Employee consultation in a business sale – has the bar been raised?

Balancing the good faith obligations under employment laws with the commercial reality of business sales has always been a vexed issue in New Zealand due to the two core competing interests involved.

On one hand, the Employment Relations Act 2000 (ERA) includes statutory obligations on all employers to provide employees with information in relation to any proposal that could have an adverse effect on the continuation of their employment, and the opportunity to comment on this, before a decision is made to proceed. As a business sale will invariably result in the termination of employment of the seller's employees upon completion, the consultation obligation is often triggered before a sale agreement is entered into.

On the other hand, sharing commercially sensitive details of a proposed sale with all employees before a sale agreement has been signed is often neither desired nor commercially viable. The more commonly taken approach involves a business consulting with its employees on the impact of a decision to sell after signing a sale agreement. Of course, this will not allow for meaningful consultation over the sale (and is not compliant with the ERA), but can include matters such as potential redeployment, the duties to be performed prior to completion, and the entitlements that will be payable upon termination.

A form of hybrid approach that is also sometimes taken is for a business to enter into a conditional sale agreement, and to consult with employees in the period prior to the agreement becoming unconditional. While not necessarily strictly compliant with the ERA, this approach allows for some meaningful consultation prior to a sale becoming unconditional.

Some exceptions limit the consultation obligations in a business sale. A key exception provides that an employer is not required to provide employees with access to “confidential information” where it is necessary, for good reason, to maintain the confidentiality of the information (for example, to avoid unreasonable prejudice to the employer’s commercial position). In this context, “confidential information” means “information that is provided in circumstances where there is a mutual understanding (whether express or implied) of secrecy.”

Unjust dismissal

These issues have recently been brought into focus by the Employment Court's judgment of Birthing Centre Ltd v. Matsas, [2023] NZEmpC 162.

This case involved one of the DHBs acquiring the business of a private birthing centre and bringing it into its DHB service. The transaction resulted in the seller closing the centre, terminating the employment of all its midwives, and the DHB offering them new employment.

There were private discussions between the centre and the DHB about the acquisition, during which the DHB asked that the employees not be informed due to confidentiality reasons. Those reasons were vague and centred around the DHB not wanting “gossip and speculation” which would impact public confidence in its services.

The affected employees and the union were only advised of the acquisition after negotiations had concluded.

The employees' claims against the seller for unjustified dismissal, breaches of good faith and failure to pay notice succeeded. The awards for compensation ranged between US$5,000 to US$8,000 each, along with lost wages (where applicable), and were upheld.

What is needed to assert commercial sensitivity over a sale?

A key focus was on whether the threshold had been met, allowing the birthing centre to withhold details of the sale until completion on the basis that it was commercially sensitive.

Although both parties believed there was an element of confidentiality which needed to be maintained about the transaction for reasons which were subjectively important to them, the court found that information may only be withheld when there are reasonable grounds for doing so (an objective test). Simply wanting to avoid gossip and speculation was not accepted as a reasonable ground for withholding information.

Importantly, the court determined that there had been a failure by the birthing centre to:

• Consider options for exploring whether the integrity of their commercial position could be maintained while informing employees of a potential sale in a confidential way.
• Consider whether providing information to the union was viable on an embargoed basis.
• Direct employees not to share information during the consultation process.
• Include as a condition of sale that staff be consulted on a confidential basis and their views sought before the sale agreement became unconditional.

A key takeaway from this case is that it is still possible to meet the necessary threshold to withhold commercially sensitive information from employees in a business sale scenario, and not consult with them prior to a sale agreement becoming unconditional. But the bar has been raised.

In some circumstances, regulatory obligations (such as statutory obligations governing when the market must be notified of a sale by a listed vendor) will mean this obligation can more easily be met. Otherwise, a business will need objective evidence to demonstrate that it is necessary, for good reason, to maintain the confidentiality of the information, including evidence of the unreasonable prejudice to their commercial position that would result by sharing information with employees before a sale completes.

Note that these issues do not arise in the scenario where the sale involves that of a company's shares. This is because in that situation the employing entity remains the same, with no trigger of redundancies and therefore the strict good faith consultation obligations.

Can waivers be used?

There may also be another option to provide protection to a seller in these situations. Properly worded and enforceable waivers being included in offers of employment from a buyer in these situations will negate the ability for employees of the seller to raise claims.

Any such approach would need to be mutually agreed, and the enforceability of any such waivers is contingent on whether they are reasonable, including whether the terms of employment offered are substantially similar to employees' existing terms with the seller.

Such waivers would not provide any protection against claims being made by employees who did not accept an offer from employment from the buyer, and therefore did not enter into the waiver.

We recommend that consideration be given to these matters early in the negotiation process, particularly from a seller perspective.

Carl Blake is a partner in the employment practice at DLA Piper in Auckland. Reuben Woods is a corporate mergers & acquisitions partner at DLA Piper in Auckland.