Restructuring and Redundancy
PART ONE - Background to redundancy - New Zealand overview
What is redundancy?
Redundancy is not defined in the Employment Relations Act 2000 (“ERA”) but the commonly accepted definition today is that from the Labour Relations Act 1987. Section 184(5) of the Act defined redundancy as:
… a situation where…[a] worker’s employment is terminated by the employer, the termination being attributable, wholly or mainly, to the fact that the position filled by that worker is, or will become, superfluous to the needs of the employer…
The emphasis in the definition, and in the case law since redundancy has been a feature of New Zealand’s employment law jurisprudence, is on the position rather than the worker who occupies the position.
The common law accepts the right of the employer to determine the structure of the business and, therefore, to make positions redundant subject to any redundancies being genuine and carried out in a fair and reasonable manner (G N Hale and Son Ltd v Wellington Caretakers etc IUOW) . The ERA has overlaid this management prerogative with a statutory obligation to act in good faith, including specifically in relation to consultation over changes to the business (section 4(4)(c)), any proposal to contract out or sell or transfer all or part of the business (section 4(4)(d)) and making employees redundant (section 4(4)(e)).
Acting in good faith means, amongst other things, where the employer is proposing to make a decision that could mean an employee’s employment is terminated, giving relevant employees access to information about the decision and an opportunity to comment on that information before a decision is made (section 4(1A)(c)).
The following situations may justify termination on the grounds of redundancy (subject to any termination having been carried out in a procedurally fair manner):
- reducing employee numbers for efficiency or cost cutting reasons, including on or following the appointment of a receiver to a business, or because the work can be done by other means, e.g. contracting out
- materially changing the job description applying to a position (changing duties and responsibilities), and
- relocating a business or position in a business more than a reasonable distance from its original place.
Restructuring is a process that often results in redundancy. For that reason it is also covered by the good faith obligations of the ERA whether or not redundancy is the final outcome.
A technical redundancy situation arises where an employee’s employment with a particular employer is terminated as a result of the sale or transfer of the business to another owner, but the employee is offered the same position with the new owner on the same terms and conditions of employment, including recognition of service with the previous employer. In this situation there is a new legal employer and the employee cannot be compelled to transfer it. However, in most employment agreements providing for redundancy compensation, a technical redundancy situation is typically grounds to avoid payment of redundancy compensation. In these circumstances, if the employee elects not to transfer their employment to the new owner there is no entitlement to redundancy compensation.
Where ownership of the legal entity is transferred, as with a sale of shares rather than the business asset, there is not any form of redundancy.
Substantially similar positions
Most redundancy agreements provide for transfer into a substantially similar position as an exclusion to entitlement to redundancy compensation in circumstances in which redundancy compensation might otherwise be payable.
Review of current laws and provisions
The current law in relation to redundancy in New Zealand are covered as follows:
Section 4 of the Employment Relations Act 2000 which, among other things, provides that the duty of “good faith”:
- requires the parties to an employment relationship to be active and constructive in establishing and maintaining a productive employment relationship in which the parties are, among other things, responsive and communicative, and
- requires an employer who is proposing to make a decision that will, or is likely to, have an adverse effect on the continuation of employment of one or more of his or her employees to provide to the employees affected:
- access to information, relevant to the continuation of the employees' employment, about the decision, and
- an opportunity to comment on the information to their employer before the decision is made.
Section 4 is clear that good faith extends to:
- a proposal by an employer that might impact on the employer's employees, including a proposal to contract out work otherwise done by the employees or to sell or transfer all or part of the employer's business, and
- making employees redundant.
Part 6A Vulnerable Workers
The ERA defines some employees as "vulnerable employees". These employees attract special protections in the case of restructuring if their work is to be contracted out by their employer or their part of the business is to be sold. They may elect to transfer their employment to the organisation where the work has been transferred. A vulnerable employee includes the following categories of employees:
- cleaning services, food catering services, caretaking or laundry services for the education, aged-care and health sectors
- orderly services in the aged-care sector
- cleaning services or food catering services in the public service or local government sector
- cleaning services or food catering services in relation to any airport facility or for the aviation sector, and
- cleaning services or food catering services in relation to any other place of work The new employer must decide how to best manage their resources. This may involve making transferred vulnerable employees redundant.
A redundancy can only be made for genuine commercial reasons and employers must be able to demonstrate that these reasons exist. The Employment Relations Authority or the Employment Court will consider the genuineness of the decision to make someone redundant, including whether the decision was made in “good faith”.
Reasons for an employee's redundancy can include:
- the introduction of new technology
- rationalisations of staff to increase business efficiency
- restructuring business operations, including a change in the organisation's roles or location
- closure of business
- outsourcing, and
- sale of the employer's business.
In addition to having genuine reasons for any redundancy the employer must demonstrate they have carried out any termination on the grounds of redundancy to be procedurally fair.
