cabinet paper - report of the public advisory group on restructuring and redundancy

Proposal

This paper seeks agreement to the government’s response to the Report of the Public Advisory Group on restructuring and redundancy.

Executive summary

The Public Advisory Group on restructuring and redundancy (the Group) was set up in November 2007 to report to the Ministers of Labour, Economic Development and Social Development and Employment on the adequacy of New Zealand’s redundancy laws and provisions and to recommend options to address any gaps or issues with the existing laws and provisions. The Group’s report is attached as appendix one.

The current status of redundancy law in New Zealand offers no statutory entitlements to employees for notice or compensation in the event of a redundancy, unless these are provided in their employment agreement.

This means that employees who are made redundant and do not have these protections negotiated into their employment agreements do not have the best protections and support they could have.

In essence, the Group has recommended that the government consider:

• a statutory requirement for redundancy compensation and notice including options for introducing a statutory formula
• extensions to the Security in Change initiative and the need for wider policies to help activate the labour market, and
• encouraging but not requiring notification to government agencies of potential or upcoming redundancy situations.

I consider there is scope for further work to enhance the services available through the Security in Change initiative including linkages to other government activities. Further work could also include coordinating ways to activate the labour market and improve support for employees at risk of redundancy by improving change readiness and developing a training culture. 

I propose that further work be done in collaboration with social partners and other affected parties on the merits of possible mandatory notification arrangements. Such arrangements are commonplace in other developed economies. Notification provides a useful tool to obtain practical experiences of restructuring and redundancy. It also provides a useful link to support services provided by government agencies enabling state assistance to be deployed more effectively to affected areas.

There is limited data on the number of redundancies across businesses and no comprehensive information on redundancy provisions in individual employment agreements that apply to about eighty percent of employees. Therefore it is difficult to robustly measure the impacts of compulsory intervention in restructuring and redundancy situations. However, it is likely that any intervention will have an impact on small and medium enterprises (SMEs) and other small and medium employers including, for example, some non-government organisations which deliver publicly funded services to and for the health sector.

There are also a number of detailed features and options that would need to be considered in the design of a new minimum floor. This suggests that time should be spent on the development, design and roll out of the new minimum floor and specific consideration given to features such as the application of a minimum floor to small and medium enterprises; whether people earning above a salary threshold should be excluded; and how a minimum floor should be enforced.

There are a range of possible cost implications for employers and for government, both as a provider of services and as an employer, if a statutory minimum floor is introduced. Employers will be required to provide for redundancy protections in employment agreements. This may have implications for how employers operate their businesses. The cost implications for government relate mainly to information and awareness raising, resourcing government departments to provide advice and mobilising government departments in the event of redundancy notification. Any addition to the minimum code will also need to be enforced.

I propose a two-stage process for government’s response to the Report. These are:

• Stage One: Cabinet agrees to release the Report and express the government’s preference to introduce a minimum floor for redundancy compensation and notice, subject to consultation; agreement to consult more widely on extending the Security in Change initiative, and agreement to give further consideration to possible mandatory notification arrangements. The release would note that further details regarding the options will be canvassed in a discussion paper to be provided by April 2009.
• Stage Two: Cabinet would direct the Department of Labour to prepare a discussion paper for Cabinet to consider in April 2009, for subsequent release if agreed, around the options provided by the Group. The discussion paper would assess the options for the introduction of a minimum floor for compensation and notice and extensions to the Security in Change initiative. The paper will further explore options for mandatory notification to government agencies.

Following Cabinet’s decision on this paper, I intend to announce the government’s response to the Report of the Public Advisory Group on restructuring and redundancy as outlined in paragraph 12.

Background

The Labour Party’s Manifesto 2005 stated an intention to establish “a Ministerial Advisory Group to examine the adequacy of redundancy law and provision.” The Public Advisory Group on restructuring and redundancy (the Group), was established in November 2007 by the then Minister of Labour Ruth Dyson.

