Conducting Layoffs In Tech Start-ups: What Are The Rules For Nigerian Layoffs?

by Olubunmi Abayomi-Olukunle and Adekunle Adewale

Layoffs are always going to be a tough decision for management but may also become necessary for the survival of an employer’s business. Depending on the factors giving rise to a management decision to conduct a layoff exercise, it may often be useful for an employer to explore some alternative options to a proposed layoff exercise. In this update, we summarize the law, procedure and steps for conducting layoffs in Nigerian tech start-ups and also highlight some of the risks that employers should watch out for when conducting layoffs. We also highlight some of the strategic alternatives that employers may consider, prior to conducting a layoff exercise.

What is a Layoff under Nigerian law?

In general terms, a layoff is a permanent or temporary termination of employment by an employer for reasons unconnected to the employee’s performance. Under Nigerian employment law, companies are allowed to layoff employees where the positions or responsibilities of certain employees have become redundant. Nigerian employment law defines “redundancy” as an involuntary and permanent loss of employment caused by an excess of manpower.

Although the definition of redundancy under Nigerian employment law contemplates a situation where there is a reduced requirement for employees, a state of redundancy can also be deemed to have occurred in the event of a business closure, that is, where an employer ceases or intends to cease to carry on the business for which it employed an employee; or workplace closure, that is, where an employer ceases or intends to cease to carry on business in the location where an employee was employed.

Decorum & Collective Consultation

Nigerian employment law expects employers to apply some decorum where an employee is being laid-off for reasons unrelated to an employee’s performance. In order to implement a layoff exercise according to Nigerian employment law, a Nigerian employer is required to notify the relevant trade union or workers’ representative and provide information around the factors necessitating a proposed lay-off exercise as well as the scope of such layoff exercise. This process is typically referred to as “collective consultation”.

In the strictest sense, the view that there is no general right of collective consultation, where there is no union in a workplace is not without merit. This view is supported by the reference to a formal union/workers’ representatives in section 20(1)(a) of the extant Labour Act. However, we consider it prudent for employers to still consider collective consultation in organisations where there are no formal unions.

Given that, tech workers in tech start-ups in Nigeria are generally not unionised and also considering the relatively flat structure of many tech start-ups, one approach can be for tech employers to organise town hall meetings, to meet the legal requirement of collective consultation. Where only one or a few employees are the subject of a redundancy, it is also prudent to consult with these employees.

This process allows employers to provide information to employees around the factors giving rise to a redundancy and the principles that would drive the selection process for employees that would be made redundant. The collective consultation process also provides employees with the opportunity to ask questions and seek clarification about a proposed redundancy.
The Redundancy Selection Process

Employers have to be mindful of the “Last In, First Out” (“LIFO”) principle when laying off employees in Nigeria. Nigerian law requires employers to comply with the LIFO principle, which involves selecting employees on the basis of the length of their employment service, with the effect that employees with the shortest length of service will be selected for redundancy first, while employees with a longer service time with their employer with their employer will be selected last. However, the LIFO principle is only a general principle. As such, employers may depart from the LIFO principle where the merit, skills, ability or reliability of a particular employee justifies such departure.

Redundancy Payments

A redundancy payment is a form of monetary compensation that an employer pays to an employee affected by a redundancy event. This payment is usually in addition to any existing contractual payments due to an affected employee. Nigerian employment law places an obligation on an employer to use its best endeavours to “negotiate redundancy payments”, with affected employees. Our interpretation of this provision is that, in the absence of any new severance pay directives from the Minister of Labour & Productivity, employers are not mandated to make severance payments.

Another interpretation can be given to the provision, which is that, the intention of lawmaker is to require Nigerian employers to make redundancy payments to all affected employees. Such a broad interpretation should rightly be of concern to employers and not consistent with international practice. For instance, in the United Kingdom, only employees with a least two years’ continuous employment as of the relevant date are entitled to a statutory redundancy payment if they are dismissed by reason of redundancy.

Such payment is calculated according to a statutory formula based on age, length of service (subject to a maximum of 20 years) and pay (subject to the upper limit on a week’s pay). However, there is no such provision in Nigeria. In our view, employers only have a “best effort” obligation and are not bound to make severance payments. Additionally, employers who wish to make severance payments have the discretion to determine how much to pay as there is no statutory provision for a severance payment formula.

Unfair Dismissal

It is important for employers to retain legal advice early in the process leading to a layoff. There are important aspects of the process that external legal counsel1 can provide support with, including, amongst others,

the most appropriate disengagement procedure specific to an employer;
the design of a layoff plan;
the formula for calculating any redundancy payments;
the mode and content of the communication with employees.

Additionally, legal counsel can help provide some guidance as to what Nigerian courts would consider an unfair dismissal within the context of a layoff exercise. This is particularly necessary because the fairness of a layoff exercise is often subject of costly litigation. There are a few obvious litigation flashpoints that employers looking to implement a layoff should be wary of as follows:

It is important for the redundancy to be a real one and not a sham. In a recent case, where an employee was able to prove that someone else had been employed to fill her role, Nigerian courts held that the termination of that employee on the grounds of redundancy was unfair.

It is important to follow the above selection principle and consultation process outlined above, as a failure to comply will provide a basis for challenging the layoff exercise
It is important for the redundancy selection not to be discriminative. Where there is a pattern of discrimination connected to pregnancy or childbirth, whistleblowing, sexual preference or asserting a statutory right, there would be a basis to challenge the layoff exercise
It is important to put in place mechanisms to protect trade secrets, confidential information

Some Alternatives to Layoffs

Once lost, a valuable employee is hard to replace when business conditions get better. In some situations, an employer may suffer damage to its reputation2 and staff morale may be affected by a layoff exercise. For these reasons, it is not imprudent to examine other alternatives to laying off employees as a preliminary strategy. Some of the alternatives open to employers in this situation are highlighted below

Withdrawing existing job offers
Implementing a recruitment freeze
Asking employees to consider a contract arrangement. Many tech developers can often work on a contract basis
Redeployment and retraining
Reducing remuneration and/or bonuses
Implementing a promotion freeze
furloughs

Footnotes

1. We often advise employers to retain external counsel to work along in-house counsel to avoid a situation of conflict that may arise as a result of the employment relationship between an in-house and an employer

2. It is often strategic for employers to engage a public relations consultant during a lay-off exercise

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. (mondaq.com)

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