PART THREE - Analysis of Issues

Notification

Notification of the possibility of the redundancy is an obvious pre-requisite for consultation with unions and employees. 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.

It is difficult to measure the number of redundancies that occur every year, in various sectors, regions and for what reasons. A review of media coverage on recent redundancy situations and information from Ministry of Social Development (MSD) indicates that there are a large number of redundancies occurring in particularly small communities which has not only an adverse effect on employees but also the community both economically and socially.

Relevant aspects of notification include:

• informing a state agency of a redundancy situation
• informing and working with unions and employees, and
• disclosure of information to the Stock Exchange.

Commercial sensitivity is important to consider when notifying agencies and unions of the potential event of redundancy. A balance has to be struck between when MSD and employees are notified and also when the Stock Exchange should be notified. The employer may have good intentions by notifying MSD as early as possible, allowing appropriate assistance measures to be deployed for when the announcement occurs, however, there is always the risk that the news maybe leaked to employees particularly if it is in a smaller town. On the other hand, it can be difficult for State assistance to be deployed effectively if they are only told a few days or in some circumstances the day before a redundancy situation is announced.

Confidentiality and assurance of information provided in the notification can also have an impact on the share market. Information in the public domain on an impending redundancy can have an adverse effect on the share market as investors may ‘catch wind’ of the commercial status of a business, resulting in the share value of the business falling. Regardless, a balance must be struck between the fairness to shareholders and equitable notion of informing the employee in the event of a redundancy: it should not come as a shock to the employee if there is an impending redundancy situation.

The comparative analysis of New Zealand and international jurisdictions indicates that there are a number of countries who require compulsory notification of redundancies to a State agency, for example, the United Kingdom requires notification of redundancies over 20 employees and in the United States notification is required of a redundancy situation of more than 100 employees in a firm

The Group’s view

The Group recognises the obvious advantages of having compulsory notification of redundancies to a State agency, particularly in the event of mass redundancies in New Zealand and the potential impact on smaller communities.  Compulsory notification to an appropriate State agency is beneficial in dealing with displaced employees in advance of mass redundancies being announced and businesses closing.

The Group is however mindful of the balance required in notifying appropriate parties in a redundancy situation. Parties to a redundancy event include employees, unions, State agencies, and also the share market. Too much information in the public domain through notification have an adverse effect on the share market as investors may ‘catch wind’ of the commercial status of a business on the Share Market, affecting corporate competitiveness.

An non-compulsory option which would to ensure State assistance is provided in a timely manner and in consideration of providing fairness to the employee, is that the employer could inform the State agency of the ‘potential’ of a redundancy during the consultation process with employees during which assistance is not ‘officially’ deployed but resources are organised and information from the employer regarding skill-sets of the employee/s is matched to appropriate jobs as quickly as possible. If the ‘potential’ redundancy does arise, then it will:

• not be of surprise to the employee, and
• the State agency can be event ready and release resources immediately once the decision is final.

It is important to note that regardless of how much time a State agency has, the assistance provided should always be as best, event ready.

Other options could include a Code of Practice or minimum requirement in legislation for notification to a State agency. Compulsory notification to a State agency may require a threshold, such as 20 or more redundancies will need to be notified by the employer. The balance between incentivising compliance and penalising employers who do not comply may also need to be considered. Resourcing and administrative costs will also have to be considered if a compulsory notification of redundancies to a State agency is to be considered.

The Group has explored current policy work being done by MSD and the Department of Labour (DoL) in tracking redundancies and Security in Change work to providing earlier support for people at risk of redundancy. The outcomes of a pilot approach to tracking redundancies, and the assessment of the impact of redundancy events on the local communities, should provide a better overview of the requirements and costs associated with pursuing statutory notification to a State agency of a redundancy event.

The Group considers that it is preferable at this stage to encourage employers to provide early notification to relevant government agencies rather than introducing a statutory notification requirement.

Consultation

It is generally accepted that “good faith” requirements in s.4 of the ERA relating to redundancy require consultations with the employees or the union prior to declaring redundancies. In the past, good faith principles has been applied accordingly to employment relations matters including redundancy. In general, “good faith” principles have a strong basis in New Zealand’s employment relations in comparison to international jurisdictions.

Employers have to follow a fair process when dismissing an employee for any reason. The required procedural steps in a redundancy situation depend on the individual circumstances of each case. It is not just the act of consultation that is important, but the quality of the consultation should be meaningful in determining the right decision making processes.

Case law has stopped short of making consultation an absolute requirement. In Aoraki Corp Ltd v McGavin [1] it was noted that to impose an absolute requirement to consult would lead to impracticalities in some situations e.g. mass redundancies.

Relevant factors when considering the need for consultation include:

• the position held by the employee, e.g. whether they are in a management role [2]
• the size of the company, in a small workplace consultation will usually be expected [3], and
• the employee’s length of service [4]

Victoria University’s 2007 analysis of employment agreements suggests that for the most part, collective agreements recognise a role for the relevant union(s) in the event of a redundancy. However, union recognition clauses in the private sector are much more likely to be limited to advising the union of a redundancy prior to, or at the same time as, giving redundancy notice to employees.