The Group presented its report to me and the Ministers of Economic Development and Social Development and Employment on 7 July 2008. The report recommends work towards a formal framework for redundancy incorporating notice and compensation.

In essence, the Group has recommended that government consider:

• a statutory requirement for redundancy compensation and notice including options for introducing a statutory formula
• extensions to the Security in Change initiative and the need for wider policies to help activate the labour market, and
• encouraging but not requiring notification to government agencies of potential or upcoming redundancy situations.

Comment

The current status of redundancy law in New Zealand offers no entitlements to employees for notice or compensation in the event of a redundancy, unless these are provided in their employment agreement.

This means that employees who are made redundant and do not have these protections negotiated into their employment agreements do not have the best protections and support they could have.  Redundancy is likely to have a negative impact on the employee being made redundant and their family and community.

International comparison

In most jurisdictions examined by the Group, a minimum notice period, or payment in lieu, must be provided to employees and/or their representatives prior to redundancies taking effect. [2] All OECD jurisdictions (excluding the United States) provide a legal obligation to undertake varying degrees of consultation. The provision of compensation is more varied throughout different jurisdictions, however, in Europe it is common for states to legislate specifically for minimum redundancy payments. [3]

Other OECD jurisdictions, particularly European countries, also tend to have a higher level of prescription than New Zealand particularly in the area of notification which is closely linked to active labour market policies. 

Although New Zealand provides consultation requirements which are on par with other jurisdictions, this is the extent of statutory protection that employees are entitled to.  New Zealand is the only OECD country not to require employers to notify government agencies of proposals for redundancies.

International Labour Organisation (ILO) Convention 158

ILO Convention 158 on the Termination of Employment provides that on termination for redundancy an employee should be entitled to a severance allowance funded directly by the employer or a fund constituted by employer contributions, or social security benefits, or a combination of both. 

New Zealand is a founding member of the ILO and strongly supports the ILO and its activities.  Although ILO Convention 158 has not been ratified by New Zealand, the Courts have taken its provisions into account.  Many of the principles under Articles 1-11 in Convention 158 have been implemented into redundancy law. The introduction of a statutory provision for redundancy compensation would make New Zealand’s legislation more consistent with Convention 158.

Developments in the minimum code of employment conditions

Introducing a minimum floor for compensation and notice would be consistent with the evolution of minimum standards over time to include terms and conditions that are considered socially desirable.  These desirable terms and conditions have generally evolved out of what was commonly provided in collective employment agreements and/or the development of good employment practices.  The extension of such terms and conditions to all employees has been a feature of recent developments in the minimum code of employment conditions.

Examples include amendments to the Employment Relations Act 2000 (the Act) to provide continuity of employment for specified groups of vulnerable workers, the introduction and then extension of paid parental leave and most recently enshrining meal and rest breaks and breast feeding facilities into law.  

In this context I consider that the absence of a minimum floor for compensation and notice in the event of redundancy may be viewed as a gap in the level of protection provided to all workers.

Security in Change initiative

The Security in Change initiative is led by the Ministry of Social Development (MSD) and involves government, unions, employers and agencies working in partnership to support employers and help smooth people’s transition within the labour market [POL Min (07) 78 and POL Min (07) 7/13 refer]. Cabinet agreed to a two-faceted approach to engagement with employers and their employees, specifically proactive engagement and events based engagement.

The desired outcome is to increase the timeliness and take-up of government and community services by employers and employees at risk of redundancy, leading to long term outcomes as people move into alternative jobs, rather than the benefit system.

The primary focus of this initiative is workers with low skill levels or in vulnerable industries or locations.  To manage potential demand for assistance, the approach to engagement is driven by an assessment of areas or industries which are at higher than usual risk of redundancies. Outcomes to date and current developments of the Security in Change initiative are summarised in appendix two.

If a minimum floor for redundancy compensation and notice is implemented I consider that it could assist in providing the right balance between non-regulatory front end interventions (Security in Change) prior to job losses and back-end interventions (for example, compensation) following a restructuring or redundancy situation.

