Restructuring - a technical redundancy situation?

Andrew Scott-Howman, Partner | February 2001

A technical redundancy situation may arise where an employee's position is disestablished as a result of restructuring. Recent case law has emphasised that employers should proceed with caution in introducing new business structures if they want to avoid technical redundancies.

Background

Organisational restructuring is now a regular part of commercial management for many businesses. An employer may seek to reorganise its business to take account of new directions, or to provide a more efficient management structure.

In particular, reorganisations of this type are common following the sale of a business - where the purchaser wishes to apply its own management structure to an existing organisation.

It is common in New Zealand for employment agreements to provide for redundancy compensation to be paid in the event that an employee's position becomes superfluous to the employer's needs. A provision of this type will generally apply where a business is reorganised in such a way that an employee's position is disestablished. It is, however, usual for an agreement to provide that an employee will not receive an entitlement to redundancy compensation where he or she is offered a "suitable alternative" or "substantially similar" position following the restructuring.

Most agreements for the sale and purchase of a business take account of the prospect of claims for redundancy compensation following sale and reorganisation. In this way, the potential for claims of technical redundancy is recognised as a commercial cost of sale.

Recent case law

Two recent decisions have underlined the need for employers to be careful in the way in which a reorganisation is implemented if it is intended to avoid an obligation to pay redundancy compensation.

The employer in Auckland Regional Council v Sanson restructured its business to introduce a new management hierarchy. An employee declined to apply for a position in the new structure, preferring to rely upon an assurance that he would continue in a job which would be "essentially the same". When the new structure was announced, however, the employee found that a significant number of his management responsibilities had been transferred to a different person within the new hierarchy, and that he would be required to work in the same position as a number of people who had formerly reported to him.

In a decision which was upheld on appeal to the Court of Appeal, the Employment Court held that the restructuring had rendered the employee's former position superfluous to the employer's needs and that the proposed new position did not represent a "suitable transfer". As a result, the Court held that the employee was entitled to payment of redundancy compensation.

Similar circumstances arose in Westpac Banking Corporation v Stephen. In that case, an employee's position as an analyst was disestablished following a restructuring, but his employer invited him to apply for a new position as a "relationship manager". Even though the employee successfully applied for this new position he was dissatisfied by certain features of the proposed new job, meaning that he ultimately declined this offer of employment. In this case the Employment Court upheld a finding that the alternative position involved "a significant change in duties" entitling the employee to payment of redundancy compensation.

Each of these decisions recognised that the employer, as part of its right to manage, had an ability to change certain aspects of an employee's job. This right was, however, balanced against the employee's right to claim compensation where a restructuring resulted in them being forced to accept a significantly different position.

These decisions emphasise the need for employers who wish to avoid claims of technical redundancy to ensure that jobs offered following a restructuring do not represent a significant change in duties sufficient to give rise to an entitlement to compensation.

Employers would be best advised to seek advice prior to undertaking a proposed reorganisation and to assess proposed changes to jobs. Some key features to consider in this assessment would be whether a new position will offer the same salary, whether it is in the same geographical location, whether it involves broadly the same duties and responsibilities and, significantly, whether the restructuring will mean that the employee is "demoted" within the company's management structure.

The Employment Relations Act

The Employment Relations Act 2000 introduces a new obligation about which employers should also be aware. The Act requires employers, consistent with the duty of good faith, to consult with employees about a proposal to sell or transfer all or part of a business.

Significantly, the Act does not provide any guidance as to when this consultation should take place, nor how the employees should be consulted. A case involving questions about these matters is currently before the Employment Relations Authority, and its decision will be keenly awaited by many employers.

Conclusion

Employers should seek legal advice as soon as practical after a decision has been made to implement a business restructuring.

First, employers should be aware that an obligation to consult with employees about proposed change arises by virtue of the Employment Relations Act. A failure to consult appropriately could result in a claim alleging breach of good faith.

Secondly, in order to avoid an obligation to pay redundancy compensation following a restructuring, the employer should complete an assessment of all proposed job changes to determine whether new positions represent suitable alternative employment.