In circumstances in which termination for redundancy is contemplated, it may be necessary for an employer to select between a number of potential candidates for redundancy. Selection criteria and the application of them must be consistent with the employer’s obligation to act justified.
There may still be a genuine redundancy if the employee’s tasks are delegated to other existing employees following the redundancy. However, if the employee is effectively replaced with someone else, then the redundancy is unlikely to be genuine. A genuine redundancy occurs when a position becomes superfluous to an employer’s needs.
In the recent past, the test for whether a dismissal is justified has increasingly become contentious as the courts began to step back from considering the merits of an employer’s decision to dismiss. Over time the test applied by the courts to determine whether a dismissal was justified gradually moved from objectively considering the conduct of an employer towards a subjective consideration of the actual employer’s conduct. This shift was also seen increasingly in redundancy cases.
Amendments to the Employment Relations Act in 2004 introduced section 103A which established a new test for determining whether a dismissal is justified under the Act. Section 103A is intended to reinforce the concept of what a fair and reasonable employer would have done – determined on an objective basis. The policy intent is to ensure that there is balance between considering fairness to both the employer and the employee.
To date, only a small number of cases have considered the application of section 103A. In Simpsons Farms Ltd v Aberhart  the Employment Court specifically considered the application of 103A in a redundancy situation and confirmed that redundancy situations are within the ambit of the section. The Court also concluded that s.103 does not “revisit longstanding principles about substantive justification for redundancy” set out in earlier decisions such as G N Hale and Son Ltd v Wellington Caretakers etc IUOW.  The Employment Court concluded that:
“Although Parliament was prescriptive in 2004 so far as process was concerned, on substance of justification for dismissal it appears to have been satisfied, by enacting s.103A, to return to the position espoused by … Hale. So long as an employer acts genuinely and not out of ulterior motives, a business decision to make positions or employees redundant is for the employer to make and not for the Authority or the Court, even under s.103A.”
A review of other relevant case law, which has been applied to other redundancy situations is attached as Appendix B (The Appendix can be obtained upon your request).
Current New Zealand requirements
Knowledge of the possibility of redundancy is an obvious pre-requisite for consultation with unions and employees. This raises the issue of when such a possibility should be notified both to those affected, and wider. Notification to relevant government agencies is currently not required in employment statutes but is encouraged. There are some instances where notification is required; for instance, Stock Exchange disclosure requirements, requirements of employment agreements and any requirements relating to business failure i.e. receivership and liquidation.
The requirement for consultation with affected parties before decisions are taken has been a central feature of procedural fairness for redundancy for many years.
More recently, the ERA expanded on historical provisions for consultation, aligning them to the concept of good faith and providing broad procedural guidelines.
The essential elements of “good” consultation are that the proposal must be precise enough to enable the employee to provide useful comment, employees are given a reasonable opportunity to consider the proposal, and feedback from the employee must be considered and taken into account before the final decision is made. Consultation therefore should begin as early as possible.
Underpinning these principles is the concept of “good faith”. This requires an employer who is proposing to make a decision that will, or is likely to, have an adverse effect on the continuation of employment of one or more of his or her employees, to provide employees with:
- access to information relevant to the continuation of the employees' employment, about the decision, and
- an opportunity to comment on the information to their employer before a decision is made.
Consultation does not require that the employer and employee agree on the employer's course of action. However, an employee who may be affected by a redundancy or restructuring must be given a real opportunity to provide feedback or input into the proposal, and the employer must consider such feedback with an open mind, and must make a genuine effort to accommodate those views.
The level and duration of consultation with an employee required in a redundancy situation will depend on the size of the business, and the urgency of the situation requiring the redundancy.
Notice of redundancies
Currently there is no statutory notice period that an employer governing when an employee must be advised that they will be made redundant. Notice periods where they exist typically are contained in employment agreements.
In New Zealand, there is no statutory right to redundancy compensation, nor is there a common law right unless employers and employees or their union have agreed to one in the applicable employment agreement. The payment of redundancy compensation was most recently considered by the Advisory Group on Contracting Out and the Sale or Transfer of Businesses  in 2003. Following this work, the Department of Labour considered a range of options relating to additional protections for vulnerable employees in contracting out or sale or transfer situations. This included considering whether there should be a statutorily prescribed minimum amount of redundancy compensation payable to vulnerable employees. This work subsequently resulted in Part 6A of the ERA and it was therefore narrower in scope than this review. This review is the first comprehensive examination of redundancy matters for many years.
In 2003, Cabinet considered the question of whether redundancy compensation should be prescribed in the Act in relation to contracting out or the sale or transfer of a business. Cabinet agreed that if an employment agreement did not expressly provide for redundancy compensation to be payable, the parties would be entitled to negotiate over the matter [CAB Min (03) 18/11 refers]. This was reflected in Part 6A of the ERA which also provided for the Employment Relations Authority to determine the redundancy entitlements due to an employee in certain circumstances. Cabinet did not consider the broader question of whether redundancy compensation should be payable in wider circumstances in other redundancy situations.
