Sadly, the last two months have seen mass redundancies on a scale that we have not seen before.  With the wage subsidy coming to an end next month, there is speculation that we will see another significant wave of people being laid off.  Lots of questions are therefore being asked about the rights and entitlements of employees in this situation.

It can come as a shock to employees when they are made redundant, that they may have no entitlement to redundancy compensation at all.  People often assume that there is some statutory or common law right to be paid redundancy, but this is not the case.  

The entitlement to redundancy compensation is strictly contractual, meaning that if your employment agreement does not expressly provide for it, there is no obligation to pay.

This situation can result in inequity.  In this regard most collective agreements provide for redundancy compensation, usually based on a service based formula such as 6 weeks pay for the first year and a further two weeks for each additional year worked after the first.  However the majority of individual employment agreements, particularly in the private sector, do not provide for redundancy compensation to be paid.  Employees covered by such agreements are entitled to no more than their contractual notice period, which is often as short as two weeks.

The legal position has not always been this clear.  In 1995 the Court of Appeal in Brighouse Ltd v Bilderbeck held that procedural fairness may require the payment of redundancy compensation, even in the absence of an express contractual term requiring it, in some circumstances.  This decision was seen as controversial at the time and led to considerable confusion as to when payment may or may not be required.

However in 1998 the Court of Appeal considered the issue again in Aoraki Corporation v McGavin and came to a different conclusion.  The Court stated definitively that there can be no requirement to pay redundancy compensation in the absence of an express contractual provision to that effect. The law has remained unchanged since then.

Given the devastating financial impact for many of losing a job, and the inequities created by the current legal position, there have been calls over the past decade to make payment of redundancy compensation compulsory.

A 2008 Ministerial Advisory Group recommended the introduction of new law requiring payment of redundancy based on length of service, and other supports.

Then in 2010 Darien Fenton, Labour Party Spokesperson on Employment, introduced a private members bill seeking to amend the Employment Relations Act to insert minimum statutory entitlements for employees in the event of redundancy.  During the bill’s first reading, Fenton said;

“The need for a fair system for redundancy protection has become more urgent over the past 18 months, as more people have lost their jobs and replacement jobs have been harder to find….New Zealand workers are among the cheapest and easiest in the world to sack.  We are nearly alone in the developed world – apart from the USA – in having no redundancy notice and compensation”.

In response, National’s David Bennett said:

“This will have a huge cost on businesses.  This will hurt workers because businesses will be reluctant to take people on, reluctant to promote people, and reluctant to give them any opportunity because employers fear the cost that this legislation would impose on them.  This legislation will hurt the workers.  Why would we want to pass a bill in the House that hurts workers in a time of recession?  Why would we want to do that when we have unemployment rates at the current rate?  Why would we want to make it harder for people to get a job?”

The bill was voted down following its first reading (Labour, Greens, and the Maori Party voted 57 for and National, Act and United Future voted 64 against).

This debate took place in the wake of the 2008 Global Financial Crisis, but the views expressed, by both sides, are equally apt today.

It is difficult to argue against people receiving financial support when they are made redundant.  But the question is who should pay?  Most businesses do not make employees redundant unless they have to.  To impose additional obligations to pay redundancy compensation on these employers may be enough to tip them over the edge into insolvency resulting in further job losses.  However employers could potentially be required to insure themselves against redundancies as a cost of doing business.

If it is not the employer who pays, inevitably it falls to the State. Whether the State should provide additional support in these circumstances is a vexed question, which is probably why it has not been dealt with up until now.