Termination vs redundancy: why you should never confuse the two
Ending someone’s employment can be a tough call, but there’s a right and wrong way to go about it.
Terminating someone for poor work performance or serious misconduct can be stressful. Equally, telling someone their role is no longer required is often an emotional experience for everyone involved.
But each scenario must follow a particular legal process and there are risks in getting it wrong.
We’ve asked an employment lawyer to explain the difference between redundancy and other types of termination – and your legal obligations as an employer.
Termination versus redundancy
In New Zealand, an employer must be able to justify the reasons or cause of a dismissal and the process the employer followed. This means you need to have a justifiable reason and must follow a fair process. An employer must act as a fair and reasonable employer in all the circumstances.
Joshua Kimpton, Senior Associate at MinterEllisonRuddWatts, explains that what is ‘justifiable’ will depend on the facts of each case. Common reasons for dismissal include: cumulative misconduct, serious misconduct, sustained poor performance, medical incapacity, or redundancy.
No matter the reason for terminating someone’s employment, you must follow a fair and proper process. You also need to give the employee ‘reasonable’ notice of termination – the length of notice is usually set out in the employment agreement. The only exception to this is if the termination relates to serious misconduct, in which case notice is not required.
Kimpton explains that redundancy is a specific form of ‘no fault’ termination and has specific legal requirements.
“Redundancy occurs when an employee’s role becomes surplus to business requirements,” he says. “This might happen where a business restructures the organisation, or where an economic downturn means that work is no longer available for certain roles.”
Before employment can be terminated for redundancy, Kimpton says employers must take certain steps to ensure termination is both substantively justified and carried out in a procedurally fair manner.
“First, the employer must consult the affected employee on the proposed restructure, including the proposal to disestablish the role the employee performs,” he says. “This involves providing the employee with all relevant information about the proposal, and a reasonable opportunity to consider and provide feedback on that proposal before any decision to make change is made.”
After genuinely considering the employee’s feedback and all relevant information, if you decide to disestablish the role, you must then consider whether there are other suitable roles within your organisation that the employee could be redeployed into.
“Employers have an obligation to consider, and consult with employees on, suitable redeployment opportunities. In some circumstances, this may require the employer to consider training or upskilling the employee. The employer should only turn to redundancy after it has considered all suitable redeployment options, provided the employee with the opportunity to comment on redeployment, and genuinely considered the employee’s feedback”, says Kimpton.
What does the law say about redundancy pay?
If an employee is made redundant, as with any other type of termination, they are entitled to be paid their salary (or wages) and holiday pay up to their final day of work.
Kimpton says their employment agreement will likely specify a notice period for termination of employment.
“If the employer does not require the employee to work out this notice period, or only requires them to work out a portion of the notice period, the employer will need to pay the employee their salary (or wages) for the unworked notice period.”
Kimpton adds that, in some circumstances, employees might be entitled to redundancy compensation.
“Under New Zealand law, there is currently no legislative entitlement to redundancy compensation. Redundancy compensation will only be payable if this has been agreed to in the employee’s employment agreement, or if the employer’s policies say that redundancy compensation will be provided,” he says.
What are the implications for getting it wrong?
Employers must have genuine business reasons for restructuring their organisation and deciding to dis-establish certain roles.
“An employer should not use a redundancy process as a cover-up for dismissing an employee for some other reason,” says Kimpton. “This is known as a sham redundancy.”
If an employee believes their employment has ended by way of a sham redundancy, or is otherwise unjustified, Kimpton says they may be able to raise a personal grievance for unjustified dismissal, as well as potentially unjustified disadvantage.
“If an employee is successful in raising a personal grievance, they may be awarded remedies. The employer may be ordered to reinstate the employee to their role, reimburse the employee for lost wages, and pay compensation for hurt and humiliation suffered by the employee," he says. “In addition to the potential remedies that could be awarded, defending an unjustified dismissal claim can be costly, time-consuming, and harmful to an employer’s reputation.”
Where to go for help
The Ministry of Business, Innovation and Employment’s Employment New Zealand website provides some helpful resources for employers about restructuring and redundancies.
“However, if an employer is unsure about the process they are following, their best bet is to seek legal advice,” says Kimpton.
Making someone's role redundant without a genuine business reason, and without following a fair and proper process, can have serious consequences. And while ending someone’s employment is rarely easy, following the legal procedures can reduce some of the stress for everyone.
Information provided in this article is general only and it does not constitute legal advice and should not be relied upon as such. SEEK provides no warranty as to its accuracy, reliability or completeness. Before taking any course of action related to this article you should make your own inquiries and seek independent advice (including the appropriate legal advice) on whether it is suitable for your circumstances.