Redundancy is a form of dismissal and is therefore subject to personal grievance provisions of the ERA. Compensation, damages and other remedies are available under these provisions.
Wage Adjustment Regulations 1974
The Wage Adjustment Regulations 1974 (reprinted in 1977) since revoked, dealt with redundancy in a negative way by restricting both the amount of redundancy compensation and the entitlement of claimants. Of particular interest is the reference to severance pay agreements between the Master Builders Federation and the Federation of Labour - see Appendix C (The Appendix can be obtained upon your request).
They provided effectively for one week’s pay (2 percent) for each year of service up to 20 years, and providing a minimum of one year that has been worked. The regulations also gave the then Industrial Commission power to approve redundancy agreements which provide better than the regulations - provided there were exceptional circumstances.
Companies Act 1993
The Companies Act 1993 currently 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. Priority debts currently do not include notice of termination.
Holidays Act 2003
The Holidays Act provides minimum entitlements of annual holidays, public holidays, and special (including bereavement) leave. These entitlements also apply to employees made redundant and are not extinguished by redundancy.
Taxation of compensation
Currently, redundancy payments are treated as part of an employee’s income; the tax rate used depends on the annual gross income of the employee. In previous years (up until 1992) only 5 percent of the redundancy payment was taxed this was at the earner’s usual rate because payments were regarded as compensation.
The Income Tax Amendment Act (NO.4) 1992 provides that redundancy compensation is taxable assessable income in the hands of the recipients. Redundancy compensation payments are treated as a lump sum payment in terms of PAYE but are not liable for the ACC earner levy or Fringe Benefit Tax (FBT). Redundancy compensation payments are, however, subject to student loan deductions.
The appropriate tax rate depends on the grossed up annual value of the employee’s last 4 weeks’ earnings and the payment. The tax rate applicable to the payment where the combined total of the payment and the gross value of the employee’s income for the previous four weeks are:
- $38,000 or less – is 21 percent or 21 cents in the dollar
- between $38,000 and $60,000 – is 33 percent or 33 cents in the dollar, and
- greater than $60,000 – is 39 percent or 39 cents in the dollar.
The redundancy tax rebate was introduced earlier this year to remedy the problem of overtaxing due to tax rates moving up a bracket when the redundancy payment was added to the employee’s income. Legislation took effect as of 1 April 2008 to make the taxation of redundancy payments fairer to people who are pushed into a higher tax bracket when they receive the lump sum payment in the event of a redundancy. The rebate is based on a flat rate of six cents per dollar, for the first $60,000 of the redundancy payment received per redundancy. The maximum amount claimable is $3,600.
Redundancy compensation and effects on unemployment benefit
Prior to November 1992, redundancy payments were largely tax free. In addition, from March 1991, a separate stand down calculation for people who had received a redundancy payment and were applying for the unemployment benefit was introduced. This was calculated by dividing the amount of the redundancy payment by the weekly amount of benefit and family support the applicant would otherwise be entitled to receive. The maximum period of non-entitlement was 26 weeks. The separate redundancy stand down was removed in November 1992, when a withholding tax of 28 percent was introduced on redundancy payments. From this time, redundancy payments were included in the definition of income for the high income stand down.
Until recently, the stand-down for main benefits ranged from 1-10 weeks, depending on income prior to coming onto benefit. This has now been reduced to 1-2 weeks, which means that regardless of the amount of redundancy payment, people are able to qualify for a benefit relatively quickly.
The personal tax component of redundancy payments does not impact on clients benefit entitlement because the gross amount is used in the benefit assessment. Redundancy payments impact on commencement date of benefit since they form part of the average weekly income assessment to calculate the length of the stand-down (one or two weeks).
Reducing or removing the personal tax component of redundancy payments would deliver more disposable income, enabling employees to adjust their commitments to what is often a sudden and disruptive change in their circumstances. It may also increase the value of cash assets attributable to an employee. The value of cash assets is considered for a number of supplementary forms of assistance such as the Accommodation Supplement, Temporary Additional Support and Special Needs Grants. Main benefits are not subject to a cash asset test, income earned (or forgone) from assets is charged against the benefit.
Portability of entitlements
There are limited examples of schemes internationally to assist the examination of portability of entitlements. This may stem from the difficulties inherent in establishing such approaches. One overseas example is, Manusafe, Australia.
“Manusafe has been described as a trust fund established by the manufacturing unions with the object of collecting, maintaining and distributing employee entitlements to long service leave, severance pay and accrued sick leave”. .
Notwithstanding its good intentions, employers were reluctant to sign up to Manusafe for three main reasons:
- long service leave benefits purportedly secured through Manusafe are more generous than the current entitlement
- perceived cash flow difficulties from Manusafe in the manufacturing industry, and
- deficiencies in the Manusafe trust deed. 
