COVID-19 Job Retention by Furlough Leave

May, 2020

By: Bev Edwards

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When businesses throughout New Zealand were looking down the barrel of a 4 week lockdown from 26 March 2020, the reality of COVID-19 hit. The question of how to financially survive as a business with outgoings like rent, bank costs, and staff wages was raised, these costs did not stop for lockdown. The most easily identifiable outgoing sacrifice was the staff wage bill.

The government recognised this as a stark reality and quickly announced a COVID-19 Wage Subsidy (“WS’), to try and keep staff retained and employed. But the reality was, many businesses could not survive having to pay all the usual outgoings and still be obligated to ‘top up’ wages to 80%.The floodgates of large scale restructures and disestablishments was immediate. The government urgently amended the initial WS obligations to include an obligation not to retrench during the WS duration; any business applying post 4pm 27 March 2020 had to sign a declaration that “the business would retain the employees named in the application as the employees for the period the business received the subsidy in respect of those employees.”

The hard economic reality is, that many businesses who took the WS in the hope that staff might be retained, discovered this was unrealistic. If an employer is having cash flow problems during this crisis and a role will no longer be required longer term, or the entire business is shutting down, then it may be reasonable to make redundancies. The question of whether you can retrench whilst having the post 27 March WS declaration is dealt with in another article.

This article looks at an option that is seldom mentioned and is untested in the employment field in New Zealand, although it is used in New Zealand family/Trust and criminal law 1. and is widely being used in the UK and USA COVID-19 crisis – furlough.


Furlough leave is a temporary leave of absence for economic reasons and is designed to save jobs. A ‘furloughed employee’ is an employee placed “on a leave of absence”. The absence would involve zero hours/zero pay. Whilst a ‘furloughed employee’ is not a recognised term in New Zealand employment law, the concept will allow employers to place their employees on unpaid leave/furlough leave as an alternative to redundancy.

[1] Averbuch v Averbuch High Court, Whangarei, 31/7/1990, M88/84; Buttle v Vicar of the Anglican Parish of Kohimaramara HC Auckland 18/3/2010 CIV-2007-404-7898; Garlick v Police HC, Nelson, 4/8/2008, CRI-2008-442-12

So how do you furlough an employee? The usual contractual rules of IEA variation apply. Some (rare) contracts have a ‘Shortage of work clause’, which allows the employer the right (with agreement) to place employees on reduced hours, or alternatively, temporary leave, with correlating pay reduction. If your does not, see if your contracts have a flexibility clause, or variation clause that says the employer can change (‘vary’) specific terms of employment, for example:

  • hours or days worked
  • rates of pay
  • the place of work

Even if furlough is covered by a shortage of work/flexibility/variation clause, you will still need to consult and agree with employees that they will be furloughed, because New Zealand employment law does not give the employer a unilateral right to withdraw work/pay. If the alternative is redundancy, it is very likely that employees will agree to being furloughed in order to continue to receive the security of ongoing employment and the statutory entitlements that cannot be contracted out of like annual and sick leave, Kiwisaver, etc. A further advantage to furlough is that if employees have had a reduction in hours of work/pay, they may also be able to access support from Work and Income, so they are not left with no avenue of income at all.

Any agreed furlough must be properly recorded in writing* and care must be taken that the employer selects people for furlough in a fair way to avoid any discrimination. It is a good idea to include:

  • the date furlough starts
  • the specific terms of the furlough e.g. hour and/or wage reduction
  • when the furlough will end and/or be reviewed

What is the benefit to an employer to furlough staff and not retrench? One certainty is that COVID-19 lockdowns will end, and at Level 1, or even 2, most businesses will want to get back up and trading as fast and optimally as possible. If you have retrenched your staff, you may have paid redundancy compensation, you will have lost talent and the investment you made in staff beyond financial. You now face the unappealing prospect of having to recruit and retrain staff, which may set your momentum back months. If you have furloughed staff (usually one of your business’s least appreciated assets,) your start-up would be faster and better staffed.

*If furlough is an option you want to consider, please contact EMA Legal to assist with legal advice and furlough templates.

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