Consultation process

In any consultation process the employee should be given the opportunity to consider any proposal to disestablish his or her position and to comment on it. The employee should be given a reasonable opportunity to consider the proposal and feedback from the employee must be considered before the final decision is made. If a fair and meaningful procedure has been followed, then the employee should already be aware that his or her job is at risk and that their comments and suggestions regarding the situation would have been considered by the employer.

Alternatives to redundancy should be considered by the employer in the consultation process, ideally considered with the employee. The prevalence of redundancy counselling, job interview leave and relocation assistance is common in collective agreements, unfortunately there is little known about individual agreements. However, other alternatives a business should consider when consulting is retraining, positions in other companies within the same group and voluntary redundancy.

The Group’s view

Consultation is a statutory requirement in any process of restructuring and redundancy. In addition, there is extensive common law on this matter. The Group’s view is that this appears to be adequate but that consideration be given to codifying the relevant common law.

Notice

Currently there is no statutory notice period that an employer must comply with when an employee is advised that they will be made redundant.

Employers are entitled to make employees redundant, but any redundancy needs to be conducted in “good faith”.  Redundancies need to be genuine and employers must carry out a fair process. The focus should always be on whether the position is redundant, and not on the person. Redundancy cannot be used to dismiss an employee for misconduct or poor performance.

Providing adequate notice is imperative in allowing the employee to prepare for a redundancy event and for government assistance to be deployed appropriately.

The issue of adequate notice period has been brought before the courts and explored in case law. The courts have made a number of comments on the purpose of notice periods in redundancy situations.

Notice periods:

• give employees certainty over when their employment will end and allow them to plan accordingly [5]
• allow for negotiation of redundancy agreements [6]
• give employees the opportunity to adjust to the changed circumstances [7], and
• enable employees to try and find employment whilst employed, which is of itself a position of advantage. [8] 

It is important that employers comply with the notice provisions set out in their employment agreements and failure to give the required notice will make the employer liable for arrears of wages. [9]  The denial of adequate notice is also a breach of an employer’s obligations of fair dealing and good faith. 

Although “reasonable” notice may be implied into employment agreements [10], redundancy is a special case where common law principles relating to reasonable notice offer little guidance. [11]  “Reasonable” notice depends on the circumstances of each situation and has recently ranged from one week [12] to two months. [13]

Data gathered on collective agreements for 2007, indicate that four weeks notice period seems to be the most common allowance, but there are still some sectors who either provide little or no notice to their employees other than that specified for ordinary termination. Differential periods of notice may exist in some agreements but the practical effect maybe that some employees may get compensation instead of adequate notice period.

Four weeks notice seems to be the most common notice period amongst collective agreements, however there are some sectors where it is less than one week and can have a far greater impact on the employee. For example, in service sector industries such as restaurants, hospitality and retail – one week notice is the most common amount of notice period. Workers in these jobs are often on minimum wage and with one week’s notice it is difficult to consider options or find other work given the short time to adjust.

4 weeks notice option

Providing adequate notice is primarily an adjustment issue. The consequence of a minimum four weeks notice period is that employees will at best be prepared for the redundancy event, look for other work and seek assistance where possible such as counselling, training, government assistance etc. Notice is particularly important in the event of mass redundancies and for smaller communities where the impact of redundancy can be felt far greater both through economic and social circumstances.

A four week minimum notice period may also be important in the event of insolvency as it allows employees, employer and State agencies to prepare adequately before the firm is closed down. In the event of some insolvencies, a four week notice period maybe of no value, however a business should have some knowledge of its commercial status to be able to provide notice at an earlier stage. Voluntary redundancy and notice may also be different depending on requirements. Currently, Schedule 7 of the Companies Act does not have any requirements around notice period for redundancy in the event of insolvency.

Another issue related to time apart from providing adequate notice to the employee is untaken leave. This should not be offset by the notice period e.g. four weeks notice and if there is leave owing for the employee they should be able to take that leave. Another option is of course unless otherwise agreed, requirements stated in an individual agreement.

Some countries operate their mandatory notice requirements on a slide scale based upon services and age of employee in recognition of a greater time period required for some employees to prepare for their dismissal e.g. in Australia where the notice requirement is adjusted where an employee is over 45 years of age and with at least 2 years continuous service with the employer. This takes into account the difference that increased age can make for older workers as they are re-entering the workforce and to provide greater opportunity to find a new job. This may have some advantages for New Zealand, particularly in the area of skills shortages and the potential that older workers can have on workforce numbers and the economy.

Fairness is important in the event of redundancy, as the redundancy announcement should never be a shock or a surprise to the employee. If adequate notice period is provided, then this allows time for the employee to adjust to the news and make appropriate plans for their future particularly for those who are in vulnerable labour markets.