Another issue with Manusafe, as with the perceived risk with other funding models, has been the potential for perverse business behaviour e.g. soft landings, and the fact that funding models more often than not rely on voluntary uptake. Many employers are reluctant to contribute “to funding other people’s failure.” For these and other reasons it seems portability oriented funding models have not been successful. The Group agreed, due mainly to the apparent costs associated with a model and the limited number of successful examples internationally, not to pursue this further in the context of this report. It may however be useful to explore for the longer term.
New Zealand redundancy research
Redundancy provisions in collective agreements
Victoria University analyses and the Department of Labour captures information on provisions contained in collective employment agreements. A complete set of the University’s 2007 redundancy tables and several key Departmental graphs are available at appendix D (The Appendix can be obtained upon your request). Below are key excerpts from these data sources:
- 78 percent of all agreements have pay and notice. Across all industries and sectors, 78 percent of collective agreements (covering 309,900 employees) contain provisions for pay and notice in the event of a redundancy situation. 
- Some sectors are far less likely to have redundancy provisions. Agriculture and other community services are far less likely to have collective agreements with redundancy provisions than other industries. 
- Four weeks notice is most common. Four weeks notice continues to be the most common length of notice given to employees who are made redundant (57 percent). 
- Union recognition and consultation is generally high. Most collective agreements contain union recognition and consultation clauses in the event of redundancy (77 percent), however, they are far more common in the public sector (87.5percent) than the private sector (68 percent). 
- The 6 + 2 compensation formula is most common in the public sector but a range of options prevail in the private sector. Information collected by the Department of Labour suggests that:
- approximately a third of all collective agreements contain provisions for redundancy counselling
- almost half of all collective agreements provide leave for job interviews, and
- an opportunity to comment on the information to their employer before the decision is made.
Redundancy provisions in individual agreements
There is little information available on redundancy provisions in individual employment agreements. While bargaining trends in the collective sphere will have some influence and cross over into individual bargaining outcomes, the extent of this crossover is insufficient to make any assumptions about individual bargaining trends.
New Zealand business environment
New Zealand is predominantly a nation of small businesses, with most enterprises in New Zealand operating as small and medium-sized enterprises (SMEs). SMEs can be defined as enterprises with 19 or fewer employees and that the average enterprise has 14 workers. At February 2006 :
- 96.4 percent of enterprises employed 19 or fewer people
- 86.8 percent of enterprises employed 5 or fewer people
- 63.6 percent of enterprises had no employees, and
- 70.4 percent of employees were employed by 3.6 percent of enterprises.
SMEs provide a strong base for New Zealand’s economy with value-added output created by SMEs accounting for approximately 40 percent in the economy. SMEs a significant contribution to employment figures by accounting for 29.6 percent of total employment at February 2006 employing 522,180 people, up 1.8 percent from the previous year (around 70 percent of workers in New Zealand are employed by 4 percent of enterprises). A large chunk of part-time employees are utilised in SMEs. The number of SMEs increased by 3.6 percent in the year ended February 2006, although the proportion of SMEs remained relatively constant. Internationally, SMEs account for the majority of firms in OECD economies.
Between February 2001 and 2006, firms in New Zealand with 500+ employees were the greatest contributor to employment reduction (a reduction of 93,500 (net) jobs) followed by firms with 1-5 employees (a reduction of 81, 690 (net) jobs). However, over this period SMEs accounted for 59 percent of all net new jobs in the economy .
Firm size does have an impact the way a business operates. Larger businesses tend to engage more on research and development activity and are also more likely to engage in innovation than smaller businesses. Training (including management training) provided for employees is more likely as firm size increases.
Individual employment agreements perspectives from New Zealand small enterprises
On the request of the Restructuring and Redundancy Public Advisory Group, the Department of Labour contracted Massey University to survey 5,500 small to medium enterprises (SMEs) to fill information gaps on restructuring and redundancy practices to understand redundancy provisions in individual agreements; and specifically, frequency rates for notice periods, compensation, outplacement support, interview leave and relocation assistance provisions. The survey also examined consultation behaviours of SMEs in redundancy or restructuring events. The size of organisations in the survey was 1-49 people per business.
The information indicated that while there were differences in responses from firms of different sizes (such as responses from businesses with 1-19 people compared with 20-49), the overall sample was in favour of the 1-19 group, so the results give a good indication of employment relation practices amongst SME’s in general.
Key findings from the summary were:
- all but a small number of the SME owners had written employment agreements with their employees
- in the micro-firm sector 67 percent of employees are on individual agreements and 77 percent in the small firm sector
- from those having individual employment agreement with staff, in the event of redundancy:
- 69 percent of employees have a notice period
- 20 percent of employees are entitled to compensation
- 13 percent of employees are allowed to take leave for a job interview
- 9 percent of employees receive outplacement support, and
- 4 percent of employees get relocation assistance.
- in the event of restructuring or redundancy, SME owners are most likely to notify or consult their shareholders, lawyer and their accountant before notifying the employee, and
- of government agencies, the Department of Labour and Ministry of Social Development are most likely to be notified or consulted.