A minimum floor for compensation and notice

In considering provision of a minimum floor for compensation and notice it will be useful and relevant to consider:

• the balance of costs to the employee, employer and the government
• whether to allow for employees and employers to bargain and reach agreement on redundancy entitlements that suit their particular circumstances
• balancing the support provided to employees between statutory redundancy entitlements and social security measures, and
• the possible impacts on businesses, particularly small and medium enterprises.

Providing a minimum floor for compensation and notice would alter the balance of costs borne by parties in a redundancy situation.  Currently, where redundancy provisions are included in employment agreements, the costs of redundancy are shared between employers, employees and the government.  Where redundancy provisions are not included in employment agreements the costs of redundancy fall primarily with the employee and partly with the government, the employer does not carry the costs.

Redundancy arrangements provide a means of managing risks that employees face to their future streams of earnings with employment termination.  A key policy question is how the risks or costs should be spread between employees, employers and government.  Where employment termination occurs, employees face the costs of spells of unemployment, potential costs of re-training and relocation, and the depreciation of firm-specific human capital. The impact of these costs may vary depending on the circumstances of the individual being made redundant. 

Compensation

Redundancy compensation is of particular significance for employees who face extended periods of unemployment as a result of being made redundant. However, there are contrasting perspectives on whether employees should have a minimum entitlement to be paid redundancy compensation. [4] Consultation on a discussion document will allow for further analysis of these views.  

If a minimum floor for compensation is introduced it will be necessary to consider a number of design issues. These include:

• the level at which a minimum floor should be set
• whether different arrangements should apply depending on firm size and/or salary level
• how a minimum floor should be enforced, and
• an appropriate lead-in time to allow employers and employees to adapt to the changes.

Notice

I consider that the introduction of a statutory notice requirement of redundancy termination would give employees more certainty over when their employment will end and provide time to look for suitable alternative employment.

Further work would be needed in relation to prescribing a minimum notice period as the prescribed period would need to take into account:

• the varying circumstances in which restructuring and redundancy occurs
• the length at which notice should be set
• whether different arrangements should apply depending on firm size
• how a notice requirement should be enforced, and
• an appropriate lead-in time to allow employers and employees to adapt to the changes.

Other compensation and notice issues

The Group has also made recommendations on other aspects of compensation and notice, i.e. the treatment of compensation payments for tax and debt purposes and that notice of redundancy is treated as a priority debt under the Companies Act 1993.

Tax treatment of compensation

The Inland Revenue Department (IRD) and Treasury have raised concerns that tax-free treatment of redundancy payments would:

• create a precedent for making all payments for loss of income tax-free
• have implications for Working for Families Tax Credits, Child Support and Student Loan calculations, and
• require the adaptation or extension of current IRD systems that are subject to major capacity constraints.

The government recently considered the issue of tax relief for redundancy payments, and agreed to a flat rate of 6 cents per dollar, capped at the first $60,000 of redundancy payment.

Access to Social Assistance

A redundancy compensation payment may also affect a person’s entitlement to social assistance. The level of a person’s entitlement can be reduced by funds they hold and receive, if they are counted as cash assets and income. The definitions of income and cash assets for the purposes of social security means-testing are written into the Social Security Act 1964. The Social Security Act provides for regulations to be made to explicitly include or exempt certain funds as income or cash assets.

Interface with Insolvency

Currently the Companies Act provides that a maximum of $16,420 per employee is available for priority debts for unpaid wages, holiday pay and redundancy compensation when an employer is insolvent.

In its 2006 submission on the Insolvency Law Reform Bill Business New Zealand raised concerns that compulsory redundancy compensation may increase the cost of credit to business and adversely impact on the interests of unsecured creditors.

I consider that further examination of the Group’s recommendations around taxability and priority status should take place as part of the development of the proposed discussion paper.

Notification

It is difficult to measure the number of redundancies that occur every year in New Zealand, in various sectors, regions and for what reasons.  Notification provides a useful tool by which practical experiences of restructuring and redundancy can be obtained.  Notification also provides a useful link to support services provided by government agencies thereby enabling assistance to be deployed effectively to affected areas.