In providing adequate notice period, the length of service may be of value from an employee’s perspective and for the employer to note. Business continuity when notice is provided is crucial in regards to the timing and who the notice goes to. In smaller business’, employees maybe in touch with their employers on a more day-to-day basis and are more often than not aware of the businesses commercial position. In larger organisations, employees may not be in touch with their employers on a frequent level as might be in smaller businesses or aware of the company’s commercial position.

The Group’s view

The Group agrees that the Government should consider the introduction of a statutory notice requirement of redundancy termination. This requirement could possibly be a code of practice or introduced through legislation as an appropriate vehicle to administer the minimum notice requirement e.g. four weeks.

The Group views a statutory requirement of four weeks notice, which is currently implied in most collective agreements as adequate in ensuring that employees are treated fairly in redundancy situations.

Another option is a notice period based on service.

Where the Group has recommended consideration of options for redundancy compensation that could exclude either the employees of small firms or employees with less than one year’s service, separate consideration should be given to providing statutory notice of redundancy applying to all employees.

The Group has separately recommended that notice should be a priority debt under the Companies Act 1993.

Compensation

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 it in the employment agreement.

Currently, compensation is accounted for in at least 78 percent of collective agreements. A common formulation in the public sector is the 6+2 formula, which is 6 weeks wages for the first year of service and 2 weeks wages for each year of service thereafter. Outside the public sector there is wide variation but a breakdown is provided in Appendix D (The Appendix can be obtained upon your request). There is little information available for those on individual agreements, however it can be said with some confidence that ‘management’ and higher income earners are commonly provided redundancy compensation.

There appear to be trends in given sectors ranging from the finance and business services sector which is at the high end to mining and metals manufacturing at the low end.

What is the purpose of compensation?

Redundancy compensation generally recognises:

• that the termination is involuntary and not due to individual performance
• the loss of service related benefits
• the opportunity cost for the employee of the period invested with that particular employer, and
• the risk of not finding a comparable job and the impact generally on the earning power of the employee.

The Group note also that the Courts have formed views that compensation for redundancy also provides some income assistance for the period following termination.

An entitlement to redundancy compensation can also act as a deterrent where an employer might otherwise make an employee redundant without due consideration of alternatives.

In addition for employees, redundancy compensation contributes to employment security and can encourage prospective employees to consider employment in situations where there is a perceived risk of redundancy.

Options to provide for compensation

There are several options for delivering statutory options for redundancy compensation. These include:

• a code
• a legal right to redundancy compensation with the amount to be determined by a third party (e.g. ERA Part 6A)
• a statutory formula, and
• a redundancy fund or levy based arrangement.

Aligned with any of the chosen options there could be a variety of support systems and approaches to assist workers affected by redundancy.

Code

Options include:

• an enforceable code of employment practice to apply to redundancy situations and including a guide on redundancy compensation or statutory compensation requirements, and
• a set of guidelines illustrating best practice.

Either option will require information and education prior to implementation.

A legal right to redundancy compensation with the amount to be determined by a third party

This option would be similar to the provisions of Part 6A of the ERA. It would provide for redundancy compensation. However, the amount would be agreed between the parties or, in the event that agreement was not possible, be determined judicially.

This approach would allow for the amount of compensation to be appropriate to the particular circumstances.

However, this approach does have some disadvantages. For employees, lack of information and bargaining power may result in little or no compensation. For employers, there is the risk of time-consuming and costly legal processes.

It may be that a pattern of compensation would emerge from a series of court decisions that would act as an effective guide to employers and employees.

Another option is to require that all workers in a collective agreement have a right to redundancy compensation based on the above approach.

Statutory formula

There are a considerable number of options in how to provide for a statutory formula. These include a simple formula based on length of service such as 4 weeks first year of service and two weeks pay for each subsequent year. A number of adaptations could apply.

There could be an exclusion above a specified level of remuneration e.g. $150,000. This would recognise that senior employees at or above this level of pay commonly have compensatory provisions in their employment agreements.

There could be an exclusion below a specified number of employees. This would recognise that there are a large number of very small businesses for whom standard statutory approaches may create disproportionate effects. However, such an exclusion from a statutory requirement in employment law would represent a departure from the usual New Zealand approach of universal application of statute regardless of firm size.

Employees with less than one year’s service could be excluded. This would be consistent with other statutory entitlements based on length of service. This would also mean that statutory compensation would be targeted at those with a reasonable period of employment. It is estimated that up to a third of all employees would have less than one year’s service based on current turnover statistics. This would mean that the first year of service would count towards compensation but eligibility would be for employees of one year’s service or more.

There could be a maximum statutory level of compensation with the provision for negotiated payment above that level.

There could be a combination of the above adaptations.

The mix of options needs to take account of such things as basic business demographics.

Funding models

In considering options for compensatory funding models the Group agreed that the primary aim for any model is that there should always be money available to distribute for compensation to employees in the event of a redundancy.

