Terminating Employment (Particularly Restructuring and Redundancies) during Covid-19

This article looks at the ‘ins and outs’ of ending employment relationships during Covid-19 and its aftermath.

Furlough or stand down

The concept of a “furlough” is essentially an unpaid suspension of employees during a period of business crisis. This is a foreign concept to the New Zealand employment law framework. Unlike section 524 of the Australian Fair Work Act 2009, New Zealand’s employment legislation does not provide for a ‘furlough’ or ‘stand down’. The concept closest to this in New Zealand is the suspension of employees. This, however, could hardly ever be considered to be justifiable in the context of a business crisis. Equally problematic, at least from a practical perspective, is the concept of leave without pay. Whilst generally possible, this would require employees’ agreement, which employers may not be able to obtain.

The doctrine of frustration of contract or so-called force ‘force majeure’ clauses?

Secondly, other ‘short cuts’ are highly unlikely to be available. The common law doctrine of frustration of contract is, whilst heavily discussed amongst legal commentators these days, hardly going to be a reliable tool to end employment relationships in situations like the present. This is mostly due to the temporary nature of Covid-19 and its implications. The argument that the main purpose of the agreement would be defeated and the implications of Covid-19 would permanently disable the parties from performing their respective duties under the employment agreement, would be highly challengeable. From a legal practitioner’s perspective, reliance on the doctrine of frustration of contract is not recommendable in the present circumstances – if ever.

Equally, the reliance on a contractual ‘force majeure’ provision may very likely be risky. It would take a perfectly drafted provision that fits the exact circumstances, to make this a recommendable tool to terminate employment. Drafting such clause, of itself, would warrant an article on its own. Even if such clause was available, it would still not be particularly helpful in the situation where the business is not shutting down altogether, but instead wishes to reduce its workforce.

Restructuring and Redundancies in the era of Covid-19

Long story short, the only reliable and most recommendable tool for businesses that are impacted by the economic consequences of Covid-19 and must terminate employment relationships, is to conduct a fair and reasonable restructure process that results in effecting the redundancy of one or more employees.

Undertaking restructure processes and effecting redundancies is challenging at the best of times, as the most recent data on personal grievances demonstrates. A whopping 87 per cent of personal grievances related to restructures/redundancies were upheld in the Employment Relations Authority. The legal assessment of the justification of a redundancy is twofold – the Employment Relations Authority and Employment Court look into the rationale for the redundancy (i.e. its substantive justification), and the process followed (i.e. the procedural justification) by the employer. Both need to be evidenced by the employer. The procedural justification is where most redundancies end up being determined to be unjustified. This aspect has also been subjected to heavy media coverage in recent weeks.

The rules and legal principles, whether they stem from case law or legislation (i.e. the Employment Relations Act 2000), continue to apply without limitation in relation to redundancies effected as a result of the implications of Covid-19. If anything, the Covid-19 situation may even make it more difficult for businesses to justify redundancies. Below is a brief snapshot of a number of complicating, but important considerations when preparing for or effecting redundancies during present times:

  1. The first consideration is whether or not the business is in receipt of the wage subsidy, or is considering to apply for the wage subsidy. Where no application has been made or will be made, the restructure process will arguably be more ‘straight forward’, in that no considerations related to the wage subsidy are applicable. However, one challenge that may exist – and one which has not been tested in the Employment Court – is whether an employer’s omission to apply for the subsidy in circumstances where this would have been possible could adversely affect the justification of a redundancy related termination.

    The receipt of the wage subsidy comes with a declaration of the employer not to effect redundancies for a period of twelve weeks. According to the Ministry of Social Development, the twelve week period commences either on 17 March 2020 or the date the employer applied for the subsidy. The employer can freely chose.

    If the employer has applied for the wage subsidy before 4.00pm on 27 March 2020, then the declaration has not been breached if redundancies are effected within the twelve weeks, so long as the employer can demonstrate that “best endeavours/best efforts” have been made to avoid redundancies.

