Partner at Cavell Leitch Law
Hans van Schreven
Partner at Clark Boyce Lawyers
How to make an employee redundant
If you are an employer and you wish to make an employee redundant, you must ensure:
- that there are genuine commercial reasons for doing this (that is, that the redundancy is substantively justified)
- that the process by which this is done is fair (procedural fairness), and
- that you comply with any relevant terms in the employment agreement
Redundancies and restructuring
The EMPLOYMENT RELATIONS ACT 2000 also protects employees affected by restructuring where the work they do will be carried on by employees of a new employer or by another person. In some cases, where employees in certain industries have transferred to a new employer and are then made redundant, redundancy entitlements can be set by the Employment Relations Authority: see below, "Protections for vulnerable workers affected by restructuring" and the other headings that follow it.
When redundancies are justified
A decision to make an employee redundant is justified if you have genuine commercial reasons for doing this.
What are "genuine commercial reasons"?
What is important here is not the particular judgement that you make about what is in the best interests of your business; rather it's that you make your decision in good faith, that your reasons are genuine.
The courts have made it clear that they will not attempt to second-guess an employer's commercial judgement in making a position redundant. They will intervene if, say, it is shown that an employer's real motivation for making an employee's position redundant was because of the employee's poor work performance; in that case, genuine commercial reasons do not exist. But if the decision is based genuinely on commercial considerations, then the courts will leave you to decide how to run your business.
It is not necessary for it to be a matter of the survival of your business. You will be justified in making a position redundant even if this is part of normal business restructuring â€“ adopting new technology perhaps, or dispensing with less profitable operations.
The EMPLOYMENT RELATIONS ACT 2000 also specifically requires employers to act in good faith when making employees redundant.
The process of making an employee redundant
How do I ensure that the redundancy process is procedurally fair to the employee?
What is procedurally fair to the employee will depend on the particular case. You will need to obtain legal advice to determine exactly what steps a fair process would require in your situation.
In situations where redundancies are essentially inevitable â€“ for example, the business is insolvent or there is a major restructuring â€“ it is likely that the requirements of procedural fairness will be fairly limited. In those cases, it will probably concern the selection process for the redundant employees, the notice they are given, and the payment of any compensation. (Note that employment agreements in most industries must include a negotiated provision to protect employees where the work they do will be carried on by employees of a new employer or by another person as a result of restructuring. The provision must set out, among other things, the process for determining what redundancy entitlements will be available for employees not transferring to the new employer: see below, "Restructuring: Protection for workers outside the specified industries".)
But in other cases, particularly where there are only a few employees made redundant, the requirements of procedural fairness may be more extensive. It may be necessary to consult with the employees, to consider possible alternatives to redundancy, and to provide employees with counselling.
If the employment agreement specifies procedures for making employees redundant, your failure to comply with them will very likely be seen by the courts as procedural unfairness.
The selection of employees to be made redundant
You are given a wide discretion to determine the criteria for selecting employees to be made redundant. But these must be relevant to the needs of the new business, and your selection must be based on proper motives.
It may be that the employment agreement sets out a selection process, in which case this must be followed.
How much notice do I have to give employees?
If the employment agreement specifies a particular period of notice, then you must give that period of notice.
If the agreement doesn't deal with notice, then you must give a "reasonable" period of notice. What is reasonable will depend on the particular circumstances.
Compensation for redundancy
Do I have to pay compensation to the employees made redundant?
You are under no automatic obligation to pay compensation for redundancies. The matter is determined by the relevant employment agreement, and if the agreement doesn't provide for compensation, the employees aren't entitled to any.
The rule that there is no automatic right to compensation does not apply in the case of restructuring in specified industries where workers are particularly vulnerable (such as cleaning and food-catering services), if the new employer makes a transferring employee redundant: see below, "Protections for vulnerable workers affected by restructuring".
The phrase "technical redundancy" describes the situation where a business is sold and the new owners agree to take on the business's employees under substantially the same terms and conditions.
In this situation, because an employment agreement cannot simply be transferred from the old business owner to the new, the old employment ceases and therefore technically the employees have been made redundant. This means that if the old employment agreements provide for compensation for redundancies, the employees would be entitled to this compensation even though their employment has effectively continued.
To avoid this, employment agreements often specifically exclude technical redundancies from any provision for redundancy compensation.
