Employers' Guide - Redundancy

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Redundancy is genuine when the employee’s position eases to exist. This generally occurs in one of the following ways:

    • A decline in available work;
    • Restructuring, including contracting out work;
    • Sale or transfer of the employer’s business.

It must be remembered that a redundancy is actually a dismissal because the employment relationship is terminated by the employer, albeit most employment agreements deal with it separately because it is not a disciplinary action. Once again, an employer must act fairly and reasonably in its dealings with employees and will be required to show:

    • The redundancy is for genuine commercial reasons.
    • The relevant provisions of the employment agreement have been observed.
    • The employer has acted fairly and sensitively in the way the redundancy was carried out.
    • That the action was what a fair and reasonable employer would have done in all the circumstances.

An employer is not entitled to use redundancy as a way of dismissing someone for reasons relating to the employee personally, such as concerns about the employee’s performance or reliability.

Under the Employment Relations Act 2000, a duty to act in “good faith” extends to consultation between employers and employees:

    • About how changes to the employer’s business may affect employees;
    • Concerning any proposal by an employer which might impact on employees, including contracting out work or sale or transfer of all or part of the employer’s business.

Where an employment agreement does not have specific terms about redundancy, a fair redundancy process will usually involve an employer:

    • Making decisions on the basis of fair selection criteria;
    • Providing affected staff with information about the proposed redundancy and disclosing selection criteria;
    • Interviewing affected staff and listening to their views on the proposal and any comments on how they fit the selection criteria;
    • Providing reasonable notice of redundancy (generally no more than one month will be required, though this will depend on the particular circumstances);
    • Providing counselling, career and financial advice and retraining, where appropriate.

Practical considerations, such as urgency, can mean not all of these criteria will be required. Each case will depend on its own facts.

Redundancy Compensation

Redundancy compensation must be paid in accordance with any relevant provision in the employment agreement.

Where the agreement states it is not payable then the employee clearly has no entitlement to compensation.

If the employment agreement does not mention redundancy compensation it will only be payable where the circumstances require it, e.g it has been the employer’s past practise to pay and there is no good reason for departing from the practise.