The Group recommended that a requirement for compulsory notification would need to take into account relevant commercial and other legal obligations such as Stock Exchange disclosure requirements. However, similar considerations will also apply in other countries and have not prevented the introduction of compulsory notification.

I recommend that further work be done in collaboration with social partners and other affected parties on the merits of possible mandatory notification arrangements.

Extending the Security in Change initiative

The Group supports the extension of the Security in Change initiative and suggested three main ways in which to extend it. These are:

• enhancing the effectiveness and reach of the Security in Change initiative; the main enhancement proposed is an awareness raising campaign on redundancy support
• improving connections with other government activity; adapting the Security in Change initiative so that Industry Training Organisations are more actively involved in retraining support; and consulting on how to move to an ‘employment security’ framework such as building a training culture approach across firms and industries, and
• further policy work on activating the labour market and improving support for employees; for example, adjusting the timing of support, particularly training, so that it is routinely offered to those at risk of redundancy before rather than after redundancy.

Undertaking an awareness raising campaign would involve active consultation with the Security in Change Steering Group and multiple agencies and require additional resources.  I propose consulting on the scope for awareness-raising and reporting back on options.

The Group’s proposals in relation to activating the labour market and improving support for employees go further than the Security in Change initiative as it is currently framed.  I therefore propose consulting more widely on them in order to inform advice to Ministers on possible changes.

Available information and its limitations

There is limited data on the number of redundancies across businesses and no comprehensive information on redundancy provisions in individual employment agreements.  Therefore it is difficult to robustly measure the impacts of compulsory intervention in restructuring and redundancy situations. However, it is likely that any intervention will have an impact on small and medium enterprises (SMEs) and other small and medium employers including, for example, some non-government organisations which deliver publicly funded services to and for the health sector.

Currently 80 percent of collective agreements (covering about 20 percent of all employees) contain provisions for pay and notice in the event of a redundancy. The standard notice period is four weeks and employees typically receive compensation of between six and ten weeks wages for their first year of service, and two weeks wages for each subsequent year of service. [5] Agreements may alternatively include a redundancy provision that provides no details on pay or notice, instead either setting up a process for negotiating these matters if they arise or referring to an agreement outside the main collective agreement.

Three percent of collectivised employees have no provision for redundancy and there are specific sectors where redundancy provision is very low: agriculture (54 percent with no provision) and other services (44 percent with no provision). [6]  There is also some divergence between provisions in collective agreements in the public and private sectors (with private sector agreements less likely to have the same degree of redundancy provisions).

A key information gap is the extent of redundancy provisions in individual employment agreements (80 percent of all employees). While collective agreements will have some reach into individual bargaining outcomes, the flow on impact of collectively bargained redundancy provisions on individual agreements is not clear.

The best snapshot of the provisions relating to redundancy is available from a Massey University survey of SMEs commissioned by the Group. Key findings are that 69 percent of employees have a notice period, 20 percent of employees are entitled to compensation and SME owners are more likely to notify or consult their shareholders, lawyer and/or accountant before notifying their employees.

Little is also known about employers’ and employees’ overall experience of redundancy situations.  However, anecdotal evidence suggests that employees in low paid employment or on individual employment agreements are less likely to be in a position to bargain for redundancy entitlements and may only be able to gain these by statutory means.

Cost implications of introducing a statutory floor

There are a number of cost implications for employers and for government, both as a provider of services and as an employer.  Employers will be required to provide for redundancy protections in employment agreements which will, in the event of a redundancy, lead to costs being borne by the employer.  This may have implications for how employers operate their businesses.

There are also likely to be cost implications for employees.  Where employees do not currently have redundancy protections in their employment agreements they bear a large part of the cost of redundancy.  A statutory minimum floor would reduce the costs borne by employees being made redundant. 