However, the EMPLOYMENT RELATIONS ACT 2000 gives employees in certain industries a right to transfer to the new employer and to receive redundancy payments if the new employer decides to make them redundant: see below "Protections for vulnerable workers affected by restructuring". Employees in other industries get a lower level of protection: see below, "Restructuring: Protection for workers outside the specified industries".
Challenges by employees to a redundancy
The employee can bring a personal grievance against you to the Employment Relations Authority if:
- you did not have genuine commercial reasons for the redundancy
- the process was unfair, or
- you did not comply with the employment contract.
See How to defend a personal grievance claim brought by an employee.
The Authority can impose a number of remedies in personal grievance cases, including reinstatement or monetary compensation. If there has been procedural unfairness, the employee may be awarded compensation for the distress caused by the manner in which the redundancy was carried out.
Challenging a breach of an employment agreement
If you haven't complied with the terms of the employment agreement, the employee also has the additional right to apply to the Employment Relations Authority to have those terms enforced (called a "dispute" in the legislation).
This right is separate from the personal grievance procedure, and whereas a personal grievance must be raised with the employer in 90 days, there is no such restriction in the case of a "dispute". The only time limit is that the employee must apply to the Authority within six years of when the particular events happened.
Employment agreements in most industries must have a negotiated provision protecting employees affected by restructuring where their work will be carried on by employees of a new employer or by some other person. The provision must set out, among other things, the process for determining what redundancy entitlements, if any, will be available to employees who don't transfer to the new employer. These rules covering restructuring are explained in detail below, under the heading "Restructuring: Protection for workers outside the specified industries" and the headings that follow it.
Protections for vulnerable workers affected by restructuring
The EMPLOYMENT RELATIONS ACT 2000 gives some protection for employees where, as a result of restructuring, the work they do will be carried on by the employees of a new employer or by another person.
The level of protection offered depends on whether the employee works in one of several industries specified by the Act in which workers are particularly vulnerable (see below). Workers in those industries have the right to transfer to the new employer, on the same terms and conditions.
Workers outside those specified industries are given a lower level of protection. Their employment agreement must include a negotiated provision setting the process and content for negotiations between the employer and any new employer in a restructuring situation as it affects the employees, and the process for determining what entitlements, if any, will be available to employees who don't transfer to the new employer. See below "Restructuring: Protection for workers outside the specified industries".
What are the specified industries in which workers are given extra protections?
These are industries in which restructuring is frequent and has tended to undermine terms and conditions of work, and in which workers have little bargaining power, namely:
- cleaning or food-catering work in any workplace
- laundry work in hospitals, rest-homes or educational institutions
- orderly work in hospitals or rest-homes
- caretaking work for schools, universities, polytechnics and other educational institutions
What types of restructuring are covered by the protections for vulnerable workers?
Employees in one of the specified industries are protected in the following types of restructuring situations:
- when the company they work for is sold
- for example, they clean for a cleaning company and that company is sold to a different cleaning company
- when the company the employee works for loses its contract for the work the employee does to another business (the Act calls this "subsequent contracting")
- for example, the employee works for a catering company that has a contract with an airport, and the airport then gives the catering contract to another catering company
- when the work done by the employee is "contracted out"
- for example, the employee works for a school doing cleaning work and the school then gives the cleaning work to a cleaning company
- when the company the employee works for loses the contract for the work because the customer wants to do the work themselves (the Act calls this "contracting in")
- for example, the employee works for a catering company providing catering services for a rest-home, and the rest-home then decides to get the catering done by its own employees
Employer's obligations before the restructuring
Before the restructuring the employer must inform the affected employees that they have the right to transfer, and tell them the date by which they must decide. The employees must have a reasonable opportunity to make their decision. They must also be given access to all the relevant information about the restructuring.
The new laws do not prevent the employee, before deciding whether to transfer to the new employer, from bargaining with the existing employer for alternative arrangements. Any alternative agreed on must be in writing.
Employees who choose to transfer to new employer
If the employee decides to transfer, they become an employee of the new employer, on the same terms and conditions, including as to whether they're full-time or part-time.
The date of the transfer is determined by agreement between the employee and the previous employer. If they can't agree, it's the date on which the restructuring takes effect.
Their employment will be treated as continuous for the purpose of service-related entitlements, including annual holidays, sick leave, bereavement leave and parental leave.
A transferring employee cannot also receive redundancy entitlements from the previous employer under the previous terms and conditions.
Employees who choose not to transfer to the new employer
If employees decide not to transfer to the new employer, this may mean that they're made redundant. The standard laws governing redundancies will then apply. If any term or condition of their employment excludes redundancy entitlements where they have the right to transfer to a new employer but choose not to, that exclusion will still apply.
