Regulatory Impact Statement -
2006 Employment Relations Amendment Bill

Statement of the Nature and Magnitude of the Problem and the Need for Government Action

Amendments to the Employment Relations Act (the Act) that came into force on 1 December 2004 included protections for employees in specified restructuring situations.

The policy intent of subpart 1 of Part 6A of the Act was to provide specified groups of employees with the right to transfer to a new employer on existing terms and conditions of employment. The groups of employees are specified in Schedule 1A to the Act, and are particularly susceptible to having employment security, or terms and conditions of employment undermined through successive changes in contract as a result of restructuring.

All other employees have a different type of protection, requiring their employment agreements to describe the process that their employer will follow in contracting out or sale or transfer of business situations and the matters to be negotiated between their employer and the new employer to provide protection for affected employees.

The first case to test these provisions was Gibbs (and others) v Crest Commercial Cleaning Ltd. The Employment Court in the Crest decision found that the Act does not provide the specified groups of employees with the protection Cabinet intended in "subsequent contracting" situations (CAB Min (05) 29/3B refers). The decision meant that where an employer who has a contract with a principal (the person who the employer is doing the work for) loses that contract to another contractor (the person who will do the work for the principal that the employer previously did), the employees are not entitled to transfer to the new contractor. It was intended that the employee would have the right to transfer (i.e. move to the other contractor on their same terms and conditions of employment) along with the work.

In light of the Crest decision, three other areas have been identified which the Act does not specifically address, but where it is clear that the original policy intent was for such situations to be covered. It is not possible to identify the magnitude of the problem in these areas as there has not been sufficient time since the passing of the Act for a body of evidence to develop. The situations identified are:

a contract holder has a subcontracting arrangement in place prior to, or at the same time as, the restructuring

a contract for service expires prior to, or at the same time as, the restructuring

whether the protections apply in both situations where the work was originally performed in-house and where an employer never did the work in house and always engaged contractors.

If it was found that the Act did not apply in these situations, the protections provided to the specified groups of employees by the Act would be undermined.

Also identified are two new policy issues that need to be addressed to ensure the protections for employees are not undermined. If a fixed term agreement is linked to the duration of the contract for services and the contract is awarded to a new contractor, the specified employee cannot exercise his or her right to transfer to the new contractor following a restructure because their employment agreement has expired. This constitutes a significant gap which provides a very real risk of undermining the overall policy intent of the Act.

The Act does also not include penalty provisions in the event that an employer does not comply with the provisions of Part 6A of the Act. The absence of specific penalties means there may not be sufficient incentives to ensure the provisions of Part 6A will be complied with by employers, subcontractors and principals.

In addition, a review of this part of the Act has identified the need to make drafting changes to clarify the original policy intent concerning:

the interface of Part 6A with the Holidays Act 2003 and the Parental Leave and Employment Protection Act 1987,so that the employee retains their accrued holiday entitlement and entitlement to paid parental leave when they transfer, and

an employees' right to bargain for redundancy entitlements arises following a transfer to a new employer if he or she is surplus to the staffing needs of the new employer.

Statement of the Public Policy Objective(s)

The policy objective is to ensure the Act delivers on its original policy intent to provide specified groups of employees with the right to transfer with their work in situations where the work that they do is the subject of a restructuring.

Statement of Feasible Options (Regulatory and/or Non Regulatory) That May Constitute Viable Means for Achieving the Desired Objective(s)

Status quo

The principal Act currently provides protections that have been found by the Employment Court to apply only in very limited circumstances. It is not appropriate to maintain the status quo as this does not meet the policy objectives of the Act. It is also not appropriate to maintain the status quo for employees on fixed term agreements that are linked to the length of the contract for services as this constitutes a significant gap which could undermine the overall policy intent of the Act.

Regulatory options

Amendments arising directly from the Crest decision

The regulatory option that has been identified, to ensure the original policy intent is provided for following the decision in the Crest decision, is for Part 6A of the Act to be amended as soon as it is practical to explicitly state that the following situations are covered by the protection:

succession to contract situations ('subsequent contracting'), regardless of whether or not the work has previously been subject to a subsequent contracting

situations where the principal to a contract takes the work back in-house ('contracting in')

situations where the new contractor does not intend to be an employer, such as where the new contractor intends to subcontract the work

situations where a contract expires before a new contractor has been appointed.

Subcontracting

The regulatory option identified for dealing with the right to transfer if there is a subcontracting arrangement in place prior to, or at the same time as, the restructuring is to amend the Act to provide the employees affected with the right to transfer to the new employer. Options for doing this are to:

provide that the employee can elect to transfer directly to where the work is actually done (i.e. straight through to the subcontractor) which means that the employees do not have to transfer twice (recommended); or

deem that a pre-existing subcontracting agreement is a restructuring and the employee can only elect to transfer to the new employer even if the employee is working for a subcontractor following an initial transfer to the new contract holder (not recommended).

Coverage of subsequent contracting when the work has never been done in-house

The regulatory option that has been identified to clarify the scope of subsequent contracting situations is to clarify that the right to transfer in subsequent contracting situations is not dependent on the work having been originally performed in-house.

Fixed term employment agreements

The regulatory option that has been identified to deal with the issue of fixed term employment agreements being linked to the duration of the contract is for the employee to be able to transfer to the new employer notwithstanding the expiry of their fixed term employment agreements.

