Tread cautiously in technical redundancies

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What’s the difference between a technical redundancy and a conventional redundancy? No clue? You’re not alone – many HR professionals do not realise there are differences, and making a mistake can prove costly, as demonstrated by a recent Employment Relations Authority (ERA) decision.

The term “technical redundancy” describes situations where a business is sold and the new owners agree to take on the business's employees under essentially the same terms and conditions. However, because an employment agreement can't simply be transferred from one business to another, the old employment arrangement comes to an end, which means that technically the employees have been made redundant.

It also means that if the old employment agreements provide for compensation for redundancies, the employees are entitled to this compensation even though their employment has effectively continued. In order to avoid this, employment agreements often specifically exclude technical redundancies from redundancy compensation provision.

Further, according to the Ministry of Business, Innovation and Employment (MBIE), while an employee can't be compelled to transfer their employment to a new business owner, if an employee elects not to transfer their employment there is no entitlement to redundancy compensation.

In a recent article on technical redundancies, lawyer Simon Menzies from Harkness Henry wrote that an employer contemplating any form of redundancy must adhere to various well-established principles. These include consultation with any potentially affected staff ahead of any relevant decisions. This obligation is reinforced by the requirement, under the Employment Relations Act, for both parties of an employment relationship to be responsive and communicative with each other.

An employer wanting to do something that is likely to have an adverse effect on the jobs of their employees (such as a sale of the business) has to provide their employees with relevant information, as well as an opportunity to comment on that information, before any decision is made, he wrote.

"This obligation can create some difficulties for an employer contemplating sale of the business... Most employers in those situations tend to think a discussion with the work force will only be necessary once a sale is actually negotiated and confirmed. Further, many purchasers in the negotiation of a prospective business purchase insist on negotiations remaining confidential."

The recent ERA decision in the case of Morrick v JMV Agri Ltd provides clarification on how to resolve that tension between commercial expectations and the communication requirements prescribed by employment legislation, Menzies wrote. "The decision clearly confirms that an employer's obligations when a technical redundancy arises are no different from those in any other circumstances."

In Morrick v JMVAgri Ltd, the ERA found that, while the redundancy was genuine, the failure of the employer to consult with the employee before advising him that the business had been sold meant the employee's dismissal was unjustified, he explained. "There may well be some difficulties in balancing the obligations owed as an employer with the desire to achieve commercially realistic outcomes, but getting that balance wrong will have significant financial consequences."

Further information about restructuring and redundancy is available from the MBIE.

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