There are also a range of potential cost implications to the government if a statutory minimum floor around redundancy is introduced.  The scale of the possible costs is difficult to assess at this time but may require budget bids to be developed.  The costs will predominantly relate to:

• Information and awareness raising – A lead-in period will be required to allow employers and employees to adapt to the changes.  During this period an extensive education and information campaign will be required.
• Resourcing government departments to provide advice and enforce the minimum code.  There would be requirements for on-going resources and staff who are trained and available to provide advice. There would also be operational implications for Labour Inspectors who enforce minimum code entitlements (additional resources may be required). An extension to the Security in Change initiative would also require further resourcing.
• Mobilising government departments in the event of redundancy notification - Resourcing and administrative costs will also have to be considered if formalising the process of notification of redundancies to a state agency is progressed.

Government response to the report

I propose that the government should respond to the report in two stages. These are:

• Stage One: Cabinet agrees to release the Report and express the government’s preference to introduce a minimum floor for redundancy compensation and notice, subject to consultation; agreement to consult more widely on extending the Security in Change initiative and agreement to give further consideration to possible mandatory notification arrangements. The release would note that further details regarding the options will be canvassed in a discussion paper to be provided by April 2009.
• Stage Two: Cabinet would direct the Department of Labour to prepare a discussion paper for Cabinet to consider in April 2009, for subsequent release if agreed, around the options provided by the Group. The discussion paper would address and assess the options for the introduction of a minimum floor for compensation and notice and extensions to the Security in Change initiative. The paper will further explore options for mandatory notification to government agencies.

I propose consulting further on the scope for enhancing the Security in Change initiative with responsible agencies and key stakeholders, particularly in relation to the scope for awareness raising and the Group’s proposals in relation to activating the labour market and improving support for employees. 

Next steps

Following Cabinet’s decisions on this paper I intend to:

• release the Report of the Public Advisory Group on restructuring and redundancy through my office, and
• announce the government’s response to the Report noting that further details regarding options will be canvassed in a discussion paper to be provided by April 2009.

Consultation

The Department of Prime Minister and Cabinet, Treasury, Ministry of Economic Development, State Services Commission, Ministry of Social Development, Inland Revenue Department, Ministry of Education, Ministry of Health, Ministry of Pacific Island Affairs, Ministry of Women’s Affairs and Te Puni Kokiri have been consulted about the content of this Cabinet paper.

The Ministry of Economic Development and Treasury think that the paper does not adequately outline the potential impacts a minimum redundancy requirement could have on employment and businesses. For example, employers may be less willing to hire staff if there are minimum redundancy requirements. They may also be encouraged to use more temporary staff. Smaller businesses, which typically can have less flexibility to adjust their workforce to changing demands, may be the most adversely affected. Adding new redundancy-related liabilities to financially distressed businesses may increase the likelihood of businesses going into liquidation where they might otherwise have been able to continue as a going concern, or to have rehabilitated some parts of the business. The extent of the costs will clearly depend on the level of any statutory floor. 

The New Zealand Council of Trade Unions and Business New Zealand were also consulted on this paper.

Financial implications

Any financial implications associated with the proposals in this paper are not able to be quantified at present. The Department of Labour will provide advice in relation to costs in the next budget round.

Human rights

There are no human rights implications associated with the proposals in this paper.

Legislative implications

The proposals in relation to introducing a minimum floor for compensation and notice and mandatory notification arrangements would have future legislative implications.

Regulatory impact and business compliance cost statement

A regulatory impact analysis will be conducted as part of the process to develop a discussion document.  A regulatory impact assessment will be included for Cabinet consideration with a draft discussion document.

Gender, ethnic and disability implications

There are no direct gender, disability or ethnic implications arising from this paper however the Group’s report has given due consideration to the effects of redundancy on women, Maori and Pacific Island employees.

Publicity

Decisions about publicity will be made following Cabinet’s decisions on this paper as outlined in paragraphs 63 and 64.

