Introduction
Download a flowchart for an overview of the key steps in a typical restructure/redundancy.
Restructures are undertaken in order to meet a variety of requirements. For example, to maintain a competitive edge; to meet best practices; to comply with international market requirements; to become more cost-effective; to achieve economies and to streamline or downsize.
Definitions
"Restructuring" is the process undertaken when an employer analyses the business environment and then takes steps to alter the organisation and scale of the business structure to meet future requirements. Restructuring commonly results in redundancies.
"Redundancy" is usually defined as a situation where an employee is terminated wholly or mainly due to the fact that the position filled by the employee is or will become superfluous to the needs of the business.
Some employment agreements may contain a more precise definition of redundancy. This means the relevant clause of the applicable employment agreement should be carefully checked in all redundancy or potential redundancy situations to determine what constitutes a redundancy situation in each instance.
Note: If your proposed restructure involves contracting in or contracting out of cleaning, food catering, caretaking or laundry services, the employees concerned may be subject to special conditions under Part 6A of the Employment Relations Act. Such employees may have the right to transfer to the new employer on their existing terms and conditions. Seek specialist advice before proceeding - refer Ask an Expert. More information on this subject can be found at Employment Relations Act under Employee Protection Provisions.
Right to Manage
The Court of Appeal has consistently held that the right to restructure and to lay off redundant staff is an essential part of management’s right to manage. The Appeal Court has stated that: “The Employer is entitled to make his business more efficient… a worker does not have a right to continued employment if the business can be run more efficiently without him… nor could it be right for the Labour Court to substitute its own opinion for the wisdom or expediency of the employer’s decision”.
However, that right is subject to there being genuine reasons for the restructure; and the process being procedurally fair.
Note: More recently the Employment Court has shown a willingness to examine much more closely the employer's reasons for any restructure, in order to be satisfied that not only was a fair process applied, but that the reasons were genuine. So careful consideration is required.
Genuine operational reasons
Clear evidence of genuine commercial reasons for redundancies is important. Obviously poor financial performance could be one such factor but the business does not have to be loss making to justify redundancies. Proposals to increase profitability may also constitute a genuine operational reason. Other factors may include changes made in anticipation of market fluctuations or changes to simplify business processes.
A failure to demonstrate genuine reasons may lead to accusations that there were other reasons behind the lay-offs and that the redundancy was a sham. This is particularly the case where a single employee is to be made redundant and the employee has a history of unsatisfactory performance or conduct, as arguments can arise that the employee was really dismissed for those reasons.
A key point to remember is to focus initially on the proposed changes to the business structure. The personal impact only comes into consideration when the new structure is confirmed.
Redundancy situations do not give you the right to unilaterally alter the terms and conditions of an employee’s employment. Such changes involve consultation and variation of the contract by mutual agreement. In some situations a restructure proposal may involve changes to terms of employment, but seek specialist advice before you start.
Fair Process
The key elements of a fair process in redundancy situations are:
Consultation with employees affected
- Consultation does not require that there be agreement. However, it clearly requires more than mere prior notification.
- If there is a proposal to make a change, and such change should be preceded by consultation, the change must not be made until after consultation with those required to be consulted.
- This does not involve a right to demand assurances, but there must be sufficiently precise information given to enable the person to be consulted to state a view together with a reasonable opportunity to do so. This may include an opportunity to state views verbally or in writing.
- The requirement for consultation should never to be treated perfunctorily or as a mere formality. The person to be consulted must be given a reasonably ample and sufficient opportunity to express views or to point to problems or difficulties.
- Consultation must be allowed sufficient time.
- Genuine effort must be made to accommodate the views of those being consulted; consultation is to be a reality, not a charade.
- Consultation does not necessarily involve negotiation towards an agreement although this not uncommonly can follow as the tendency in consultation is to seek at least consensus.
- Consultation involves the statement of a proposal not yet finally decided upon, listening to what others have to say, considering their responses, and then deciding what will be done.
- The party obliged to consult, while quite entitled to have a working plan already in mind, must keep its mind open and be ready to change and even start afresh.
Consultation cannot be equated with negotiation in the sense of a process which has, as its object, arriving at agreement.
Selection Criteria
Any decision as to the selection of employees to be made redundant must be carried out in good faith, without reference to irrelevant factors, and with reference to relevant criteria.
Communicate the proposed criteria to employees early in the process so they have the opportunity to contest or discuss them. Any such criteria should be as objective as possible, but some element of subjective assessment will inevitably be involved.
As far as possible apply objective selection criteria based on skills, qualifications and relevant experience so the business retains employees who can make the best contribution to the future. The concept of “Last On, First Off” has no relevance or applicability in redundancy situations unless there are express provisions in the relevant employment agreement or company policy.
Use the example Redundancy Selection Criteria documents for assistance in developing professional selection criteria.
Selection Processes
Discuss assessments of an employee with the employee before any selection decision is finalised. This gives the employee an opportunity to object and explain his/her reason for that objection. This is particularly relevant where assessments are based on subjective factors (such as opinions). In these circumstances the employee must be allowed the opportunity to raise new subjective considerations that may alter the assessment.
Because such assessments concern selection for redundancy, they are likely to be of greater importance to the employee than his/her annual performance appraisal. Allow the employee at least as much feedback time during a redundancy assessment as for a performance appraisal.
Similarly, tell employees who will be carrying out their assessments so that they have an opportunity to object to any assessor and suggest alternative names. At the conclusion of the assessment process, tell employees their overall assessment rating and give them the opportunity to discuss their rating before any decision is finalised.
Redeployment Options
Consider alternatives to redundancy, whether for a different position in the Company. Actively seek suggestions from the employee as to any alternative positions in which he/she may be interested, whether as an employee or a contractor.
Therefore, while the Company has the right to restructure and eliminate an employee’s role, it does not automatically follow that the employee’s employment will be terminated. Accordingly, every effort must be made to offer affected staff alternative work elsewhere within the Company.
Representations of the employee
Afford the employee a reasonable opportunity to make representations about the potential redundancy before any action is taken to dismiss. The employee has the right to be represented. It is also vital to demonstrate if any representations were considered before making the final decision.
Notice
The redundant employee is entitled to the amount of notice specified in their employment agreement (or payment in lieu of such notice). Where no period of notice is set out in the employment agreement, reasonable notice must be given.
In general, you should allow the employee to work out the notice period so that he/she has an opportunity to seek alternative employment while still employed.
Many collective employment agreements include the requirement to notify the employee’s union representative of any impending redundancy and this requirement, where it exists, must be observed.
Redundancy Compensation
Redundancy compensation must be in accordance with the express provisions of the employment agreement. If the agreement does not provide for compensation, the employee has no entitlement. There is no statutory entitlement to redundancy compensation.
Other
It is generally good form to allow a redundant employee reasonable paid time off work during the notice period to seek alternative employment or attend job interviews. However, this should be on the basis that permission is required on each occasion to control the amount of time off. In some cases counselling, career advice, financial planning advice, or a comprehensive outplacement programme may be warranted.