What happens to employees in a sale of business in New Zealand?

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LegalVision

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Processes that new employers can use to lawfully and efficiently utilise technical redundancies.
New Zealand Employment and HR
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Introducing redundancies following the sale of a business and navigating the process of technical redundancies require a delicate balance of legal compliance, strategic planning, and sensitivity toward affected employees. When a business undergoes a change in ownership, restructuring often follows, which may lead to redundancies as roles are reassessed and streamlined. As an employer, you must approach these situations with care, ensuring fairness in selection processes, providing adequate support to affected employees and complying with legal obligations regarding consultation, notice periods, and redundancy compensation. This article will address the processes you can use to lawfully and efficiently utilise technical redundancies.

Asset Sale or Share Sale?

The primary distinction between the types of sales of businesses is how they impact employees. In an asset sale, employment agreements do not automatically transfer to the buyer. If the buyer wants to retain the current employees, a collaborative process is necessary. This involves you terminating the employees' current agreements while the buyer simultaneously offers them new ones. Typically, the asset sale and purchase agreement will mandate that the buyer extend employment offers to the existing employees on terms that are the same or similar to their current ones.

In a share sale, only the shares of the company running the business are sold, not the business itself. This means that the employment status of staff remains unchanged since you remain as their employer. An asset sale is when a buyer agrees to purchase some of your business assets and liabilities.

What is a Redundancy?

When a role is no longer required by the business, it becomes redundant. It is important to note that redundancy is based on the nature of the role itself, not the individual employee filling it. Additionally, redundancy does not always equal job loss for the employee, as you may choose to place them in a different position. This underscores the significance of distinguishing between the role itself and the person occupying it.

How Do I Manage Redundancies During Business Restructuring?

A business sale or transfer is termed as a 'restructuring'. During restructuring, you may have to make your employees redundant and terminate their employment on the settlement date, being the date that the business changes hands to the purchaser. However, if the purchaser opts to retain your employees, they may enter into new employment agreements from the settlement date. In some cases, even though employees are technically made redundant, their redundancy may be classified as 'technical redundancy', exempting the seller from the obligation to pay redundancy entitlements (if any). It is advisable to incorporate 'technical redundancy' provisions into your employment agreements to facilitate this process and avoid redundancy payments. The process of whether to retain existing employees depends on factors such as:

  • the employee protection provisions in their employment agreements; and
  • whether they qualify as 'vulnerable employees' under the Employment Relations Act 2000.

What is a Employee Protection Provision?

All employment agreements legally must contain an employee protection provision. This provision sets out the employee's rights in the event of a restructuring. If you are selling your business, you should carefully review these provisions in your employment agreements to understand the process. Generally, the process will involve:

  1. documenting your proposal, such as explaining the reasons for the sale and how it may affect them;
  2. inviting your employees to a meeting to discuss the sale and how it affects them;
  3. holding the meeting;
  4. requesting their feedback, either in written or verbal form; and
  5. genuinely considering that feedback.

After following the above steps and assuming you still wish to proceed with the sale, you must then confirm the details of the sale to your employees in writing. Your letter should set out:

  • their notice period (as per their employment agreement);
  • the end date of their employment;
  • whether they will be receiving any compensation, considering any redundancy compensation clauses in their contracts; and
  • an offer to meet with them to discuss if they have any questions.

Throughout this entire process, you should regularly communicate with the purchasers to confirm whether they will be offering employment to any of your employees upon taking over your business. The purchaser may request information from you as part of their due diligence, such as your employees' employment agreements.

Do I Have to Make an Employee Redundant?

There are alternatives to making an employee redundant when selling a business, including:

  • redeployment to another position within the business; and
  • retainment by the purchaser.

Redeployment occurs when you offer a different role to an employee, noting that their current role will become redundant. If your employee agrees, they will still be employed by your company but will assume new responsibilities.

Alternatively, your employee may be retained by the purchaser. This situation represents a 'technical' redundancy as, although you have decided to remove their role, the purchaser agrees to retain the role and sees an ongoing need for it to be filled.

Do I Owe Redundancy Compensation to My Employees?

Redundancy compensation is not compulsory in New Zealand. That means you are only required to make this payment if the employment agreement provides for it. If the agreement does not include a clause about a redundancy payment, you are not required to make one.

If you are going through a technical redundancy process as part of a business sale, it is likely that your employees are not eligible for redundancy payments even if their employment agreements stipulate it. This will depend on the wording of the agreement and whether it excludes situations of technical redundancy.

Key Takeaways

If you are planning on selling or purchasing a business and need to undergo restructuring, you may be faced with having to make some of your employees redundant. However, in circumstances where the redundancy is a 'technical redundancy', the employee can carry on with their role, with the only change being their employer. In this situation, you may not have to provide them with redundancy compensation. Aside from a technical redundancy, you may also consider other options for retaining your employee, such as redeployment.

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.

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