Recommendations

I recommend that the Cabinet Business Committee:

1. Note that the Public Advisory Group on restructuring and redundancy was set up by the then Minister of Labour, Hon Ruth Dyson, in November 2007, to report to the Ministers of Labour, Economic Development and Social Development and Employment on the adequacy of New Zealand’s redundancy laws and provisions and to recommend options to address any gaps or issues with the existing laws and provisions by 30 June 2008
2. Note that the Public Advisory Group on restructuring and redundancy provided the Ministers of Labour, Economic Development and Social Development and Employment with the Group’s report on 7 July 2008
3. Note that the Public Advisory Group on restructuring and redundancy has in essence recommended that the government consider:
   1. a statutory requirement for redundancy compensation and notice including options for introducing a statutory formula
   2. extensions to the Security in Change initiative, and
   3. encouraging but not requiring notification to government agencies of potential or upcoming redundancy situations.
4. Note that there is limited data on the number of redundancies across businesses and no comprehensive information on redundancy provisions in individual employment agreements
5. Note that there are a range of possible cost implications for employers and for government if a statutory minimum floor around redundancy is introduced
6. Note that further examination of the Group’s recommendations around taxability and priority status will take place as part of the discussion paper proposed in recommendation 8
7. Agree to release the Report of the Public Advisory Group on restructuring and redundancy and
   1. express the government’s preference to introduce a minimum floor for redundancy compensation and notice, subject to consultation
   2. agree to consult more widely on extending the Security in Change initiative, and
   3. agree to give further consideration to possible mandatory notification arrangements.
8. Direct the Department of Labour in consultation with key agencies including Treasury, the Ministries of Social Development and Economic Development, the Inland Revenue Department and social partners to prepare a discussion paper for Cabinet to consider in April 2009, for subsequent release if agreed, discussing the options for the introduction of a minimum floor for compensation and notice,  opportunities to extend the scope of the Security in Change work programme and possible mandatory notification arrangements
9. Direct the Department of Labour to work directly with the Ministry of Social Development and consult with other agencies, social partners and other stakeholders on the scope for extending the Security in Change initiative and for developing new active labour market policies
10. Note the Minister of Labour will release the Report of the Public Advisory Group on restructuring and redundancy and announce the government’s response to the Report, as per recommendation 7 and 8, following Cabinet’s decisions on this paper.

Appendix One

The Report of the Public Advisory Group on restructuring and redundancy.

Appendix Two:  Security in Change initiative

Security in Change is funded from within the Ministry of Social Development’s baseline. The governance and strategic direction of the Security in Change work programme is overseen by the Security in Change Steering Group, chaired by the Ministry of Social Development (MSD) and comprising representatives from Business New Zealand, the New Zealand Council of Trade Unions, the New Zealand Chambers of Commerce and the Department of Labour.

Outcomes to date

From 9 May 2007 to 15 August 2008, 230 employers and their employees were assisted under the Security in Change initiative.  Collectively, these firms employed approximately 4,000 staff, around 70 percent of whom were affected by adverse events.

The firms were mainly located in the Auckland, Southern, Nelson and Central regions, and in the manufacturing and retail industries.  Generally, the affected workers were semi-skilled to low-skilled, in retail, customer service, truck driving and seafood processing.  MSD provided job search assistance and information about income and employment assistance to the affected employers and their workers and worked in partnership with agencies such as the Department of Labour, Inland Revenue, Careers Services Rapuara as well as other local employers.  The majority of workers transitioned into alternative employment, with support from the Ministry of Social Development and/or their employer.

Current developments

As a pragmatic, relationship-based programme, the Security in Change initiative is continuing to develop.  It is still largely reactive in nature, responding to adverse labour market events as they emerge.  Its success is in proving two-way intelligence, with agencies receiving more early warnings of possible firm-level events.

The Security in Change initiative relates closely to other initiatives aimed at activating the labour market, such as:

• the current Ministry of Social Development/Department of Labour work on giving employment preference to New Zealander jobseekers given temporary work visa immigration; and
• the recent Cabinet direction to trial a new approach to work with firms in small communities and rural areas that are disproportionately exposed to labour market change and to improve the ways in which they access government and non-government services aimed at improving productivity, business practices and skill development [POL Min(08) 9/9 refers].