The New Zealand business landscape has strengthened in the last few years, but there are indications that the economy is slowing and accordingly we may expect an adverse effect on some businesses and communities over the next few years.
Statistics New Zealand business entry and exit statistics relate to the movement of firms into and out of businesses. Entry and exit statistics are not start-up and failure statistics. Businesses may exit due to administrative changes in restructuring or ownership such as amalgamations, mergers or acquisitions by other firms. However, administrative changes cannot always be identified as such through the entry/exit datasets.
As of February 2007 there were over 460,000 enterprises in New Zealand. While there has been a net increase in the number of firms entering into business, the number of firms exiting has steadily grown over the past 6 years. Of these at least 315,000 enterprises were sole traders and almost 135,000 were enterprises consisting of 1-19 employees. The enterprises employed just over 1.9 million people.
The number of businesses has grown steadily in the past six years from over 370,000 in 2002, jumping to almost 420,000 businesses in 2004, which corresponds to the strong economic boom during that period. However, the economy has stabilised and is now growing at a slower pace. This gives rise to issues that affect business dynamics such as productivity and firm turnover.
Firm turnover in New Zealand is not unusual when compared with other economies. Most firms’ initial level of labour productivity upon entry is below the industry average but grows rapidly thereafter. Continuing firms generally add to industry labour productivity growth. On average exiting firms experience stagnant or declining labour productivity in the years leading up to their exit, and when they eventually end most have below industry average labour productivity. This pattern persists even at a highly disaggregated industry level and indicates that firm turnover has positively contributed to labour productivity growth in NZ .
SMEs account for the majority of all entries and exits and, in particular, are dominated by firms employing 5 or fewer employees. Larger firms remain longer in business than SMEs. The majority of firms with 1-5 employees remained the same size over the period 2001 to 2006 and did not evolve into a larger sized firm. Throughout the same period, firms with 6-9 employees were least likely to remain the same size, but were split as to whether they evolve into either a larger or smaller size. Just over half the firms with 10-19 employees remained the same size from 2001-2006, with those that moved most likely to have down-sized rather than expanded .
Innovation in the business is often synonymous with creative destruction. The benefits of creative destruction, as the new replaces the old, often comes with workplace failure and worker displacement and subsequent reallocation to new jobs. A critical unknown factor in the framework is how best to encourage innovation and manage the resultant creative destruction to maximise the net benefits from innovation. Seeking to lift innovation and productivity across a broad base of workplaces is likely to reduce the costs associated with destruction. In this sense, creative destruction can be both positive in terms of encouraging innovation and destructive in terms of redundancy and potentially displacing workers. This process can be managed efficiently and effectively if both employees and employers are involved adequately in the process.
Insolvency and business start-ups
Currently New Zealand’s insolvency protection for employees is set out in the Companies Act 1993. The maximum priority amount is set out in the Companies (Maximum Priority Amount) Order 2006 and provides that the amount for the purposes of clause 6 of Schedule 7 (including for unpaid wages, holiday pay and redundancy compensation) of the Companies Act is $16,420 per employee.
Clause 6 of the 7th Schedule provides that if "a liquidation of a company commenced before the Companies Amendment Act 2006 came into force, that company's property must be applied in accordance with the priorities stated in this schedule on the date the liquidation commenced as if the Companies Amendment Act 2006 had not come into force."
Therefore if a liquidation commenced before 1 November 2007 the priorities and clause 6 set out in the 7th Schedule (i.e. that Schedule in force prior to 1 November 2007 amendment) apply. Clause 6 (prior to Nov 2007 amendment) provides that the maximum amount for certain priorities must not in the case of any employee exceed the prescribed amount.
The Insolvency and Trustee Service (ITS) does not administer all of the company liquidations in New Zealand. The majority of liquidations are administered by private liquidators such as accountants and lawyers. Ministry of Economic Development statistics indicate that average annual figures for insolvencies for the year ended June 2007 are company liquidations commenced: 3,991 company receiverships commenced: 291. These figures can be skewed by the fact that liquidation can go on for many years and in some instances, companies do not provide adequate information. Some companies may also place themselves into liquidation unnecessarily.
Comparatively, company liquidations have increased gradually over the past six years since 2002 from 0.33 percent to 0.86 percent of businesses. The number of businesses that have gone into receivership in the previous six years has remained steady at around 0.04 to 0.05 percent, however in the year June 2006 - June 2007, receiverships increased to 0.06 percent of businesses. The increased number of insolvencies in 2007 may have significant effects on the occurrence of redundancy and may also be correlated to the slowing rate of growth in the economy. However, it is important to consider that, as the number of insolvencies has increased, the number of total companies on the companies register has also increased literally in this time.
