When making workers redundant, one of the requirements on employers through the redundancy process is to ensure fair selection criteria are used so as to avoid acting unlawfully and risking costly tribunal claims.
The ‘last in first out’ approach was once one of the most common ways of selecting employees for redundancy, as an objective and relatively straightforward criterion to apply. However, as equality and anti-discrimination legislation has developed in recent years, this approach has become problematic and is now largely discredited as a sole means of selection for redundancy because of its potential to discriminate.
In this guide for employers, we explain how the last-in, first-out approach to redundancy works and the key considerations to take account if you are looking to rely on this criterion when making people redundant.
What is the last in first out approach?
There are various different ways of identifying a pool for redundancy selection, including the last-in-first-out method (LIFO).
The LIFO method involves selecting employees on the basis of their employment service. This means that those with the shortest length of service will be selected for redundancy first, or scored the highest using a redundancy matrix, while those with a longer service time with their employer will be selected last or scored the lowest.
Discrimination & last in first out redundancy
When making redundancies, as an employer you are legally required to follow a fair procedure, without discriminating against certain individuals or groups. Relying on length of service redundancy selection criteria can theoretically be lawful, provided they are fairly applied. However, depending on the circumstances, LIFO may constitute indirect discrimination, requiring objective justification in order for the discrimination to be deemed lawful.
Under section 19 of the Equality Act 2010, indirect discrimination is defined as where “a person (A) discriminates against another (B) if A applies to B a provision, criterion or practice (PCP) which is discriminatory in relation to a relevant protected characteristic of B’s”.
A PCP is discriminatory in relation to a relevant protected characteristic of B’s if:
- A applies, or would apply, it to persons with whom B does not share the characteristic
- It puts, or would put, persons with whom B shares the characteristic at a particular disadvantage when compared with persons with whom B does not share it
- It puts, or would put, B at that disadvantage, and
- A cannot show it to be a proportionate means of achieving a legitimate aim.
Put more simply, under the 2010 Act the LIFO method could indirectly discriminate against an individual, or group of individuals, by reason of:
- An employee’s age: where last-in-first-out can indirectly discriminate against young people who have less opportunity to acquire a long service record when compared to older employees
- An employee’s sex: where last-in-first-out can indirectly discriminate against women because women tend to have shorter periods of employment than men, mainly by reason of breaks for childcare.
Both age and sex are protected characteristics under the 2010 Act, although in limited cases these factors may not be relevant. This could be where the entire pool of staff at risk of redundancy are female or anyone selected for redundancy is older than the youngest within that pool.
In the case of Allan v Oakley Builders and Groundwork Contractors Ltd , the employment tribunal found that the pool of administrative staff to be made redundant was all female and the claimant was the oldest of the pool. Accordingly, there was no difference in treatment because of age or sex and so the claims for discrimination and unfair dismissal were dismissed.
The tribunal also stated: “While last in first out is not everyone’s first choice these days it cannot be said to be an irrational method to choose. It is an entirely objective criterion. It avoids the employer having to judge people”.
However, where there is a risk of indirect discrimination when applying last-in-first-out as a selection criterion, the employer will still be required to objectively justify this treatment as being proportionate in achieving a legitimate business aim, such as rewarding loyalty or maintaining a stable workforce.
A practical approach to last-in-first-out
In addition to its potential discriminatory effects, LIFO is now also largely discredited as a sole means of selection for redundancy as it can often mean: “a relatively recent employee who is a stellar performer of great value to the future of the business may have to be sacrificed for a timeserver nearing retirement with no enthusiasm for his or her employment” (Allan v Oakley Builders).
So while adopting LIFO as the sole criterion for redundancy may present discrimination risks and potentially results in the loss of valued workers – this does not mean employers should avoid LIFO altogether. In practice, employers can significantly lessen the effects of potential discrimination by applying additional criteria to the redundancy selection process alongside last-in-first-out. In this way, provided other suitable criteria are used in a balanced way, the employer can still make the overall process fair and non-discriminatory.
By way of example, an employee’s skills and performance could be used to provisionally select candidates to be made redundant, where the LIFO method could be applied in a tiebreaker situation between two candidates who otherwise score equally on the other criteria. Although the simplicity of the basic last-in-first-out approach would be lost here, the employer would be retaining the best skills and abilities within its workforce to meet any future challenges.
Alternative redundancy selection criterion
As a potentially discriminatory measure, employers should be cautious about using the last-in-first-out method as a sole criterion. However, when used alongside other selection criteria, LIFO is likely to be deemed a more proportionate means of achieving a legitimate aim.