1. Self Insurance – Employers remain responsible for funding statutory redundancy   entitlements, and can fund that either through their own balance sheet or by taking insurance with a third party provider.
2. Compulsory Compensation Insurance - Employers remain responsible for funding statutory redundancy entitlements, and must take insurance with a third party provider to ensure payments are available even in an insolvency situation.
3. Levy – Employers (and possibly employees) pay a payroll-based levy to a centrally managed fund which then meets statutory redundancy payment costs (similar to the levy collection under ACC scheme, but with only lump sum compensation payable as per the statutory formula).
4. Contributions – Employers and employees (and possibly government) make contributions representing a small proportion of wages into one or more managed funds (similar to Kiwisaver) which then provides any lump sum compensation payable as per the statutory formula.
5. General Taxation – Government funds statutory entitlements from general taxation (effectively an enhanced social security or unemployment benefit in redundancy situations).

Options (b) through (e) offer higher funding certainty, but with varying degrees of compliance and administration costs.  Options (b) through (d) potentially open another source of short and medium term investment funding in New Zealand, potentially assisting capital deepening and through that productivity.  Options (b) through (e) could have reduced administration costs, greater efficiency and lower risks if they were firmly aligned with a similar funding scheme already in operation for another purpose (e.g. (b)) private income protection insurance, (c) ACC, (d) Kiwisaver, (e) Unemployment Benefit payments made by MSD) rather than set-up on a stand-alone basis.

Self insurance

This option has minimal compliance costs, and is effectively the funding status quo for current redundancy entitlements contained in employment agreements.  It provides no greater certainty of payment of any statutory entitlement than does the current system of meeting redundancy entitlements in employment agreements.

Compulsory compensation insurance

This option would be similar to a normal business insurance type model, whereby the employer seeks income protection for their employees who may in the future be made redundant. This is a competitive business insurance type model, and insurance companies could specifically cater for these business costs that would be incurred by the employer in ensuring their employees are secured for redundancy compensation.  Some form of insurer of last resort may be required to cover firms who do not actively seek or gain insurance cover.

In the event that the business goes into receivership, the money would then be transferred from the insurance fund to the receiver and the insurance company effectively becomes a creditor to the receiver. However, redundancy payments will be paid to employees and any monies that is left over from the receivership will be credited back to the insurance company.

The benefit of this is that similar to a levy option the cost of the insurance can be borne by the employer but matched in employee contributions. An insurance model would ensure payments are made to employees in the event of redundancies.

The risk is that larger organisations may be able to afford insurance costs related to business income protection whereas smaller sized firms may struggle to bear the cost of an insurance levy. Similar to a levy option, premiums may have to be set according to the history of the business and as such an appropriate criteria will have to be set.

There may also be scope for perverse business behaviour, where businesses may deliberately go under, either to start afresh or to get rid of employees in order to recoup some money for personal benefit or to start another business. To counter-act perverse business behaviour, strict conditions and criteria would need to be set, to ensure this does not happen. However, for this reason and also for genuine redundancy cases, some employers may be put in the position where they have to subsidise either perverse business practices or a genuine case of a business going under when they may be in a financially secure position that they may never need to access the funds.

Similar to a levy option, the added business cost for the employer may mean that the employer does not increase the employee’s wage or salary due to another business compliance cost.

Another risk is that the insurance company will go under, but in most insurance companies it would be considered that they would have an underwriter – essentially a global insurer underwriting the insurance company which is insuring the business for redundancy compensation.

Levy

A compensation levy option could be developed, which could be based on a scheme similar to the current ACC funding model, whereby firms are rated according to their industry, number of injuries or deaths per industry etc and a levy cost is then identified according to criteria for the type of the business.

In the context of employment relations and redundancies, this would require a business to be rated in regards to a set criteria and a levy rate would then be set for the employer. A rating criteria could involve:

• length of existence for business
• profits, and
• industry average.

So, for example, a business that has been in existence for a period of time, has consistently demonstrated good returns on profit and in an industry with low average for redundancies would have a lower risk rating and as such a lower rate set for a levy. The levy could be contributed via a payment solely from the employer or the levy cost could be divided between employer and employee.

The benefit of this approach is that the cost of the levy could be shared by both employer and employee, and the levy fund ensures that there will be money available to pay redundancy compensation if required.

The risks associated with this option is that it could be extremely expensive to establish and allocate resources to as it would need to be setup in a similar format to the current ACC corporation. Given the cost associated with resourcing, administrating e.g. who will develop criteria and rate businesses annually for their redundancy compensation levy may not be very cost effective.

A funding model can also create disincentives for employers by creating opportunities to engage in perverse business behaviour e.g. to access the compensation fund for either their personal benefit or to start another business.

For this reason and also for genuine redundancy cases, some employers may be put in the position where they have to subsidise either perverse business practices or a genuine case of a business going under when they may be in a financially secure position that they may never need to access the funds.

Due to the added business cost for the employer there maybe the risk that the employer does not increase the employee’s wage or salary.

Contributions

This model would operate on a similar level to kiwi-saver in that there would be employee, employer and government contribution to a fund. But the government contribution does not necessarily need to be a fiscal contribution towards a monetary compensation it could also be in the form of providing training. The State already provides similar initiatives, whereby training initiatives are subsidised by the government for employees.