It is difficult to measure exactly how many or what amount employees receive for redundancy compensation payments in the event of insolvency. The ITS unfortunately does not hold this information and neither do IRD or any other State agency. When a company becomes insolvent it can be placed in liquidation by its shareholders, its board or by the High Court. When a company goes into liquidation its available assets are realised by the liquidator for the benefit of its creditors. A liquidator must first pay secured creditors out of the proceeds realised. Next, the liquidator must pay those entitled to a preferential claim and then distribute the proceeds rateably among all unsecured creditors. If there is a surplus, it is to be distributed either in accordance with the terms of the company’s constitution or in accordance with the default provisions of the Companies Act 1993.
The preferential claims which apply in the case of a company insolvency are set out in the Seventh Schedule to the Companies Act 1993. Wages, salary and compensation for redundancy owed to the employees are preferential claims, which are paid before the unsecured creditors of the insolvent entity. Any money representing the unclaimed assets of the company is paid into the Liquidation Surplus Account, which is administered by the Public Trust.
There is no accurate 'start up' figure as business ‘start up’ figures do not currently include sole traders or limited partnerships and many of the companies that are set up do not actually start doing business (e.g. they are set up for Loss Attributing Qualifying Company (LAQC) as trusts and for tax purposes etc).
Incidence of redundancy and data on turnover rates
There are no official figures on the number of redundancies per year as redundancy notification to a state agency is not a statutory requirement.
Linked Employer-Employee Data (LEED) currently provides the best snapshot of overall churn in the labour market. LEED data measures the number of employees that leave businesses (separations) and job destructions. An unknown subset of these will be redundancies.
In the year to June 2006, over three hundred thousand employees per quarter began work in a business location (accessions) and almost three hundred thousand employees per quarter separated from a business, resulting in an average quarterly worker turnover rate of 17.3 percent. During the five-year period to June 2006, the worker turnover rate has remained at between 17.1 and 17.6 percent.  Further trend series graphs showing job destructions and overall employee numbers are available in appendix E (The Appendix can be obtained upon your request).
From an industry perspective, the agriculture, forestry and fishing industry had the highest average quarterly worker turnover rate, followed by the accommodation, cafes and restaurants industry. Both these industry groupings provide short-term seasonal work. The lowest average quarterly worker turnover rate was recorded in the manufacturing industry. 
Figure 1: Regional worker turnover rate year ended June 06
Figure 2: Worker turnover rate (%)
In addition to LEED data, a study by Statistics New Zealand is currently underway investigating the employment outcomes for displaced workers. It looks at the impact of closures on the future employment, earnings, and benefit receipt of the affected and unaffected employees. The project will provide information on labour market adjustment costs and the ease and speed with which displaced workers are re-employed. It is intended to support the Department of Labour’s priority of increasing labour market participation.
Data from the Inland Revenue Department
Although, there is little information on redundancy compensation received, Inland Revenue (IRD) has attempted to estimate volumes of redundancy payments. The work was done as a one-off and there are no plans to update or replicate this analysis in the near future. However, there are some tangible results to come out of the work on redundancy payments. There is no variable for redundancy monies in IRD data, and so the data gathered resulted from a detailed process of elimination.
The analysis was performed for two years of employer data; the years ended 31 March 2004 and 31 March 2005. The numbers of workers found to be receiving redundancy compensation were almost 29,000 in 2004 with a total value of $235.5 million and almost 30,000 in 2005 with a total $238.9 million. IRD excluded employees over 60 years to avoid confusion with retirees.
The average value of a redundancy payment was approximately $8,000 per each redundancy payment across both years. The analysis suggests that approximately 1.5 percent of employees were paid redundancy pay in 2005.
Redundancy information in the media
A review of media articles, spanning the last 12 months, has shown that the causes of redundancies are various, however, within certain industries there are common themes. For example:
- exporting and manufacturing business often cite the high New Zealand dollar as the primary reason for redundancies or closures
- larger businesses have relocated customer service and IT operations overseas in an effort to cut costs
- relocation to other parts of New Zealand
- business collapse, business going into receivership/liquidation, merging/consolidation of business operations, and
- cost cutting/efficiency factors enabling employer to meet budgets.
A table summarising key indices from all of these media articles is available in Appendix F (The Appendix can be obtained upon your request).
Gender, ethnic and disability implications
Data from the 2006 census indicate that there are certain industries and geographical areas with a relatively high proportion of Maori or Pacific Island workers or female workers. According to the Household Labour Force Survey (HLFS) as of March 2008, there were just over 990,000 women in employment. They appear to be over represented in some industries such as Accommodation and Hospitality, Health and Social Services, Personal Services and Education. A number of jobs in these industries include vulnerable and low pay work, such as Homecare and Residential Care.
As of March 2008, there were approximately 205,000 Maori in employment (according to the HLFS). They appear to be highly represented in industries related to Manufacturing including Meat Processing, Sawmilling and Timber Dressing, Printing and Services to Printing, Construction, Transport, Wholesale, Personal Services, Health and Social Services. A number of these industries have large firms in smaller communities which are dependent on the firm for a large proportion of their economic activity. Pacific Island workers are also highly represented in Manufacturing, Transport, Health and Social Services, and Accommodation and Hospitality industries, particularly in the Auckland area.