Here, the starting point is to consider other criteria that are largely objective and measurable, and do not in themselves discriminate against certain individuals or groups. Potential discrimination could be on the grounds of any protected characteristic under the 2010 Act including age, disability, gender reassignment, sex, sexual orientation, marriage and civil partnership, race, religion or belief.
A fair basis upon which to select people for redundancy could include:
- An employee’s skills, qualifications and/or aptitude
- An employee’s standard of work and/or performance
- An employee’s disciplinary record
- An employee’s attendance record, although you would need to discount any pregnancy and maternity-related absences to avoid indirect sex discrimination, as well as any disability-related absences to avoid indirect disability discrimination.
In adopting a fair approach you are not limited to these examples, and not all of your criteria need to be objective. That said, if you do decide to use qualitative criteria you should still have supporting evidence, such as HR records and recent appraisals, to avoid any potential complaints of bias.
Further, although it is open to you as an employer to identify and apply appropriate criteria in line with the skills you want to retain in your organisation, if you weight criteria to reflect the most important factors, last-in-first-out should not be weighted more highly than any other criteria.
LIFO redundancy pay entitlements
If you make an employee redundant, regardless of the method for redundancy selection that you adopt, they may still be entitled to either a statutory or contractual redundancy payment, depending on the terms of their contract.
This means that even in the absence of an occupational redundancy pay scheme, an employee will be entitled to the basic statutory minimum, subject to having accrued 2 years’ continuous service.
The statutory redundancy pay rates are based on an employee’s age and length of employment, where a qualifying employee will be entitled to the following, up to the relevant maximum threshold:
- 0.5 week’s pay for each full year of employment aged 18-22
- 1 week’s pay for each full year of employment aged 22-40
- 1.5 weeks’ pay for each full year of employment aged 41 or more
In this context, adopting a last-in-first-out approach can appear to be an attractive way of making cost savings. This is because LIFO can often disproportionately penalise younger employees among the most recent arrivals where younger people, due to their shorter service and age bracket, are more likely to be entitled to lower redundancy pay.
However, costs concerns alone cannot be grounds to justify discrimination, regardless of the economic needs of your business. In the case of LIFO, you cannot justify age discrimination by simply saying it would be cheaper to discriminate than to not discriminate.
In these circumstances, even though costs can still be taken into account as part of the justification process, an employer would need to combine their need to minimise the costs of a redundancy exercise with other considerations.
Alternatives to redundancy
Prior to selecting people for redundancy on a compulsory basis, you may first want to consider offering voluntary redundancy. Voluntary redundancy can often be an effective means of cutting costs to enable a business to stay afloat, while minimising stress and maintaining morale during difficult times. You do, however, risk losing your best talent if they opt to take the redundancy package voluntarily.
If there are insufficient volunteers, this may still lead to compulsory redundancy.
When dealing with workforce issues such as redundancy, it is important to consider the legal risks and rights of your workers, as well as the human resource aspects impacting employee morale, productivity and engagement.
DavidsonMorris can help you assess the circumstances and understand the options that are in your best interests, not least to avoid unwanted tribunal claims and damage to reputation. Working closely with our HR specialists, we offer a holistic advisory and support service for employers encompassing both the legal and people management elements of redundancy and reorganisations.
As employment law specialists, we can assist if you have any queries relating to redundancy, dismissals or settlement agreements, particularly in large and complex situations. Speak to our experts today for advice.
Redundancy consultation period FAQs
Does Last In First Out still apply?
Once a common method of redundancy selection, the Last In First Out approach can still apply – where those with the shortest length of service will be selected first – as long as this can be objectively justified. However, additional criteria may need to be used to lessen the effects of discriminating against young people and women who often tend to have shorter periods of employment.
What is FIFO and LIFO example?
LIFO (last-in-first-out) is a method of redundancy selection, where those with the shortest length of service will be selected first. This is often used alongside other criteria in collective redundancies. A variation on LIFO is FIFO (first-in-first-out). This involves selecting those with the longest service for redundancy, and may be used for downsizing or delayering management.
Which is better LIFO or FIFO?
LIFO, or last-in-first-out can be an acceptable method for redundancy selection, although it runs the risk of indirectly discriminating against young people who may have the shortest length of service. FIFO, or first-in-first-out, equally brings its own legal risks where it is likely to disproportionately affect older employees, as they are more likely to have joined the company first.
Last updated: 7 September 2023