Should you include lay-off clause in contracts?
Should you include lay-off clause in contracts?
A lay-off clause enables you to temporarily lay off an employee with no work and no pay or to temporarily reduce their working hours with a corresponding pay reduction. Should you include this clause in the employment contracts of all staff?
What does a lay-off clause do?
You have no general legal right to temporarily lay off an employee with no work and no pay, or to temporarily reduce their working hours and pay (called short time working), without the express contractual right to do so. So, including a lay-off and short time working (LOST) clause in employment contracts means you would have the power to do this, subject to any statutory guarantee pay (SGP) that may be due. A LOST clause can therefore be extremely useful to help you navigate temporary situations that might affect normal working, such as work shortages or an unexpected workplace closure, e.g. due to flooding, heavy snow or power failure. It means you can temporarily adjust your workforce levels without terminating contracts.
Tip. Lay-offs and short time working can be alternatives to redundancy where a work shortage is only anticipated to be short term.
Trap. If you don't have a LOST clause, you would have to obtain each employee's express consent to a lay-off or short time working. If you impose either without consent and then don't pay the employee (or pay them reduced pay), that's an unauthorised deduction from wages. You would also be in repudiatory breach of contract, entitling them to resign and claim constructive dismissal if they've been employed for two years or more. This is still the position even if trading conditions are poor.
What to include in a lay-off clause
A LOST clause should: (1) reserve the right to impose a lay-off or short time working where the needs of your business make this necessary; (2) make clear that the employee's pay will reduce proportionately to the hours reduction, which means pay will cease where it's a lay-off. If you fail to include this, you would have to continue paying them in full; (3) confirm that the employee will receive SGP if they qualify for it. You must pay it for a maximum of five "workless" days (pro rata for part timers) in any three-month period and the current daily cap is £38 (2024/25 rate); and (4) ideally set out the other consequences of lay-off or short time working, e.g. the effect on bonuses and commission, sick pay, etc.
Tip. You don't have to pay SGP for any day the employee does some work, as that's not a workless day, e.g. if they work afternoons only.
Tip. When imposing a lay-off or short time working under a LOST clause, advise the employee in writing of the reasons for it, the date it will start and the expected duration, and then keep the position under regular review (see The next step). Also, to preserve trust and confidence, hold a prior meeting with staff to explain your proposals.
How long can a lay-off be?
There's no implied term that you can only impose a lay-off or short time working for a reasonable period, so you can decide the duration according to business need. However, there's a statutory scheme in place under which employees can apply to claim statutory redundancy pay if the lay-off (with no pay) or short time working (with less than half a week's pay) lasts for four or more consecutive weeks or for six weeks in any 13-week period.
You can only impose a lay-off without pay, or short time working with reduced pay, where you have the contractual right to do so. In the absence of a clause, you would need employees' express consent to a lay-off or short time working and this would be a lot less flexible for your business.
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