Appendix three: Views of submitters to the Public Advisory Group on restructuring and redundancy on the introduction of compulsory redundancy compensation [7]

Those favouring legislated compensation

Individuals, union representatives, and community law advisers strongly favoured statutory entitlement to compensation for redundancy. It was noted that such a requirement would protect employees who are not in a position to negotiate entitlements in individual agreements, or who are unaware of their rights under the Employment Relations Act 2000 (the Act) and have been made redundant on questionable grounds. [8]

Community Law Canterbury also suggested, as an alternative, if the cost of minimum entitlements was considered too onerous for employers, that there should at least be default minimum entitlements in legislation where the issue has not been addressed in an employment agreement.

The Centre for Work and Labour Market Studies (CWaLMS) also favoured enacting a regime of statutory entitlement to compensation for redundancy because of the curious current state of common law on the issue. CWaLMS submits that legislative clarification of entitlement to redundancy compensation is required in light of the Court of Appeal’s 1998 decision in Aoraki Corporation Ltd v McGavin [1998] 1 ERNZ 601, which overturned the principles which had previously made it possible to award compensation for redundancy when an employment agreement was silent on the matter.

“In finding that redundancy compensation could not be paid in the absence of specific contractual provision, the Court adverted very specifically to the effect of the legislative policy of the Employment Contracts Act 1991 in shaping its decision. The enactment of subsequent legislation premised on a very different legislative policy, however, has not led to any judicial reconsideration of the precedent in Aoraki.”

CWaLMS also noted that theCourt of Appeal, in a 1994 judgement Brighouse Limited v Bilderbeck [1994] 2 ERNZ 243 superseded by Aoraki, stated that the following could be relevant in assessing whether compensation was payable:

• the reason for redundancy
• the length of the employee’s service
• the period of notice, and
• the ability of the employer to pay.

On the amount of compensation, several submissions [9] suggested this should be based on length of service.  Finsec proposed seven weeks’ salary for the first year’s service, and four weeks’ salary for each subsequent year’s service.  The ability of an employer to pay was referred to in a few submissions on both sides of the debate. For example, union representatives suggested that there should be a set amount for all companies to pay, related to their “profit margin”, [10] and that employers should be required to pay higher levels of compensation when the redundancy arises from restructuring of a business which remains a going concern, as opposed to a business which is ceasing operations. [11] HRINZ suggested that the amount “…would have to take into account an employer’s ability to pay at the time–especially in those situations where the reasons for redundancy relate to survival and the retention of other jobs, especially in small businesses.”

One submission proposed that a redundant employee should have first right to reemployment at the same rate if a position is refilled within 24 months. [12]

Those opposed

Of those who considered the current legal framework adequate, several suggested that introducing statutorily prescribed redundancy compensation could do more harm than good, particularly in the case of SMEs. 

“We are concerned that if compensation be provided for at a Regulatory level the payment of compensation will put a business under additional financial stress resulting in even more loss of jobs.” [13]

“We believe any minimum redundancy compensation regulation will have a dramatic effect on the health of New Zealand businesses – a consequence that should not be under-estimated.” [14]

Potential consequences cited in submissions included:

• disincentive to recruiting more labour
• employers cutting labour costs in other areas
• greater use of temporary or contract labour
• loss of competitiveness vis-à-vis trading partners overseas
• redundancies more likely because of the additional liability
• second and third round redundancies more likely to follow, and
• viability of the business at risk.

Overall, this group generally considered that redundancy compensation is adequately addressed currently through bargaining for contractual terms by those employers who can afford it, supported by the existing safety net of the benefit system.

Some businesses [15] suggested there was a windfall nature to redundancy payments in the current economic climate, citing experiences with employees electing to be made redundant and finding rapid re-employment, on occasion with essentially the same company.

“We are… increasingly finding that the power rests with the employee who is choosing to take redundancy compensation when another job which pays the same amount of money and has the same terms and conditions, is offered as a redeployment option”. [16]

Progressive Enterprises Limited (PEL) suggested in this context that legislative clarification would be useful to enhance the distinction between redundancy of a role versus redundancy of a person’s employment.   