Data obtained from IRD from 2005 indicate that nearly thirty thousand compensation payments were taxed and the value of these compensation payments was $238.9 million which roughly equates to $8000 per payment for each redundant worker. This data indicates that if a contribution either from the State or the employer were to be introduced it could be at a cost of $2.50 per week per employee.

The benefit of this option is thatthe cost is borne by all three parties – employer, employee and the State ensuring credibility to the fund and that money will be available for employees in the event of redundancy. Redundancy compensation need not be associated with a wholly monetary compensation option for the employee. The form of compensation should also allow for training initiatives for the employee to engage in, which would make for better skilled employees re-entering the workforce.

As with the levy type option, there are resource and administrative costs associated with this option which could be very costly. The scope for perverse business behaviour also exists, so strict requirements would need to be developed for the fund so as to avoid perverse practices. It can be roughly calculated that from the IRD data, 1.5 percent workers were made redundant in 2005. This indicates the economic life cycle issues as 2004-2005 respectively were strong years economically, but when the economy is slower it would be expected that redundancy payouts would be more commonplace as economic activity and GDP is lower leading to more incidences of redundancy. The economic life-cycle would potentially affect the above options too via higher premiums.

Similar to the other options, the added business cost for the employer may mean that the employer does not increase the employee’s wage or salary due to another business compliance cost. Again as mentioned in other options, some employers may be put in the position where they have to subsidise either perverse business practices or a genuine case of a business going under when they may be in a financially secure position that they may never need to access the funds.

Income protection for the above options would be tax deductible.

General taxation

This option could be delivered through a number of ways:

• it may require extending some parameters around the unemployment benefit so as to include a compensation equivalent of four weeks work (which the employee would have been doing had they not lost their job) on top of the unemployment benefit, and
• through active labour market policies (ALMP) such as providing for a counselling service, CV writing course, training.

The Government could establish a fund dedicated to redundancy provisions by providing an amount e.g. $50 million to a labour market dynamics fund and which can be applied to employees made redundant.

A criteria may need to be established so as to ensure uptake of the ALMP, and that the benefit can only be accessed if the ALMP services have been approached.

The benefit of this approach is that this would enable better State assistance to be deployed to those who need it, particularly those who have been in the same job for a long time and may need assistance with searching for new jobs.

It also ensures that people do not take up the unemployment benefit immediately after redundancy and not utilise any other services available to them, to find a new job.

However, the cost of this option would be borne by the tax payer and as discussed earlier the cost may be high or low for the respective year depending on the economy and the number of redundancies.

KiwiSaver

Further options the Group discussed included using the KiwiSaver scheme as a fund. This option may be in the form of an additional employer contribution in KiwiSaver to provide redundancy insurance. It could alternatively be a provision that allows a proportion of employer and worker contributions to be withdrawn in the case of redundancy. However, the Group agreed these options would work best if the KiwiSaver option was compulsory. The Group’s view is that the KiwiSaver options are too complex and risks undermining the objectives of the KiwiSaver scheme.

Funding models – overseas

The international review indicated that there are some funding models in international jurisdictions which support the payment of redundancy compensation. For example, in Ireland there is a scheme, where employers who comply with all redundancy requirements are entitled to a 60 percent rebate from the Social Insurance Fund. Employers are required to make regular payments into this fund through Pay Related Social Insurance contributions. Where an employer is unable to pay the employee their entitlement, the Department of Enterprise, Trade and Employment pays the full amount directly to the employees from the Social Insurance Fund. This system guarantees payment to employees, and provides incentives for employers to comply with redundancy requirements such as notice.

Summary of funding models

The funding models identified above all provide some level of benefit but more so risks for those involved. The benefit in the models is that they all ensure compulsory compensation to the employee, which is vital allowing the employee to find other work whilst still managing to pay for expenses.

The risks identified indicate that any one of these models would be costly, resource and administratively intensive to operate. The models may also be unfair for employers who may end up subsidising the cost for businesses with bad practices and it may also encourage perverse business behaviour amongst some employers.

Affordability of the funding models is a crucial issue that could affect businesses. The cost of providing for compulsory compensation via these models may see employers cutting back on other parts of their business such as investing in training or increasing wages or salary of staff.

The cost of the funding model may be dictated also by the state of the economy as with any economic cycle, if the economy is slow and GDP is low then it could be predicted that redundancies may occur more frequently given the business climate and as such may push the cost of the funding model and premiums high.

It is important to note that as there is little data available on the number of people who actually receive a redundancy payment, it may be worth reviewing data or developing a mechanism by which this information can be obtained. This information will help inform a better understanding of the requirement of a funding model and the structure of a mechanism.

Redundancy support scheme

The Group has included the option of a redundancy support scheme. This builds on the initiatives already developed on “Security in Change”.  A Redundancy Support Scheme provides a way to consolidate and expand the scope of current MSD assistance as well as provide access to a rebate for small employers on the cost of redundancy compensation.