Many of these industries identified above are also associated with low paid and low skilled jobs and the relatively high proportion of females and Maori and Pacific Island employees can increase the vulnerability of these groups, particularly in the event of a redundancy where it may be harder for them to gain a new job and also to have financial resources to support themselves through the transition period. More often than not a number of these industries can also be located in smaller communities, which can have an adverse effect not only on the worker but also on the community. The incidence of mass redundancies occurring is more frequent due to a slowing economy and the impact of globalisation, therefore attention must be given in the policy setting for possible implications of vulnerable workers and their displacement in the event of redundancy.
There is little information on the effects of redundancy on people with disabilities or any barriers they may face in re-employment.
Length of service
Women are more likely to have shorter service due, for example, to parental leave and related considerations. The proportion of women who hold the same job for over a year is approximately 30 percent for women compared to just over 34 percent for men. They are also disproportionately represented in part-time work with approximately 36 percent of employed women working part-time as compared to approximately 12 percent of working men employed part-time. Both these factors impact on the quantum of compensation due to redundancy that men receive as compared to women taken as a group .
New Zealand is rapidly becoming more dependent on older workers to maintain the size of the labour force as the population ages, therefore it is prudent to encourage older workers to stay in the workforce for a longer period of time. International evidence suggests that once older workers have time out from employment, they are more likely to need assistance to re-enter the job market. It would seem wise when there is a rapid transition to give older workers a longer consultation period, particularly if trying to retain older workers from leaving the labour market altogether.
Labour market dynamics
The Department of Labour’s regular forecasting activity and environmental scanning of the economy point to employment growth slowing over the next five years. In particular the manufacturing primary processing sector  is forecast to barely grow over the next five years. These projections have been used to identify industries that are more likely to experience adverse labour market events. The industries within the manufacturing sector are very diverse but the specific industries that may be at a larger risk of job losses in the medium term are the Food, Beverage & Tobacco, Textiles & Apparel, Wood & Paper Products, Metal Product, Machinery & Equipment and Furniture Manufacturing Industries (which together employ around 160,000 people). These industries are exposed to outsourcing risks, have low projected employment growth and generally have large sites that would have a significant impact were they to close down.
At risk communities have been identified by examining current regional and employment data on the types of industries in these communities which are potentially exposed to a company or industry restructuring and large site closures. Areas considered are outside of the main urban centres which have a much greater ability to absorb employment shocks. The analysis showed that there are 61 non-metropolitan areas  across New Zealand where more than 20 percent of employment, or 100 employees, are concentrated in a single industry (which may or may not be concentrated in a single firm). The attached maps in appendix G show the geographical locations of these at risk areas (The Appendix can be obtained upon your request).
While many industries have some concentration in small areas, there are two or three main industries that dominate the data. Meat and Meat Processing, and Dairy Product Manufacturing are the two most frequently identified industries. Timber and its related industries are the next largest group of industries. There is a reasonable geographical spread of these concentrated areas of employment. There is a high share of concentrated employment in Waikato, but most regions in the North Island have some areas where employment is concentrated in a single industry. There is less concentrated employment in the South Island, with a high proportion of it located in Southland.
Public and expert consultation
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.
A full list of the submitters, with an analysis of the common themes to emerge from the submissions, is attached as Appendix H (The Appendix can be obtained upon your request).
Summary of the views from those advocating change indicated:
- Many workers are unable to bargain for redundancy entitlements and can only gain these by statutory means
- The “good faith” requirements of the ERA are overly broad and often avoided
- Compensation should be statutorily prescribed (and tax-free)
- Consultation and notice provisions should be strengthened
- Clarification of law and statutory definition is needed, and
- Education about rights and responsibilities is also needed.
Views of those advocating status quo:
- Current law provides a workable platform
- “One size fits all” legislation would be inappropriate to the widely varying circumstances of restructuring/ redundancy situations
- Flexibility, not regulation, is needed for competitiveness in global market and to promote innovation
- Compliance costs are already heavy, particularly for SMEs
- Statutorily mandated provisions, especially regarding compensation, would do more harm than good, and
- Management prerogative is a fundamental tenet of employment law in New Zealand.
Specific issues raised in submissions:
In addition to comments for and against further legislation regarding consultation, notice and redundancy compensation, specific issues raised in submissions included:
- Whether special considerations apply in the case of:
SMEs (less able to cope with additional compliance costs and liabilities), and
Temporary, fixed-term and/or individual agreement workers (these groups particularly in need of statutory protection)
- Whether a Code of Good Practice to cover restructuring and redundancy situations should be developed, in lieu of regulation
- Whether the protection currently provided to “Vulnerable Workers” under Part 6A of the ERA should be extended to other employees
- Whether the Grievance Procedure provisions of the ERA (s103A) need clarification to provide an objective test for redundancy dismissals
- Whether the “Good Faith” requirement of the ERA should be clarified, e.g. regarding:
any situation in which consultation is not required, and
any situation that does not constitute a redundancy
- Tax treatment of redundancy payments.
