutting corners can carry steep consequences, including tribunal claims and long-lasting reputational damage.

A carefully constructed redundancy process doesn’t just protect businesses; it also supports employees through what is often a stressful and uncertain period. Below are the core steps that small businesses should take to manage redundancies in a legally sound and responsible way.

1) Understand the True Meaning of Redundancy
For a redundancy to be lawful, the role—not the individual—must genuinely cease to exist. This might be due to a reduction in workload, a departmental restructure, relocation, or a full business closure. A redundancy process cannot be used as an alternative route to address performance concerns or interpersonal challenges.

While statutory redundancy pay requires two years’ service, a fair process must still be followed for all affected employees. Failing to do so risks exposure to wider claims such as discrimination or whistleblowing, which have no minimum service requirement.

2) Communicate Early and Transparently
Early communication is one of the most effective ways to minimise risk. Employees should be informed as soon as redundancies are being considered, giving them the opportunity to prepare and contribute alternative suggestions.

This includes employees who are away from the workplace, such as those on parental leave or long-term sickness absence. Excluding these employees from the consultation process could lead to claims of unfair dismissal or discrimination.

For restructures involving 20 or more redundancies, collective consultation rules apply, and the penalties for failing to meet these obligations can be significant.

3) Consider Every Possible Alternative
Redundancy should never be the first step. Employers are expected to explore all feasible alternatives, including voluntary redundancy schemes, reduced hours, job sharing, redeployment and flexible working options.

In some cases, small operational adjustments can prevent compulsory redundancies altogether. When job losses are unavoidable, demonstrating that alternatives were meaningfully explored will provide essential protection should any decisions later be challenged.

4) Establish a Fair Selection Pool
When fewer than 20 redundancies are proposed, employers must identify which roles fall within the selection pool. This must be based on job roles and responsibilities rather than personal characteristics or subjective impressions.

Selection criteria should be clear, measurable and directly linked to business needs. Any process that appears discriminatory or inconsistent significantly increases the risk of legal claims.

5) Carry Out a Genuine Consultation Process
A redundancy process must include meaningful consultation. Typically, this involves at least two individual meetings with affected employees. The first should outline the reason their role is at risk and explore alternatives such as redeployment or adjusted working patterns. If redundancy cannot be avoided, the discussion should turn to ways of reducing its impact.

A second meeting generally confirms the final decision, explains entitlements and outlines the employee’s right to appeal. Every redundancy decision should be confirmed in writing.

A Cautious Reminder
Redundancy is a serious legal process—not a performance management shortcut. If a business cannot demonstrate that a role is genuinely redundant, it risks costly claims and reputational harm. For small employers already navigating financial strain, the consequences can be particularly damaging.

A well-managed process, however, provides clarity for employees and security for businesses, reducing risk at a time when certainty is needed most.