This would also have the effect of increasing the number of employers that engage on active labour market mechanisms.

It is recognised that active labour market mechanisms work best when many employers are engaged. However in practice it is likely that only larger firms will participate. What is proposed in the Redundancy Support Scheme is that all employers that register with the scheme are eligible for a range of services and that workers and unions can also notify the MSD to ensure that redundancy support mechanisms are made available in a redundancy situation. In some cases it may be possible to avoid redundancies due to high levels of information about possible firm closures and new employment opportunities.

However, it is also possible for such a scheme to include provision for a rebate for small employers for the cost of redundancy compensation. This would be on way to ensure that all workers have the same entitlements regardless of firm size, assist small employers with the costs of compliance with the statutory requirements, and promote active labour market mechanisms. If the statutory formula excluded workers with less than one year’s service, the Group does not believe that the cost to Government of a rebate needs to be of a very large sum.  In any case such a provision can be calibrated based on the definition of small firm that applies and the extent of the rebate.

It is suggested that only employers that register with the scheme are eligible but that the effect of registration for a small employer should not be onerous. The Group notes that there is already in operation a payroll subsidy for small employers that recognises the disproportionate cost to small employers in the provision of PAYE details to Inland Revenue.

The Group’s view

The Group was able to reach agreement that the Government should consider the introduction of a statutory requirement for redundancy compensation based on length of service. However, we did not reach a firm conclusion on the quantum delivery mechanism for such an entitlement. Accordingly the Group has also discussed a range of options as set out above. These options will need further analysis and policy development. They include a statutory formula for all workers and variations, which exclude some workers, some employers, and cap the statutory minimum compensation.

The Group has also considered a fund or levy-based scheme.

The Group has proposed further consideration of a Redundancy Support Scheme, which would channel support for workers and employers affected by redundancy and in the case of small employers provide a rebate on redundancy pay.

ILO Convention

International Labour Organisation Convention 158 and Recommendation 166 relating to the termination of employment set out the key principles relating to the dismissal of workers in redundancy situations. This includes placing emphasis on severance pay, notice periods and appeal periods.

The Group’s view

The Group discussed the implications of New Zealand ratifying ILO Convention 158. The Group’s view is that there is no point in attempting to ratify the Convention unless a statutory provision for redundancy compensation is provided and only then should the Government initiate the ratification process.

Tax treatment of compensation

Redundancy compensation is currently fully taxed. The current tax treatment appears to be unfair given that redundancy compensation is not an earning in the normal sense of the word. The tax treatment could be more generous to redundant employees. In previous years (up until 1992) redundancy compensation were taxed at a rate of 5 percent of the redundancy payment and at the earner’s usual rate because payments were regarded as compensation. The Group proposes a tax free option or a lower tax rate, e.g. five percent.

The Group notes that some relief was provided earlier in 2008 through the Income Tax Act 2004, Income Tax Act 2007, and the Tax Administration Act 1994 being amended to provide a new rebate (renamed "tax credit" in the Income Tax Act 2007) for redundancy payments. The rebate is a flat rate of six cents in the dollar, capped at the first $60,000 of redundancy payments in relation to each redundancy event. 

Before this amendment, depending on the level of a person's earnings, receipt of a redundancy payment arguably could result in over-taxation when the redundancy payment pushed the person's total earnings over an income threshold and therefore onto a higher marginal tax rate. There was no tax relief available for redundancy payments. The rebate will mean low and middle income workers will not be adversely affected by having an artificial tax rate applied to their redundancy payments.

For example, an employee receives a redundancy payment of $80,000. His redundancy payment rebate is capped at the maximum of $60,000 redundancy payment, giving a rebate of $3,600 ($0.06 x $60,000).

A new definition of "redundancy payment" has been included in legislation. A definition is required so that redundancy payments qualifying for the rebate relate to payments which arise from a genuine redundancy and have been subject to the PAYE rules.

In Australia, redundancy payments up to a certain amount are tax free. The tax-free limit for the 2006–07 year is a flat dollar amount of $6,783 plus $3,392 for each completed year of service. ($7,020* + $3,511* for each completed year of service * for the 2007/08 financial year and will be indexed each financial year).

Anything paid over that is an ETP (Eligible Tax Payment). This amount will be taxed but at a special low tax rate. The employer is responsible for paying the compensation, there is no Government funded redundancy scheme.

The Group’s view

The Group agrees that the tax rate of redundancy compensation should either sit as tax free – similar to Australia and other jurisdictions or that 5 percent of the payment should be taxed as was previously done before 1992.

Priority Debt

Pay in lieu of notice is not currently regarded as priority debt under the Companies Act 1993.

The Group’s view

The group considers that at least 4 week’s pay in lieu of notice should be included as a priority debt within the overall limit of $16,420 per employee.

Timing of implementation

It is recognised that implementation of a statutory provision for compensation and other matters is a significant change to the minimum code. It would therefore be advisable to allow a reasonable time before such requirements come into force to allow employers to adapt. During this period there should be an extensive education and information campaign.

