CORPORATE & COMMERCIAL NEWS, JULY 2009

Redundancy

We all know that the current economic climate is having an impact on the employment market and most of us know someone who has lost their job – either because of cost cutting measures, or because the business has been sold, or closed down entirely. Obviously, no-one (employee or employer) wants to be in this situation, and redundancies are not a decision
that employers (for the most part) make lightly. If you do have to carry out staff cuts, it is important to make sure that you go about it in a fair (and lawful) manner.

To justify termination of employment by redundancy, it is necessary to have both a genuine reason for the redundancy, and to follow a ‘fair’ process.

A genuine reason involves an assessment of whether the position or positions are genuinely superfluous to the employer’s requirements. It is the position not the person which must be considered. Notwithstanding the overriding economic situation, employers still need to consider whether the particular position(s) they are thinking of removing are actually no longer needed.

In the case of a business sale, employees of the vendor will (at least technically) be redundant, as they will no longer be needed by the vendor if the sale goes ahead. it is important to consider employees while the Sale and Purchase Agreement is being negotiated.

The law requires employers to discuss with a potential purchaser whether there will be jobs available for most categories of employees, and if so, on what terms. Even if a vendor and purchaser agree to transfer employees, this cannot happen automatically. The purchaser must offer employment and provide the proposed terms. If there is an intention to transfer entitlements, such as holidays, this must also be agreed with employees.

However, if the employees concerned are occupied in what are deemed ‘vulnerable’ occupations (e.g. cleaning, food catering, orderly or laundry services) they will have an automatic right to transfer to the purchaser of the business. If the employees are not ‘vulnerable’, any transfer will be by agreement.

In terms of process, the law (both common law, and the Employment Relations Act 2000) requires consultation with employees whose positions may be affected.

Consultation involves developing a proposal for the planned restructure which sets out what the employer proposes to do, how it could affect existing employees, why the proposal is being considered, and any supporting information. The proposal must be just that - a proposal, rather than a predetermined decision. The information supporting the reasoning is critical and is now required by the Employment Relations Act. Note that this process applies when considering
redundancies due to cost cutting, but also if there is a proposal to sell or close the business. While realistically, employees may not be able to have much impact on the employer’s decision to sell or close down, they are nonetheless entitled to information about the proposal, before a decision is made.

Once the proposal has been developed, it needs to be put to the employees who could be affected if it goes ahead. Employees must be advised of the proposal, its potential effects on their employment and, crucially, that they will be given an opportunity to comment on the proposal and offer alternatives to it. They are entitled to be represented during this process, which is quite different to just being invited to bring a support person. Employees should not be expected to respond to the proposal immediately but should be invited to take it away, consider it, take advice if desired, and meet again with the employer to provide comment or alternative suggestions.

The process is adaptable and fluid rather than rigid. It can take from a few days if the proposed redundancies are on a small scale in a small business where the need is glaringly obvious, to months for large scale redundancies in a large entity, particularly if the process is enshrined in collective employment agreements. The specific process is different in each case depending on any urgency, the reasons for the redundancy and whether there are a number of identical
positions that are at risk.

A final decision on the proposal can only be made once the employer has given all employees a full opportunity to provide feedback, and considered all the feedback received. If the proposal involves disestablishing certain positions, the employer must consider whether there are any alternative positions available for the employee which will avoid having to terminate their employment through redundancy. For example, if a sales team in Auckland is being disestablished, there may be the prospect of a sales job elsewhere in New Zealand.

Only if there are no suitable alternatives to redundancy should an employee be given notice of termination. If employment is terminated for redundancy, employees are entitled to notice as per their employment agreement (or to be paid in lieu of notice), redundancy compensation if this is provided for in the employment agreement, and any outstanding holiday pay as
at the date of termination. Employers may also want to consider the possibility of outplacement support, assistance with drafting a CV and references. In the case of a sale, employees may be offered new employment with the purchaser. The vendor will need to check employment agreements to see whether employees are entitled to redundancy compensation even if
they are offered a job with the purchaser.

The process itself is not onerous. Like most employment processes, it simply gives employees information about a potential decision, and the opportunity to comment before the employer makes the ultimate decision. However, it is the adaptation of that basic process to the particular circumstances that is critical. It also needs to be applied to each decision in decision in the process. Employers who step back before a decision and ask themselves ‘which employees would be impacted by this?’ and ‘have I consulted with them?’ are not going to go too far wrong.

The importance of consultation cannot be overstated. Sometimes employees will have information or ideas that have not occurred to an employer when developing a proposal, and we have seen a number of examples of this. Employers do change, amend, or even abandon proposals for restructure as a result of employee feedback. It is not about just going through the motions.

Not following this process risks a personal grievance for unjustified dismissal. This is likely to be far more costly in terms of time, management input, legal fees, and other costs, than taking advice early, being patient, and following a consultation process .

This is a guideline only. The circumstances will dictate the particular process and its timing. It is important to think through these principles and then seek advice prior to commencing any restructuring and consultation process, particularly when a sale or closure is in the wind. We can assist you with drafting the proposal, preparing letters to employees, and of course help you deal with any difficult situations along the way.

Jim Roberts, Partner, Hesketh Henry
Phone: 09 375 8723. Email: jim.roberts@heskethhenry.co.nz