“Treating the two as the same circumstance results in an entitlement mentality around mandatory termination of employment and redundancy compensation.”

Further, PEL submitted that the ERA does not adequately address issues which arise where employment may need to be varied through transfer to another employing entity within a group of companies on the same terms and conditions.

Telecom noted that labour market projections by Statistics NZ in 2004 indicated that such labour market conditions were likely to continue over the next 15 years, suggesting that “any statutory compensation should be set at a low level indeed”. 

Some submissions [17] noted that if statutory redundancy compensation is proposed:

• it should not increase the burden on employers whose contractual redundancy compensation is more beneficial
• It should take account of technical redundancy situations, i.e. should not be payable where suitable alternative employment is offered by a third party.

Who pays?

Government

Air New Zealand submitted that if statutory redundancy compensation is introduced, it should be funded by the Government as maternity pay is, on the basis that there will be savings in unemployment benefits paid.

Insurance

Some submissions [18] raised, but did not favour, the idea of compulsory redundancy insurance.   The Institute of Chartered Accountants examined three options in some depth:  employee funded, tax payer funded, and employer funded. While it did not support any of the options, it did view an employee-funded option as “easily the best”:

“Treating redundancy provision more like a “private” good, which it clearly is, is appropriate.  Where the same party that benefits also pays, there are good reasons for that party to correctly state how much, in this case minimum redundancy entitlement, should be provided for. The Institute suspects the demand would not be strong.”

The other options would entail compliance costs and “deadweight loss”, with an employer-funded option potentially reducing both non-redundancy employee remuneration and employment, and impacting negatively at a macroeconomic level on output, interest rates and the exchange rate.

Tax treatment

Three submitters [19] proposed that negotiated and/or statutorily-mandated compensation payments should be tax-free to the recipient.

“It is unfair and inconsistent that it is currently taxed, while money paid as compensation for humiliation and distress under S123 1 c (i) of the Employment Relations Act is not taxed.” [20] 

The Manufacturers and Exporters Association submitted that lower tax rates on negotiated redundancy payments “would be helpful.”

“It is equitable that the Crown (on behalf of us all) carries some of the reorganization

[1] A minimum floor for redundancy compensation and notice refers to a set level of notice and/or compensation.

[2] These jurisdictions are France, the United Kingdom, Ireland, Australia, Canada, the United States, Norway, Denmark, Hungary, The Czech Republic and Poland.

[3] For example, in the UK, the Employment Rights Act 1996 sets out a general scheme for redundancy entitlements for employees. It specifically prescribes entitlements to redundancy payments and a calculation formula.

[4] These are outlined in appendix three.

[5] Employment Agreements: Bargaining trends and Employment Law Update 2007/08, Victoria University.

[6] ibid

[7] The Group invited written submissions from members of the public seeking their views on the adequacy of current redundancy laws and provisions. Twenty-two written submissions were received, of which fourteen submissions (from businesses and professional groups) generally supported the current legal framework as adequate, while eight (from individuals, union representatives, community law advisers and academics) claimed that the current framework was not adequate and advocated changes.

[8] Dunedin Community Law Centre, noting that the absence of statutory provision also raised the need for “good faith” requirements to be more clearly defined, and for increased education for both employees and employers.

[9] Dunedin Community Law Centre, Helen Brosnan, Himanshu Kamar, Angelina Matekohi

[10] Angelina Matekohi

[11] Finsec

[12] Himanshu Kamar

[13] RCSA

[14] Employers and Manufacturers Association

[15] PEL, Air New Zealand, Telecom

[16] Telecom

[17] Air New Zealand, PEL

[18] Manufacturers & Exporters Association, Institute of Chartered Accountants

[19] Bob Hewitt, Finsec, PEL

[20] Finsec which also submitted that “the full quantum of redundancy compensation should apply as a standalone priority debt in the event of insolvency.”