Redundancy compensation does not crystalise as a contingent liability until a redundancy situation arises. However, a statutory obligation for employers to compensate redundancy workers is a realisable and potentially significant cost and that is further reason to allow time to adapt.

A disadvantage of a delayed introduction is that it could build momentum around a date of application and result in some works being made redundant just before the statutory requirement comes into force. However, this is unlikely as it would be a one-off situation with few or no long term benefits to the employers.

The Group’s view

The Group considered that depending on the nature of any statutory requirements an implementation period of one year was appropriate.

Resources

It is important to recognise that any addition to the minimum code needs to be enforced. Ideally there should be a major education campaign advising employers and workers of their rights and obligations. But in addition there would be requirements for ongoing resources, calculators, staff who are trained and available to provide advice and labour inspectors. Further, if there is an extension in active labour market policies (ALMP) such as Security in Change, there needs to be adequate resources provided.

The Group’s view

The Group recognises that implementation of a statutory provision implies a need for additional resources in relevant government departments and agencies.

The impact of possible statutory requirements on the unemployment benefit

It could be argued that having statutory provision of redundancy pay may ensure that people to some extent have sufficient means to look after themselves for a longer period before the need to grant a benefit.  For example, if the minimum statutory redundancy pay was the equivalent of 2 weeks pay, it could be argued that it would be appropriate for people to wait that long before MSD are prepared to look at granting a benefit, similar to what MSD do with holiday pay. 

It is worth noting that a person is not entitled to benefit for any period of paid notice whether notice period is worked or not worked.  It is regarded as a continuing payment from employer when it is determined the 'cessation date of employment’.  Another point to consider is that setting a statutory notice period gives a guaranteed period during which MSD can work intensively with people to find them other suitable employment.  

An important issue to note is how the redundancy payments are treated for Working for Families (WFF) Tax Credit purposes.  If the payments are not taxed, they may not want to include them as income for WFF tax credit purposes, if they are taxed they would almost certainly be included as income.  Therefore, people getting WFF tax credits might experience an unexpected reduction in their entitlement and possibly a debt as a result of a new statutory redundancy payment. 

Government services

The Government is currently engaged in a number active labour market policy work in relation to redundancy.  The implementation of the Employee Security in Times of Change project is being led by MSD and is developing ways to engage with industry, unions and government to provide support earlier on in redundancy processes to affected employees.

Employee security in Times of Change

MSD is leading the implementation of the Employee Security in Times of Change work programme. In April 2007, Cabinet agreed to introduce a range of processes to help ensure that workers at risk of redundancy are better identified and provided with the services and support they need to obtain alternative employment at an earlier stage than at present.

The initiatives involve developing ways of proactively engaging with unions, associations and firms, and providing support to workers being made redundant. These initiatives are relationship-based, and in November 2007, Cabinet agreed that it was desirable to widen both industry and governmental agency involvement in the partnership scheme.

An employee redundancy support fact sheet developed by the Security in Change Steering Group is attached as appendix K (The Appendix can be obtained upon your request). This describes support that MSD provides to workers in the event of a redundancy.

Ministry of Social Development services

MSD is most actively involved with providing assistance to employees in the event of a redundancy by ensuring services such as counselling, CV writing, employment search etc are all provided where possible. In some situations, employment may be found for employees made redundant but the new job may be some distance away from their hometown. MSD is able to provide support to workers who are displaced as a result of redundancy, such as providing assistance in relocation costs or travel costs for those who may have to travel some distance from their home and community to another part of the country to work.

There is also a ‘jobs for you’ (Jobs4U) scheme, which is a mechanism that MSD applies to reduce matching time for the employee to the new job. MSD does this by matching the appropriate skill-set of the employee to jobs available whether in the same community or at a location which is in travelling distance of their home.

In providing assistance, early notification would enable MSD to activate rapid response units to affected areas, particularly if they are smaller communities and have the risk of negative flow on effects affecting more than just the employees. However, as discussed earlier notification must be balanced with commercial sensitivity both for the employee and the employer in order to communications about redundancy are handled in a timely tactful, appropriate and direct way.

A challenge facing Government agencies is in ensuring that appropriate support services are delivered in a timely manner at the point of need.  This implies the need for contingency planning to ensure that the appropriate infrastructure and support mechanisms, involving a range of government departments, other agencies such as territorial authorities, tertiary providers, relevant ITOs and others, can be quickly and smoothly brought in to play as and when necessary.

The MSD also provides Redundancy Support pages on the Work and Income website at http://www.workandincome.govt.nz/employers-industry/redundancy-support.html, which describes the employment training, financial support, job search, mentoring and other services that MSD can offer in the event of a redundancy.

Work and Income officers are often deployed to areas where redundancies have occurred and provide first hand support to employees who have lost their jobs as a result of a redundancy. 

