Redundancy FAQs for Employers

What is redundancy?

New Zealand does not have a statutory definition of redundancy. Broadly, a redundancy occurs in situations where an employee’s employment is terminated because the employer no longer needs the employee’s position or has a reduced requirement for the employee’s position. Common redundancy situations exist where:

  • The employer is closing the business or a part of its business;
  • The employer is outsourcing a part of the business;
  • The employer is restructuring its business and, as a result, it requires fewer employees in certain roles; or
  • The employer is closing down the business or part of its business in a particular location.

Example:

a restaurant becomes insolvent, the employees are no longer required and their employment will terminate by reason of redundancy.

Example:

a business decides to outsource its marketing function to an external agency and make the marketing team redundant.

Example:

a supermarket invests in automatic tills. As a result, it requires fewer cashiers and a number of them will be made redundant.

When will a redundancy amount to unjustified dismissal?

The statutory test for whether a dismissal (including a redundancy dismissal) is justified is set out in Section 103A of the Employment Relations Act 2000. Broadly, the test is whether the employer’s actions and how it acted were what a fair and reasonable employer could have done in all the circumstances. Parties to an employment relationship are also required to deal with each other in good faith. This is particularly relevant in redundancy dismissals.

A dismissal on the grounds of redundancy may result in a successful claim for unjustified dismissal either because:

  • it cannot be substantially justified; or
  • it has not been implemented in a procedurally fair manner.

Example:

An accountancy firm has a secretary whose performance is poor. Rather than go through a performance review process, it decides to dismiss her for redundancy. Shortly afterwards, the firm hires a new secretary. It is likely that the Employment Relations Authority would find that the dismissal was unjustified because it could not be substantially justified.

Example:

A large retailer decides to outsource its HR function and reduce its HR team from 3 HR advisers to 2. The employer selects the 2 employees it will make redundant and, without discussing it with them, tells them that their employment will terminate by reason of redundancy. While the reason for the redundancy is genuine and probably substantially justified, it is likely that the Authority would find that the dismissal was unjustified because the employer did not follow a fair procedure.

The Authority and the Court will scrutinise an employer’s decision making to ascertain if the redundancy was genuine and not, for example, a way of getting rid of a poor performing employee. Employers must be able to provide a commercial justification for their decision to make an employee redundant and ensure that information on which the decision is based is factually correct.

A broad overview of the procedure for redundancy

The first step should be to check employment documentation for any internal procedures that apply to redundancy. If internal procedures apply, employers should follow them unless there is a good reason (such as the procedures not being legally compliant) not to.

Employers who have a proposal which will result in one or more redundancies must consult extensively with those employees who are at risk of redundancy. Save for a few exceptions, employers must provide the employees at risk of redundancy with all relevant information. Employers must not reach a decision on the proposal until the consultation is complete and employees’ views have been considered and responded to.

Where it is necessary to select employees for redundancy, the employer will need to implement a fair selection process. A selection will be unfair it if is related to certain specified impermissible reasons including the prohibited grounds of discrimination (i.e. sex, age, race etc). Employers must consult with employees on the proposed selection criteria. Once selection has been undertaken, employers must not reach a final decision until the employees have been given an opportunity to comment on their scores.

Where the employer has a vacancy that a potentially redundant employee has the skills and qualifications to perform, that role should be offered to the potentially redundant employee. Depending on the circumstances, it may also be necessary to offer a different or more senior role to a potentially redundant employee.

Save in certain circumstances in respect of vulnerable employees (see below), there is no statutory requirement to pay employees redundancy compensation. However, employers should check their documentation including employment agreements and employee handbooks to see if employees have a contractual entitlement to redundancy compensation. Employers should also consider past practices. If they had a regular practice of paying redundancy compensation and this is well known, their employees may have a contractual right to redundancy pay on the basis of ‘custom and practice’.

Special rules apply for vulnerable employees (in certain situations) and those employees who are on or who have recently returned from parental leave. Vulnerable employees are listed in Schedule 1A of the Employment Relations Act 2000 and include employees who work in cleaning services and food catering services in any workplace; laundry services for the education, health or age-related residential care sector; orderly services for the health or age-related residential care sector; and caretaking services for the education sector.

Special considerations will also apply if there is a collective agreement in place and/or if the affected employees have a bargaining agent or are represented by a union.

The redundancy process is complex and fraught with difficulty. The above is a very broad overview only. We advise employers who are considering implementing redundancies to take advice as early as possible.

For more information on the redundancy process, please contact us on: (09) 214 5780.

Disclaimer:  The information in this Knowledge Centre is not intended to be and does not replace legal advice.  It is provided free of charge for information purposes only.  Reasonable effort has been made to ensure the information is correct and up to date.  However, no responsibility for its accuracy or for any consequences of relying on it is assumed by the author or Just Employment Limited.  You are strongly advised to obtain specific advice from a lawyer about your case or matter.