Penalty provisions and remedies

The regulatory option that has been identified to ensure that employees can enforce their rights when an employer fails to provide employees with the right to elect to transfer is to provide remedies and penalties for non-compliance.

Drafting issues

The regulatory option that has been identified is to amend the Act to clarify the original policy intent concerning the interface of the Holidays Act 2003 and the Parental Leave and Employment Protection Act 1987 with Part 6A of the Act, and to specify that the right to bargain for redundancy entitlements only arises where an employee is surplus to requirements as a result of a restructuring.

Statement of the Net Benefit of the Proposal, Including the Total Regulatory Costs (Administrative, Compliance and Economic Costs) and Benefits (Including Non-Quantifiable Benefits) Of the Proposal, and Other Feasible Options.

Government

The costs and benefits will fall on the Government as an employer of specified employees, or as a principal that holds contracts involving specified employees. The costs and benefits that apply to the Government are, therefore, the same as those for "business".

Business

The changes will encourage employers to make the best use of existing talent, and facilitate more productive employment relationships and the promotion of good faith behaviour. Additional compliance costs arise from the proposals concerning fixed term agreements. These are detailed in the Business Compliance Cost Statement. Other than the costs outlined in the Business Compliance Cost Statement, there are no incremental costs related to the clarification of previous policy decisions.

Providing that the employee can elect to transfer directly to where the work is actually done (i.e. straight through to the subcontractor) will reduce the regulatory burden on employers by ensuring that there does not need to be an extra and unnecessary transfer situation.

Specified groups of employees

The original legislation has been found to provide specified groups of employees as set out in Schedule 1A of the Act only with the right to transfer between their original employer and the next contractor to do the work. The proposed changes will ensure that the policy objective of the original Act is met by providing specified employees with the right to transfer to subsequent contractors.

This, along with the right for specified employees on fixed term employment agreements to transfer, means that effective protections will be provided to the employees who are most affected by change of employer situations by ensuring that their terms and conditions of employment cannot be automatically undermined in a change of employer situation.

Allowing specified groups of employees to transfer on fixed term employment agreements will mean that when the employee transfers, they will be employed:

on a permanent basis if the work they are going to is permanent, or

on a fixed term that mirrors the term of the new employer's contract for services, if the work they are going to do is performed under a contract for services.

Providing that the employee can elect to transfer directly to where the work is actually done (i.e. straight through to the subcontractor) means that the employees do not have to transfer twice.

Ensuring coverage in situations where the work has never been done in-house will ensure that there are no inequities amongst employees identified as 'vulnerable' and whose employment situations are the same in every other way.

Including penalty provisions and remedies will provide specified employees with effective means to enforce their right to elect to transfer.

The positive impact of the proposed changes will be felt most heavily by the employees in the group specified by the government as requiring additional protection. Anecdotal evidence shows that these employees tend to be from lower socio-economic groups such as women, Maori and Pacific Islanders and such protections will help them with security in employment.

Society

The proposed changes will provide socially acceptable levels of employment protection for specified employees affected by restructuring situations. Ensuring that employees have a right to stable employment and an assurance that terms and conditions of employment cannot be reduced because of subsequent contracting will result in increased confidence and fairer employment relationships.

Clarifying the original policy intent will give a clearer indication of how these protections apply in practice and will prevent confusion arising in the future over how the Act applies.

Consultation

The Treasury, State Services Commission, Department of Prime Minister and Cabinet, Te Puni Kokiri, Office of Ethnic Affairs and the Ministries of Economic Development, Pacific Island Affairs, Health, Education, Women's Affairs, Youth Development and Justice have been consulted over the proposed amendments.

Comments that were received from these agencies have been considered and, where appropriate, included in the final version of the Cabinet paper.

Business Compliance Costs Statement

The proposed changes are likely to affect those contractors who use fixed term employment agreements tied to the length of contracts as a standard operating practice. There are no available figures on the number of businesses that operate in this way or their motivations for doing so.

These employers will face the following compliance costs:

costs associated with identifying whether the particular employee has the right to transfer and, if so, being considered a permanent employee when the restructuring involves contracting in or the sale or transfer of business

costs associated with providing information to employees in restructuring situations so they can elect to transfer to the new employer

costs associated with assessing implications in restructuring situations of employees exercising the right to transfer, including incorporating provisions allowing specified groups of employees the right to elect to transfer to a new employer in sale/transfer agreements or the tendering process

costs associated with negotiating redundancy entitlements required under the Act.

The proposed changes may affect the price at which tenderers are willing to perform the contract, as such, the principal may have to pay more to receive the same services.

Any additional compliance costs to business that arise from the proposal will fall on businesses that employ the specified groups employees provided protection under subpart 1 of Part 6A of the Act. These are likely to be relatively insignificant, because of the fact that a restructuring situation is a costly endeavour and interaction with employees in consulting them and determining their future is already required by employment law.

The compliance costs cannot be readily quantified. The specific costs and their impact will depend upon:

the size of the parties involved

the commercial arrangements involved

the number of employees who will have the right to transfer.

The Department of Labour will work with the New Zealand Council of Trade Unions, Business New Zealand and contracting companies to ensure understanding of, and compliance with, the requirements of Part 6A.