Department of Labour services

Department of Labour provides information on the Employment Relations Act 2000 on its website www.dol.govt.nz to guide employers when they are faced with making a redundancy decision. The Department’s Workplace Contact Centre also provides information to both employers and employees on the Employment Relations Act 2000 and dispute resolutions.

Department of Labour supports competency, and champions workplace practices that lift productivity and drives innovation. It also works to assist workers who are displaced by the process of creative destruction that is often associated with innovation, by providing information on skills that are in shortage, and better matching training available to workplace demands. Employment regulations can also modify the creative destruction process (such as restrictions on the use of contracting out). Government has a strategy to increase the adoption of global knowledge (Treasury is preparing policy on this), which needs to more explicitly incorporate increasing the absorptive capacity of workplaces.  

Active labour market policies (ALMP)

There is also scope to address redundancy and restructuring in smaller and rural areas through ALMP. Cabinet has recently agreed that the DoL pilot an approach with up to ten firms in small towns and rural areas to investigate ways to improve access to, and take-up of, business assistance services so that labour market and community outcomes are improved.  This approach will support both economic and social objectives.  Improving government support for firms in rural areas or small towns could result in:

• firms remaining viable over the long term, which will help secure the labour market outcomes of rural communities and small towns
• individual workers accessing government services, for example work-based training programmes, so that they develop transferable skills that help secure their longer-term employment outcomes, and
• communities strengthening and, where possible, diversifying their employment base through engagement with economic development agencies, territorial authorities and government agencies.

It is envisaged that the Department of Labour’s Labour Market Knowledge Managers (LMKMs) would facilitate this approach in close collaboration with the regional networks of other agencies including New Zealand Trade and Enterprise, the Tertiary Education Commission, the Ministry of Social Development and the Ministry of Economic Development.

Tracking redundancies

A number of activities are in train to provide earlier support for people at risk of redundancy.  As part of the Security in Change approach, Ministry of Social Development and Department of Labour are piloting an approach to tracking redundancies.  This work will monitor the labour market outcomes of people who have been made redundant and speed up the provision of customised support.  An innovative feature of this pilot is the involvement of the National Distribution Union, acting as the main provider to deliver services to all affected staff, such as assessment interviewing, the preparation of personal employment plans, providing a resource centre and mentoring services.  The wider impact of the redundancy events on the local communities is also being assessed.

Unified Skills Strategy

The Unified Skills Strategy is aimed at improving the skills of the existing workforce and ensuring firms have access to skilled workers whilst mindful of the need to increase productivity.

Action six of the strategy proposes ‘Improved access to careers and labour market information and advice for adults in the workforce, including enabling pathways within and between industries’. This strategy is anticipated to help employees in times of job transition when affected by redundancy, by increasing awareness of current government provision of career and labour market information and enhancing the range of information and tools on the Career Services website and their other suite of services. Other training initiatives that could be leveraged off include iwi training initiatives that engage with employees in affected communities.

Worker displacement issues

In the consultative process, Te Puni Kokiri raised the issue of worker displacement especially amongst Maori, who in the event of a redundancy (particularly if they receive a redundancy payment) may tend to head back to their Whanau, iwi and land to gain security during an unsecure time in their life. The redundancy approach taken here is more of a collective approach where the effects of the redundancy are shared by the Whanau and not just by the employee. Redundancy compensation provides opportunities that can be utilised in many ways to assist not only the affected employee but also their Whanau and iwi.

Worker displacement can often have an impact not only on the community they leave but also on the new communities they enter (especially in the event of mass redundancies in a small area such as Oringi, April 2008). For example, demographic movements of redundant employees from an urban centre to rural areas where employees may want to connect with their iwi, land or Whanau again - in a time of insecurity can have a big impact economically on the smaller centres. Similarly, the same effect can apply to redundancies that occur in small centres and employees move to larger, urban areas putting at risk the economic viability of many businesses in the smaller centres.

This indicates the issue of job transition and managing the shift in skills and workforce from one geographical area to another when redundancy occurs. This places pressure on both old and new communities to provide employment to affected employees and to those who have returned to be with their Whanau or iwi (this issue is also dependent on the length of time the employee will stay in the region). This shift, during a time of skills-shortages in New Zealand poses a broader policy interest in terms of productivity, skills retention and recruitment and job prospects/ employment security.

The Group’s view

Redundancy has many implications for (ALMP), which are targeted at assistance for employees, skills retention, productivity, and employment security (job transitions). The Group agrees that further work needs to be done in addressing these issues, especially in retaining redundant employees in New Zealand and in the workforce and to address productivity and skills-shortages issues.

The scope of assistance needs to be wide and the appropriate government agency should be event ready – in New Zealand’s case it is MSD – with other agencies ready and able to provide assistance as may be needed in the circumstances of specific redundancies. The role for government can also be extended to research and development, which can be encouraged further with qualification or tax incentives.

In addition there may be opportunities to link workers affected by redundancy into new opportunities that are emerging – for instance around home insulation, solar heating, major construction projects and so forth. The Group recognises that this will not be easy as there are many factors that impact on a successful matching of worker and employer needs.

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