With economists predicting a downturn in the economy, it is timely to review employers’ obligations when restructuring. Any economic downturn is likely to lead to business sales, restructuring and other efficiency measures.

Before you start: check your employment agreements

Employment protection provisions

A business cannot be ‘restructured’ as defined in the Employment Relations Act 2000 (basically, restructuring includes sale, transfer or contracting out all or part of a business) unless the affected employees’ employment agreements contain ‘employment protection provisions’. So if your employees don’t currently have employment protection provisions in their employment agreements, you will need to insert these before you can restructure. Restructuring does not include sale of a business by a sale of shares, or while the employer is bankrupt or in receivership or liquidation.

Employment protection provisions for most employees are provisions providing a process the employer will follow to negotiate with a proposed new employer about affected employees.

Some categories of employees, such as cleaners and cafeteria staff, (‘vulnerable employees’) get a higher level of protection than other employees. Vulnerable employees have the right to choose to transfer to the new business on their existing terms and conditions of employment, if they are made redundant because of the restructuring. The new business must agree redundancy compensation for any transferring employees it wishes to make redundant, unless their previous employment agreement excluded compensation in that situation.

Union consultation clauses

Most CEAs require the employer to consult with the union whenever the employer is considering redundancies. Employers should ensure that they scrupulously follow any such requirement. Union consultation clauses often trigger consultation at a quite early stage, and it will never be acceptable to present the union with a ‘fait accompli’.

Other clauses to check

Employers considering restructuring should also check employment agreements for the following:

  • Clauses allowing them to direct employees to work at different sites or take on different responsibilities.
  • ‘Technical redundancy’ clauses. If your employees don’t have these in their employment agreements, you may need to pay redundancy compensation for a ‘technical redundancy’ (where your business is sold and employees are offered employment with the purchaser).

Redundancies: genuineness and fairness

Any redundancies must be genuine and follow a fair process.

Genuine commercial reason required

Employers have a management prerogative to make a business more efficient. But a genuine commercial need to reduce costs does not automatically create a genuine commercial need for redundancies. Employers need to show they have a genuine commercial reason for the specific redundancy decision they are making. They should take care to document all decisions and reasoning related to any restructuring that might result in redundancies.

Fair procedure: good faith paramount

The ERA specifically requires employers to consult in good faith before implementing any redundancy decisions (or any proposal which might impact on the employer’s employees – section 4(4)(d)).

Baguley v Coutts Cars Ltd [2000] 2 ERNZ 409 is the leading case under the ERA on fair procedure for redundancies. Findings to note from Baguley were:

  • Good faith obligations in the ERA are not significantly different to employers’ obligations pre-ERA.
  • Selection criteria should always be disclosed.
  • It is prudent to offer redeployment if possible.

Since Baguley, amendments have been introduced to the ERA in section 4(1A), providing that:

  • Good faith is wider than the implied obligation of trust and confidence and requires parties to the employment relationship to be ‘active and constructive’ and ‘responsive and communicative’.
  • An employer proposing to make a decision that is likely to have an adverse effect on the continuation of any employee’s employment must give the affected employees access to information relevant about the decision and an opportunity to comment on the information before the decision is made.

The ERA does not define what ‘active and constructive’ or ‘responsive and communicative ‘means and, as yet, there is no guidance on this from case law. But clearly, the courts are going to require more of employers when they are consulting their employees about restructuring proposals and there is now a specific statutory obligation to provide information and give opportunity for comment on it.

Carter Holt Harvey v National Distribution Union Inc [2002] 1 ERNZ 239 (CA) provides guidance on the meaning of good faith. The Court of Appeal noted that:

Good faith connotes honesty, openness and absence of ulterior motivation...whether a person has acted towards another in good faith will involve consideration of the knowledge with which the conduct is undertaken as disclosed in any direct evidence, and the circumstantial evidence of what occurred.

In Auckland City Council v NZ Public Service Assn Inc [2003] 2 ERNZ 386, the Court of Appeal held that it was impossible to make rules or protocols defining good faith. Its meaning would depend on the context.

Consultation: case law guidance

Guidelines to note from the case law on consultation are:

  • Make sure you consult during the proposal stage, before any final decisions are made. Employers should consult with an open mind.
  • Allow enough time for consultation – employers need to consult, not merely notify.
  • Give employees enough information and a reasonable opportunity to give their views.
  • Make genuine efforts to take on board employees’ views.
  • No consultation may be required in crisis situations – for example if the business is about the collapse.

Employees should be told the selection criteria and given an opportunity to comment on them. It seems an employer must consult even if consultation will make no difference – an employee is entitled to feel properly consulted.

Obligations to redundant employees

Once a redundancy decision has been made, the employer must give the redundant employees the notice required under their employment agreements. (Or ‘reasonable notice’ if their agreement says nothing about notice. This is unlikely to be much more than one month). Employees must be allowed to ‘leave with dignity’ and work out their notice, unless their agreement allows payment in lieu of notice. Redundancy compensation must be paid if:

  • The employment agreement or a binding internal policy requires it; or
  • The vulnerable worker provisions of the ERA require it.

Otherwise, no redundancy compensation need be paid.

The employer should also assist the employee e.g. by providing counselling, referring to income support, helping with finding a new job, providing time off for interviews and a job reference.

Potential pitfalls

Employers should also review their internal policies and agreements for any procedures they need to follow. Another issue to look out for is any employees on parental leave during restructuring. Employers have more onerous obligations to those employees than to employees actually at work.

Employers should carefully check the content of all communications to staff/unions about proposed restructuring. It is all too easy to send a loosely worded letter or memo that is later pointed to as evidence of pre-determination, or as misleading. Staff/union communications need careful management.

As we seem to head for the first downturn in the economy since the ERA was introduced, the law is not clear on employers’ obligations in redundancy situations. For example, as yet there is no guidance on what ‘active and communicative’ and ‘responsive and constructive’ means. But what is clear is that more is required, and statutory obligations are more specific, than pre-ERA. Employers considering restructuring should check their agreements and policies first, then proceed in good faith with an open mind and honest communication.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.