Generally, this will occur where a business is going through a challenging period, but the business owners can see a light at the end of the tunnel. To avoid costs and ensure long term survival, a business may choose to hibernate, or temporarily suspend conducting business until it is ready and able to commence again.
Recently, some businesses have elected to hibernate because of the Covid-19 pandemic. For example, in some cases, businesses that rely on overseas tourists have decided to temporarily suspend or hibernate their business until the boarders open again.
Business hibernation in the general sense covers a broad range of issues. This article will focus only on those issues which affect employment obligations.
The impact on employment?
Hibernating a business is likely to have one of two impacts on employees:
- In some instances, a hibernating business may decide to propose a restructure and make their employees redundant. This may be appropriate where it is unclear if or when the business will be able to commence again.
- Alternatively, a hibernating business may decide to come to an agreement with its employees to take a stand down or leave of absence period from work. This is sometimes known as a ‘furlough’.
An employer can potentially make employees redundant when their position is no longer needed. Where a business is hibernating, particularly for an uncertain or extended period of time, and an employer does not require employees, it may be entitled to make employees redundant.
If some, but not all, of the business is being placed into hibernation then the employer must consider whether there is any opportunity for employees to be redeployed to another part of the business which is not hibernating. Only once this option has been considered can an employer terminate employment for redundancy.
Where employees are made redundant, the notice period in the employment agreement must be complied with. If there is no specific clause in the employment agreement outlining the period of notice in a redundancy situation, reasonable notice must be given. The length of reasonable notice will depend on factors such as the reason for the redundancy, custom, practice/industry norm, and the amount of compensation being paid (if any).
Redundant employees must have all unused annual leave, salary and other entitlements paid out. Where an employment agreement makes provision for redundancy compensation, this will also have to be paid out. However, if the employment agreement doesn’t have such a clause, the employee will not be legally entitled to receive redundancy compensation.
Agreed stand down or leave of absence
An agreed stand down or leave of absence may be used when there is not enough work for all employees during a quiet period and the employer (and the employee) want to avoid terminations. Instead, they would like to ‘freeze’ the relationship until the point where employees are required again. A recent example of this was Air New Zealand’s decision in April 2020 to offer some of its cabin crew the option to go on a leave of absence for three years or longer following the downturn in travel because of the Covid-19 pandemic.
For an employer to fulfill its employment obligations when deciding to hibernate employees, it is crucial that agreement is reached between each employee and the employer.. There is no automatic right for an employer to require an employee to agree to a stand down or leave of absence arrangement (as there may be in some other jurisdictions). It is essentially an agreement to take a period of unpaid leave. Requiring employees to take unpaid leave without their agreement is likely to amount to a suspension and is likely to be unjustified except in very specific circumstances (we strongly recommend employers take legal advice before suspending employees).
Where any changes to terms and conditions of employment are proposed by an employer, there are good faith requirements that must be followed, including ensuring that the employee is advised of their right to seek independent advice before agreeing to any variation.
If the changes to the terms of employment are agreed to, these changes must be recorded in writing, regardless of whether the change is temporary. The variation should be clear about what employees are entitled to do during the period (e.g. whether they are allowed to get another temporary job), what will happen to leave (see below), and how long the period will last, or when it will be reviewed.
The advantage of a hibernating business seeking agreement with employees to take a leave of absence is that things like notice, redundancy payments (if applicable) and annual leave do not have to be paid or worked out. Further, it helps to provide some reassurance for the employer (and the employee) that they will be able to retain staff by placing them on a temporary break, as opposed to having to go through a process of rehiring employees.
One important implication of obtaining employees’ agreement for a leave of absence is leave entitlements. Under section 16 of the Holidays Act 2003 (Act), upon completion of each 12 months continuous employment, employees are entitled to no less than 4 weeks paid annual leave. If employees are on unpaid leave for more than one week, the remainder of the unpaid leave period will not count towards their 12 months continuous employment and related leave entitlements unless the parties agree otherwise. Sick leave and bereavement leave entitlements may also be affected.
As the impacts of Covid-19 and its related restrictions are eased, we are optimistic that business hibernation is something that is less likely to occur.
While business hibernation can be a useful tool, in terms of employment, it also causes stress and uncertainty for all parties. If a business does choose to hibernate, and either makes employees redundant or seeks agreement for a leave of absence, it is important that negotiations in good faith and careful consultation are undertaken, and any agreement is recorded in writing.
As always, where there is any uncertainty, we strongly suggest seeking legal advice.
If you have any questions about business hibernation, please get in touch with our Employment Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.