What if the new employer makes a transferring employee redundant?
If the new employer decides to make a transferring employee redundant, the employee will be entitled to any redundancy payments in their agreement.
If the agreement doesn't provide for, or doesn't exclude, redundancy entitlements in that situation, the employee will be entitled to redundancy payments, with the appropriate amount to be agreed through negotiation with the new employer. If they can't agree, either party can apply to the Employment Relations Authority for it to investigate.
The Authority will rule on how further bargaining should happen, if it thinks further bargaining is possible. Alternatively, if it thinks further bargaining isn't warranted, the Authority will decide what amount of redundancy payment the new employer should pay.
Obligation to provide new employer with information about employee transfer costs
From December 2006, potential new employers in a proposed restructuring have the right to be given information about the labour costs of employees who would have the right to transfer if the restructuring goes ahead.
They can request the information for the purpose of:
- deciding whether to terminate a contract or to let a contract lapse
- negotiating a contract
- entering into a contract, or
- tendering for work
What information is the new employer entitled to?
The information to which they're entitled includes:
- how many employees are eligible to transfer
- the wages or salary payable to those employees in a given period for doing work that may be subject to the restructuring
- the total number of hours in that stated period spent by the employees doing the work that may be subject to the restructuring
- the cost of all service-related entitlements, whether legislative (for example, under the HOLIDAYS ACT 2003) or as agreed between the employer and employee â€“ such as the costs of annual leave and sick leave balances
- the cost of any other employee entitlement, such as agreed entitlements that aren't due until a future date (long service leave, for example)
Who can ask for, and who has to provide, information about employee transfer costs?
- Contracting in: If for example a rest-home is considering whether to bring in-house some catering work that it currently contracts out, the rest-home can ask the catering contractor for information about employee transfer costs.
- Contracting out: If for example a school is considering entering into an agreement with a cleaning company to do cleaning work that is currently done by school employees, the cleaning company can ask the school for information about employee transfer costs.
- Sale or transfer of business: If for example a cleaning company is considering whether to sell its business, potential buyers can ask the company for employee transfer costs information.
- Subsequent contracting: If for example an airport's contract with a catering company is about to end and the airport has asked for tenders, a potential independent contractor can ask the airport for employee transfer costs information.
What if I don't have the information?
It may be that you don't have the information because the work has been subcontracted and is not performed by your employees. In that case, you must ask the subcontractor to provide you with the information; they must do so.
How much time do I have to provide the information?
You must provide the information in sufficient time to allow the person requesting it to use the information when deciding whether to enter into a restructuring.
Restructuring: Protection for workers outside the specified industries
A lower level of protection is given to employees in restructuring situations outside the specified industries in which workers are particularly vulnerable. In those cases, the employee's employment agreement must include an "employee protection provision", which specifies the issues that the existing employer must negotiate with the new employer in relation to the affected employees, and the process that this negotiation will follow (see below for more details). The level of protection that employees will receive will therefore depend on what is negotiated between the employer, the employees and, where applicable, their unions.
Also, this protection does not apply to all of the types of restructuring in which workers in the specified industries are protected.
What types of restructuring are covered by the protections for workers outside the specified industries?
An employee outside the specified industries is protected when:
- the work they do is "contracted out" (that is, their employer contracts another business to perform work the employee was doing for their employer "in-house"), or
- the company the employee works for is sold (including if it sells only the part of the business that affects the employee)
The employee is not protected when:
- the company the employee works for loses the contract for the work because the customer wants to do the work themselves ("contracting in"), or
- the company the employee works for loses the contract for the work the employee does to another business ( "subsequent contracting")
What does the "employee protection provision" in the agreement have to include?
If an employee works outside the specified industries in which workers are particularly vulnerable to restructuring, their employment agreement must include a provision that covers the following:
- the process that the existing employer must follow in negotiating with a new employer about a restructuring, as it affects employees
- the issues to be negotiated, including whether the employees will transfer to the new employer on the same terms and conditions
- the process that will be followed to determine what entitlements, if any, are available to employees who don't transfer
Affected employees can choose whether or not to transfer
When an employer has arranged for an affected employee outside the specified industries to transfer to the new employer, the employee has a choice whether or not to transfer.
- It has been possible to give only some general guidelines here about the requirements of procedural fairness. The precise requirements will depend on your particular case, and you should therefore obtain legal advice about the steps you should take.