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Brief Counsel

Risk mitigation when retrenching

23 January 2009

Even in a recession, every termination of employment on grounds of redundancy must be justifiable.  This means that it must accord with what a fair and reasonable employer would (not 'could') have done in all the circumstances (s103A, Employment Relations Act).  Failure to meet that test will risk a challenge by the employee via a personal grievance action.

This Brief Counsel provides advice on how to mitigate your risks in a retrenchment.

With an increasing number of businesses expected to reduce staff numbers this year, it is timely to revisit employers' obligations when restructuring.  Employees can challenge a decision to terminate their employment by raising a personal grievance within 90 days.

Justifying a redundancy

To justify a redundancy, you must be able to show that:

  • there were genuine reasons for the redundancy, and
  • the redundancy was carried out in a procedurally fair manner.

It will not be enough just to cite the economic downturn.  You will still need a strong business case for the restructure and a detailed, well thought out, proposal to provide to the affected employees. The proposal would usually include:

  • current and proposed new structure diagrams
  • the cost savings to the business
  • other cost saving measures the company has considered
  • how the new structure will be more efficient, and
  • why certain functions/roles are no longer required within the organisation.

If you are citing the need to save costs as a reason for the restructure, you should be prepared to provide supporting financial information or be able to justify that any information being withheld is commercially sensitive. Even where commercial sensitivity applies, unions may still request that you provide the sensitive information to an independent expert to verify that it supports your proposal.

Following due process

As well as having genuine reasons for the restructure, you will need to follow a fair process.  The process requires you to have formal meetings with the employee to consult over the proposal.  Consultation involves:

  • giving the employee all information that is relevant to the proposal to discontinue that person’s employment
  • providing the employee with an opportunity to comment on the proposal
  • considering the employee's feedback and other alternatives to redundancy, and
  • giving the employee the opportunity to have a legal representative present at the meetings. 

You should not make any decision about the restructure until after the full consultation process has been completed and the employee's input has been considered. The Employment Court set out the following useful guidelines regarding consultation:

  • consultation must never be treated as a mere formality
  • sufficient precise information must be given to enable the employees to state a view, together with a reasonable opportunity to do so
  • genuine efforts must be made to accommodate the views of the employees, and
  • the employer, while entitled to have a working plan already in mind, must have an open mind and be ready to change and even start anew.

Information disclosure

The importance of providing sufficient information cannot be overstated.  The duty of good faith requires an employer to provide the employees affected by a restructure with access to information relevant to the continuation of their employment (Section 4(1A) of the Employment Relations Act). 

A recent decision in the Employment Court highlights that it is not enough to ask the employee to suggest alternatives to redundancy during the consultation process. You must be able to show you considered other options and redeployment opportunities. In Davison v HP Industries, the Employment Court held that Mr Davison's dismissal for redundancy was unjustified. Mr Davison had been employed by HP and its predecessor since 1987 first as an apprentice engineer, then as a technician. The Employment Court found that while the redundancy itself was genuine, HP Industries had not complied with its obligations under section 4(1A) by:

  • not giving Mr Davison enough notice that his position was at risk
  • not making efforts to find an alternative for him at the beginning rather than the end of the process, and
  • not considering Mr Davison's personal circumstances, which included being aware that one of Mr Davison's children was in hospital for a time during this process and that his wife was expecting twins. 

Judge Shaw awarded Mr Davison $9,000 for hurt and humiliation. She found that HP had acted with undue haste which caused Mr Davison anxiety, stress and frustration given he was facing the termination of his employment of 20 years. 

Taking the time to follow a fair process does not have to be difficult or lengthy. As long as you are well prepared and approach consultation with an open mind you shouldn't fall short of your obligations.

Providing all supports possible

At the conclusion of the process, you should consider offering outplacement support as it may reduce the impact of the redundancy on the employee. There is currently no statutory right to redundancy compensation in New Zealand and it is only payable if there is a contractual right or, perhaps, if there is a clear and consistent past company practice of paying redundancy compensation. However, employers should also consider offering redundancy compensation, even if only a small payment. Paying compensation over and above the employee's legal entitlement will demonstrate that the employer is acting reasonably and should reduce the risk that the employee will raise a personal grievance. 

Employers should also advise employees that the National-led Government has introduced financial assistance for employees who were made redundant on or after 8 November 2008. The "Re-Start" package may provide assistance for up to 16 weeks to low and moderate income families with children, and to people with high housing costs who lose their jobs through redundancy. Employees can apply for this assistance through Work and Income. 

Applications must be made within 20 days of the termination of employment.

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