Proposed transfer clause sets alarm bells ringing for employers

October 2001

By the Employment Team

Controversial new legislation designed to increase protection for employees could seriously affect the employers' prerogative to organise their business as they see fit.

Proposed transfer clause sets alarm bells ringing for employers

The Government formed an Advisory Group consisting of employers and union representatives to consider ways to improve the level of legislative protection for employees in the event that their work is contracted out, or a business is sold or transferred.

The Council of Trade Unions tabled a controversial draft transfer clause in July. Notably this is the only clause which has been released to the public for submissions.
The key points of the draft transfer clause are as follows:

• The object of the clause is to ensure job security and continuity of the terms and conditions of work where a business or part of a business is being sold or transferred.
  

• The transferor and transferee of a business must inform union(s) (if applicable) or employees of the transfer 30 days before the date of transfer.
  

• Notification must include the date of and reasons for the proposed transfer, the name of the transferee, implications of the transfer for employees, the date by which employees must choose not to transfer, and implications for employees who choose not to transfer.
  

• Every employee employed by the transferor and affected by the transfer must be employed by the new employer unless the employee chooses not to be.
  

• Transferring employees' terms of employment, conditions of work and service with the transferor are to be transferred to the new employer.
  

• Transferring employees are not entitled to any benefit in relation to redundancy or to make a claim against their former employer for unjustified dismissal.
  

• Employees who choose not to transfer must notify their existing employer and the proposed new employer no later than 10 days prior to the proposed date of transfer. The employees' employment will then terminate on the date of transfer.
  

• Employees who do not transfer are entitled to payment of redundancy compensation (unless otherwise agreed in writing). The draft transfer clause does not specify the proposed formula for redundancy compensation.
  

• Any employer or proposed new employer who fails to comply with the transfer clause are liable to a penalty under the Employment Relations Act in respect of each employee affected by the non-compliance.

The implications which arise from this draft clause are enormous. While the clause provides certainty of terms and attempts to provide certainty of employment in restructuring and transfer situations, it may affect employers' prerogative to organise their businesses as they see fit.

The definition of "transfer" captured by the clause is far wider than commonly understood - it includes changes in legal status, merger, division, lease, contracting out, contracting in, subcontracting and succession to a contract.

Employees who do not choose to transfer (and where there is no written agreement with their employers preventing payment of compensation) will be eligible for payment of redundancy compensation even if they have been offered no less favourable terms and conditions of employment with the purchaser. Thus, the choice of redundancy or transfer lies with the employee. This may create an incentive for employees to refuse to transfer because of the likelihood of a compensatory payment. The proposed clause may reduce the value of businesses being sold, particularly as employees' knowledge and experience is reflected in the value of goodwill of businesses.

The clause requires prospective purchasers to employ all the employees of the vendor's business and on the employees' existing terms and conditions. The clause does not recognise that part of a decision to sell a business or out source work may be due to excessive labour costs. The impact of the clause may be to remove the use of sale/transfer and outsourcing of businesses as a way to reduce labour costs.

In addition, the requirement for the purchaser and the vendor to notify the union (if applicable) and employees affected by the transfer 30 days prior to the proposed date of transfer ignores issues of commercial sensitivity. Notification may be difficult where a sale or transfer is not confirmed until just prior to settlement and the result may be to delay parties from effecting a commercially pragmatic deal in a timely fashion.

The Advisory Group is currently finalising its recommendations to the Government. If enacted, the clause will affect the ability of employers to manage their businesses as they see fit and will shift the choice of redundancy or transfer to employees. The Government anticipates that it will soon be in a position to release the Group's findings in respect of the draft transfer clause.