The Group consulted expert advice from key stakeholders, business groups, government agencies and academics to provide written and/or oral submissions. Oral submissions were received from eight submitters, other experts were invited but were unable to meet with the Group due to other commitments.
Key themes to emerge from oral consultation included:
- a greater focus was required for vulnerable employees and vulnerable sectors in the labour market
- the scale and impact of mass redundancies – especially in smaller centre and towns
- the balance between disclosure and notification – both for the employee and also for the market to manage
- current good faith principles are adequate for consultation requirements, and
- compensation – a fund model may create perverse business behaviour amongst employers e.g. soft-landings.
In particular, the New Zealand Stock Exchange highlighted the implications of redundancy notification and the effects on companies on the Stock Exchange. They indicated that although notice of an impending redundancy situation to a worker and State agency should be considerate of the worker’s employment situation and provision of adequate redundancy support, any move to make redundancy notification a statutory requirement would have implications for the Stock Exchange. Confidentiality and a lack of assurance around disclosure of company information due to notification can have an adverse effect on corporate competitiveness.
The New Zealand Stock Exchange indicated that vulnerable workers are most at risk in the event of a redundancy. High income earners generally have the ability to look after themselves in the event of redundancy and do not need compensation protection as much as low income earners. In light of possible statutory requirements for compensation, income splitting was identified as a possible option to address equity issues through performance appraisals. This may mean that those who are made redundant and earn a high salary e.g. $150,000+ may be exempt from performance appraisals in return for no compensation in the event of a redundancy.
The Small Business Advisory Group (SBAG) also provided a submission on the impact of regulatory requirements for small businesses. They highlighted the differences in business structure and resources available to small and larger firms, and that smaller sized businesses would struggle with additional compliance costs if statutory requirements were introduced. An impending redundancy or restructuring situation have far reaching effects in a smaller firm than a larger firm as many SME owners often have their own life-savings and homes on-the-line with their business and if the business goes under the owner risks losing everything they own as well as legal credibility in the case of bankruptcy. There is no one-size-fits-all approach to designing regulations and if a framework were to be explored for redundancy the implications for small businesses should be considered (which make up to 97 percent of businesses in NZ) and adapted separately for larger firms who have more resources and have a far greater impact on employment and communities through mass redundancies. They also pointed out that the small employer is often disadvantaged where an employee decides to leave, yet the employer simply has to cope with that situation.
It is also important to note the New Zealand Institute of Chartered Accountants (NZICA) view on accounting for redundancy provisions in business accounts. A redundancy situation cannot be accounted for in the accounts until the situation actually arises and only then can redundancy be crystallised in the financial reports.
NZICA also made reference to accounting processes in the European Union:
Regulation (EC) No 1606/2002
The International Accounting Standards (IAS) Regulation places an obligation on European companies whose securities are admitted to trading on a regulated market in the EU to prepare their consolidated accounts, as of 1 January 2005, in conformity with IAS/IFRS (International Financial Reporting Standards) and Standing Interpretations Committee/International Financial Reporting Interpretations Reporting Committee (SIC/IFRIC) issued by the International Accounting Standards Board (IASB) and endorsed by the EU.
Member states may permit or require this accounting framework to be applied to the consolidated accounts of companies whose securities are not admitted to trading on a regulated market in the EU and/or to annual (individual) accounts regardless of whether the company is admitted to trading on a regulated market in the EU. For a summary of the oral submissions please refer to Appendix H (The Appendix can be obtained upon your request).
  2 NZLR 1079
 EC 2006 ARC 13/06
  2 NZLR 1079
 The Group comprised representatives of the New Zealand Council of Trade Unions, Employers’ Federation and nominees from the State Services Commission, Minister of Labour, Ministry of Pacific Island Affairs and Maori Business Network. The Group was chaired independently by Nigel Haworth. A further Group was appointed to give further consideration to these proposals and advise the Government on options.
 Manusafe entitelements and the Manusafe controversy, issue 4, November 2001, Workplace Relations
 Leda Blackwood et al, Employment Agreements: Bargaining Trends & Employment Law Update 2006/2007, Victoria University
 SMEs in New Zealand: Structure and Dynamics, July 2007, Ministry of Economic Development.
 Law, David and McLellan, Nathan The Contributions from firm entry, exit and continuation to labour productivity growth in New Zealand, March 2005, Treasury
 SME’s in New Zealand: Structure and Dynamics, July 2007, Ministry of Economic Development
 Worker turnover rate is a measure of employment stability. A region or an industry with a low worker turnover rate is more likely to have stable employment. The worker turnover rate is the worker flow (or the sum of accessions and separations) as a percentage of the average of total jobs in consecutive periods. The average quarterly worker turnover rate for the year is the average of the turnover rates for four consecutive quarters.
 Statistics New Zealand, Linked Employer-Employee Data: June 2006 quarter, released August 2007.