Boom and Bust - the Resurgence of Restructures

When considering a restructure an employer needs to focus on two aspects- why and how. Employers need to firmly grasp:

1. why they are wanting to restructure their business; and
2. what process they are going to follow.

Employees need to be able to clearly understand why the restructure is being proposed and have sufficient information at hand to provide informed feedback to the employer.

The Reason

A business can restructure when it is commercially necessary to do so.  Therefore, when proposing to restructure the business, an employer will need to have a “genuine reason”. This will then need to be communicated to all affected employees.

“Genuine” was defined in Brake v Grace Team Accounting[1] to mean whether “the fair and reasonable employer could have come to the decision in all of the circumstances”.  When considering this genuine reason, an employer needs to actively consider what evidence they are relying on and what are they wanting to achieve from the restructure.

A genuine reason will normally fall into one of the following categories:

1. Financial – including the current state of the market;
2. Operational – Streamlining the company process through significant change including removing surplus roles; or
3. Sale (or transfer) of a business.

Learning

Financial

Economists have signalled New Zealand will likely go into a recession in 2023. As cashflow issues became apparent, employers may consider a restructure of their business is required.

If a business is wanting to restructure their business due to financial reasons, we recommend the following are considered before issuing a business proposal.

1. Is there a problem with the current and projected financial position of the company?
2. How accurate is the information you are relying on?
3. What changes can reasonably create the desired outcome? There should be more than one option considered.
4. Who are the affected parties in each option?
5. Can affected parties be redeployed?

Operational

If, as an employer, you are considering a restructure for the purpose of streamlining your business, then we recommend that you think about the following before making a decision.

1. What is wrong with the current organisational structure of the business?
2. How can it improve?
3. What changes can reasonably create the desired outcome? There should be more than one option.
4. Who are the affected parties in each option?
5. If new roles are being created, can you redeploy affected staff?

The concept of restructuring to address the issue of surplus staff was explored in Caddy v Vice-Chancellor, University of Auckland.[2]  Dr Caddy was employed by the University in July of 2009 as a musicologist and at the time of her employment ending, she was a Senior Lecturer.  For a period of five years the number of undergraduate students enrolling and majoring in musicology declined. Only 10 enrolments remained by 2018.

The Court identified that when making the operational decision to restructure the University was not looking at the performance of individuals, but rather, had a focus on looking at the positions that were held by individuals.  In making this assessment, the University decided to make Dr Caddy redundant, as her role was found to be surplus.  The Court found that the University had a genuine reason to disestablish her role.

Sale

If the proposed sale is a share sale, often referred to as a business transfer.  During a share sale all existing employment relationships remain unaffected.  This type of sale does not trigger a technical restructure.  It is business as usual.

If the proposed sale is an asset sale (where there is a change in the legal entity employing the staff) this will trigger a technical restructure and requires an employer to carefully consider how to align employees last day of notice (when the employment relationship concludes) with the completion date.  Employers are required to act in good faith and to consult with all affected staff as the employment relationship changes.

If, you are considering an asset sale of your business, we recommend that you think about the following before making a decision.

1. Whether you have any vulnerable employees (for example, cleaners, security guards, or caretakers) who will need to have their employment transferred.[3]
2. Whether you want to include as a condition of the sale and purchase agreement (SAP) that the purchaser must offer employment to all affected staff or that a percentage of all staff sign the individual employment agreement proposed by the purchaser.
3. If staff members are going to transfer over to the purchaser will their annual entitlements follow? Will they retain their original commencement date?
4. What and how you will communicate information to affected staff?
5. What will you do if they elect not to transfer?

Summary

These considerations are not exhaustive but are guidelines that can help employers determine if they have a genuine reason to restructure their business and make certain roles redundant.

Identifying a genuine reason is the critical first step in deciding whether a restructure is necessary.  As an employer, acting in good faith would not use a restructure to bypass the disciplinary and or performance management of an employee.  We recommend that employers take additional care if they are proposing to make an individual, who has had performance issues redundant, as the Court may apply a high level of scepticism when assessing the employer has a genuine reason.

Fair and Reasonable

Once an employer has determined their genuine reason, they also need to ensure that they follow due process and do not rush the process or make a rash decision.  Following due process is tested under section 103A of the Employment Relations Act 2000 (the Act) which states:

whether the employer’s actions, and how the employer acted, were what a fair and reasonable employer could have done in all the circumstances at the time the dismissal or action occurred [emphasis added].[4]

To determine if an employer has acted in a fair and reasonable manner, the Courts will look at the merits of the decision.  For example, a fair and reasonable employer would not have acted fairly or reasonably if they:

1. created and relied on incorrect information;
2. restructured their business to bypass a disciplinary and or poor performance process; or
3. employed a new employee in the same position that they have just deemed surplus to the business.

Before any final decisions are made an employer should undertake a consultation process in order to comply with their good faith obligations under section 4 of the Act.  We consider a fair and reasonable employer would:

1. explore all options before pursuing a restructure;
2. create a change of business proposal to be sent to all affected staff;
3. set up a meeting between all affected staff where the restructure can be communicated, and the proposal circulated;
4. actively encourage the affected staff to provide feedback within a reasonable timeframe (this will generally be five working days, however, can be longer when the restructure is complex, or affects a significant number of employees) that is set out in the proposal;
5. consider this feedback and provide a response to the feedback; and
6. consider redeployment options and communicate these, where possible, to affected employees[5];
7. communicate the outcome to all affected staff; and
8. implement the decision (redeploy/ terminate).

If, after considering the feedback provided, the employer decides that the best option is to restructure their business and make certain staff redundant, then a fair and reasonable employer may continue to help these affected staff after the outcome has been communicated.  While redundancy compensation is not a requirement under New Zealand law, a fair and reasonable employer may:

1. provide a written reference for the employee setting out their employment was terminated by way of restructure;
2. provide the employee time off work to attend interviews or search for employment; or
3. offer additional support to affected employees such as counselling.

Learning

An employer should always ensure they have clearly communicated to the affected staff the reason for the restructure in accordance with their good faith obligations.

If you require advice around the restructuring and redundancy process, or any other issues in relation to Employment law, then please contact one of our specialists in the Employment team including, Alexandria Till and Brett Edwards.

[1] [2013] NZEmpC 81.

[2] [2021] NZEmpC 129.

[3] These roles are protected at law.

[4] Employment Relations Act 2000, s 103A.

[5] This may occur after the outcome.

This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.