How to legally terminate redundant employees

Terminating redundant employees is never easy. But as a result of COVID-19 and the economic downturn, more businesses are having to make difficult decisions in order to survive.

Speaking to HRD, Jessica Higgins, Associate at New Zealand law firm Anderson Lloyd, said in recent years, the threshold employers must reach to make an employee redundant has been raised. The courts now hold a high bar for employers and redundancy is certainly not an "easy" way to terminate an employee.

“There needs to be a strong commercial and genuine reason for making somebody redundant and those reasons need to relate to the role and not the individual filling that role - that's where we see employers getting tripped up,” she said.

“A performance or a disciplinary issue that is dressed up as a redundancy to try and move on a troublesome employee is always going to be very risky, but we do see it happening.”

When is redundancy fair and reasonable?

Higgins said New Zealand’s Employment Relations Authority and Court take a more involved role in assessing the justification for making an employee redundant. Where previously the courts were reluctant to delve too deeply into the commercial reasoning put forward by an employer, case law shows a redundancy will be scrutinised – including any financial information that might be relied on to justify a redundancy for cost saving reasons.

For a redundancy to be justified, the business must show that making the role redundant is a fair, reasonable decision in all the circumstances. If the business's financial situation is relied on to justify a redundancy, the maths has to stack up. Poor calculations or a personal vendetta against the employee will not be looked upon lightly in court.

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What is the process of employee redundancy?

The first part of the decision-making process involves proving the genuine need to terminate the role, as discussed above. Once that has been achieved, an employer can begin the second part of the process. Higgins said even when an employer has a genuine reason, they can fall down if they fail to follow the correct procedural steps.

“Providing all of the relevant information to the employee is really important. The employer has a statutory obligation under the Employment Relations Act to provide any information that's relevant to the decision to make an employee redundant,” she said.

“Consultation is also vital and without it, a redundancy is very likely to be unjustified. That means that an employee needs to be given a meaningful opportunity to give feedback on a proposal before a decision is made.”

Higgins said at the outset, any redundancy must be framed as a proposal rather than something that is set in stone. While there is no set time period for consultation, she said one week is an absolute minimum. However, it depends on the complexity of the restructure, the amount of information provided to the employee and the business’s financial situation. For a more complex situation, more time allows the employee to comment and offer feedback which is the ultimate aim of the consultation process.

During the height of the pandemic last year, some businesses rushed the consultation process because of the financial strain they were under. But in response, the court was clear. Just because businesses were operating in unexpected circumstances, their legal obligations remained.

If the employee offers any feedback in response, the employer should genuinely consider it. While it may not be viable, they must be willing and able to show why.

After the consultation, an employer can make a final decision and give notice of termination. That notice will be dependent on the period stipulated in the employee’s employment agreement. It may be a standard notice period or a specific time period that relates to redundancy as per their agreement.

“It's not a legal obligation but what we do encourage employers to do if they have the resources is to think about ways they can support and help an employee once they’ve made a decision to make someone redundant,” Higgins said.

“That might be things like offering to pay for one or two counselling sessions or help with updating their CV - especially if they've been employed in the role for a long time and the thought of looking for another job is daunting. Another example is offering time off during the notice period to seek alternative employment.”

One area where employers can fall down is where there is a pool of employees being selected for redundancy. An employer may be reducing the number of roles available, for example, when downsizing a team of three to just one person. In that situation, Higgins said HR must be careful with the selection process. The selection process, and any selection criteria used to assess each employee and make a decision about which roles are disestablished, must be fair and reasonable – and importantly, it must be consulted on with employees.

An employer cannot simply decide the criteria and plough ahead with a selection process. Again, a meaningful period of time must be given for employees to give feedback on the criteria and raise any concerns they might have.

Overall, the driving message is that the redundancy process must be carried out in good faith. It must begin with a genuine commercial reason, and involve adequate consultation, allow for feedback and, where possible, provide support.

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How much severance is required?

Unlike in Australia, there is no statutory obligation to offer redundancy pay under New Zealand’s employment law. That is unless redundancy compensation is included in the employee’s employment agreement. Higgins said in her experience, that situation is relatively rare, although more common in certain industries and where the employee is employed under a collective employment agreement.

Can employees fight redundancy in court?

A poorly executed redundancy process exposes employers to risk of a personal grievance for unjustified dismissal. Employees have recourse to lodge a personal grievance case under the Employment Relations Act 2000 within 90 days of the when the grievance occurred or it came to their attention. If successful, an employer may be liable for compensation, lost wages and legal costs.  It is not easy to get right and given the potential risk should things go wrong, Higgins encourages HR to seek legal advice before finalising a redundancy proposal.