    If, however, the employer has applied for the wage subsidy after 4.00pm on 27 March 2020, then the declaration will be breached if redundancies are effected within the twelve weeks. This is due to a change in the declaration narrative which took effect on 27 March 2020 at 4.00pm.

    A breach of the declaration would very likely trigger the employer’s obligation to pay the wage subsidy back to the Ministry – certainly for employers who applied or the subsidy post 27 March 2020.

    Further, whilst unclear, in that this is untested in Court, a ‘breach’ of the wage subsidy declaration may potentially affect the assessment by the Employment Relations Authority/Employment Court of the justification of a termination for redundancy. The safest advice therefore is to avoid, as far as is possible, redundancies during the twelve week retention period.

  2. The next important consideration that is particularly attributable to the Covid-19 situation relates to the consultation process, which affects the procedural justification. Whilst effecting redundancies may not be permissible or at least advisable during the twelve week wage subsidy period (if any), a consultation process may be commenced during that time – without jeopardising the subsidy itself or the justification of a subsequent redundancy.

    Physical meetings with employees may not be possible. Whilst it is perfectly lawful to conduct a consultation process and consultation meetings with the aid of electronic means, for example FaceTime, Skype, Microsoft Teams, Zoom, telephone, email, etc., some employees may not have access to such means. This may also affect the employee’s ability to seek independent advice. Employers must assess whether potential problems exist in relation to their ability to effectively consult with employees and employers must cater for this. Employers must also make reasonable accommodation for potential delays as a result of employees being unable or less able to be consulted with.

  3. The other ‘ordinary’ considerations remain fully applicable. For example, the employer must have genuine business/commercial grounds to effect redundancies. These grounds are fully assessable by the Employment Relations Authority/Employment Court. The employer needs to provide all information that is relevant to the proposal to effect redundancies, for example financial data that speaks to the commercial rationale. Further, the employer must provide employees with reasonable opportunities to consider the proposal, seek independent advice in relation to the proposal, have the assistance of a representative or support person, provide feedback on the proposal, and have such feedback to be open-mindedly considered by the employer. All this needs to occur before the employer can decide whether or not to proceed with a restructure/redundancy proposal.
  4. And then there may be the issue of selecting the employee who is to be made redundant…. Where the employer has asked employees to agree on a (temporary) reduction of hours of work and/or wages, and an employee has not agreed to this request, would it be fair to select that employee for redundancy? Could this be considered an improper motive or selection criterion? What if the employee may have had reasonable grounds to decline a wage reduction? As so often, the answer to this and many other problems associated with restructure and redundancy processes depends on the particular circumstances.
  5. Lastly, a word on the redundancy of employees who have not yet commenced employment. Once an offer of employment has been made and accepted, the above rules and principles are fully applicable – even to employees who have not even commenced working. Even a 90 day trial period – if at all permissible – may not come to the rescue, in that most such clauses say that the trial period commences when the employee starts to perform their work. That, however, may not have happened yet.

The EMA ‘Practice Kit on Restructuring and Redundancy’

At EMA Legal, we are experienced in advising on and assisting businesses with complex restructure processes. We encourage our members to seek our professional advice before undertaking restructure processes. This can save businesses significant money but also stress and collateral damage in the workplace. In order to further assist our members with navigating this complicated area of employment law and mitigate their risk in relation to personal grievance claims, EMA Legal have developed a ‘Practice Kit on Restructuring and Redundancy’. The ‘Practice Kit’ consists of template documents, detailed guidelines and practice tips. The ‘Practice Kit’ is available for a fixed fee which is heavily reduced for a limited period of time (until 30 June 2020). Please contact Liaine Warneford on Liaine.Warneford@ema.co.nz if you wish to purchase EMA’s ‘Practice Kit on Restructuring and Redundancy’, or if you have any questions.

Michael Witt LLM is a Senior Solicitor of EMA Legal and BusinessCentral Legal. Michael is experienced in providing strategic and legal advice and assistance with the preparation and management of complex restructure processes. You can contact Michael on Michael.Witt@ema.co.nz.

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