Terminating employment agreements during COVID-19 response and recovery

There are good faith processes to follow for workplace change, and redundancy should only be considered if no suitable alternative arrangements have been found.

Last updated: 18 August 2020

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Employers and employees need to work together to slow the spread of COVID-19, protect New Zealand and keep each other safe. This means that normal obligations to keep in regular contact and to act in good faith are more important than ever. This is how employers and employees can be kind to one another.

Regular employment law still applies to all employment relationships – regardless of the circumstances that we find ourselves in. This includes:

  • having a written employment agreement for every employee, and doing what that agreement requires
  • keeping each written employment agreement up to date, including documenting any changes that affect rates of pay or hours worked
  • meeting legislative and any relevant contractual requirements for changing employment arrangements
  • complying with all minimum standards legislation and with the Employment Relations Act 2000.

Deal with each other in good faith

Employers and employees, and their representatives, must discuss in good faith the implications of the COVID-19 response and recovery on their working arrangements.

Good faith includes the following three elements:

  • Parties must not act in a misleading or deceptive way.
  • Parties must be responsive and communicative.
  • Before making a decision, which may result in employees losing their job, the employer must give the affected employees sufficient information to be able to understand the proposal and then give them a proper opportunity to comment.

Good faith is also wider than this. It is more than just following the letter of the law. It involves treating others fairly using common sense.

Where changes to current working arrangements are proposed by an employer, there are specific good faith requirements that must be followed. Any changes made need to be consulted on and agreed to by both parties. 

Any agreed change to the employment agreement should be recorded in writing. Having the agreed terms and conditions in writing is a legal requirement, whether the change is temporary or permanent.

Guidance on workplace change processes

Access to financial support

Wage subsidy schemes – Work and Income

The wage subsidy schemes support employers and their staff who are financially impacted by COVID-19 to maintain an employment connection and ensure an income for affected employees. Employers can check their eligibility and apply online on the Work and Income website.

(external link) Wage subsidy schemes – Work and Income (external link)

COVID-19 Leave Support Scheme – Work and Income

The COVID-19 Leave Support Scheme is available for employers, including sole traders, to pay their employees who can't work because the employee can't come into work as per Ministry of Health guidelines, which recommends they stay at home, and they are not able to work from home because of the nature of work. Employers can check their eligibility and apply online on the Work and Income website. 

COVID-19 Leave Support Scheme – Work and Income (external link)

Work and Income benefits

Employees who lose their job between 1 March and 30 October 2020 due to COVID-19 may be able to get the COVID-19 Income Relief Payment. People can check their eligibility and apply online on the Work and Income website. 

COVID-19 Income Relief Payment – Work and Income (external link)

Alternatives to redundancy

An employer can’t make changes to terms and conditions agreed in an employment agreement, including hours of work, wages or salary, or the nature of the job itself, without the agreement of the employee. This should be recorded in writing. 

In some situations, such as genuine financial, commercial or economic problems, or a genuine restructuring of the business, an employer may consider proposing some or all of the following workplace changes, as an alternative to redundancy:

  • changes to an employee’s job description
  • a change to when or how work is undertaken (for example, shift work)
  • reducing an employee’s hours
  • reducing an employee’s wages or salary, while still at least meeting the minimum wage requirements for each and every hour worked.

In these situations the employer must follow good faith processes for workplace change, which includes giving the employee a fair opportunity to consider, seek advice from their representatives, and respond to the proposed change.

Any agreed changes must be recorded in writing and signed by both parties, and the employee must be given reasonable time to consider the proposal. 

Redundancy should only be considered if no suitable alternative arrangements have been able to be found, following a good faith process. 

Redundancy

If an employer and employee have not been able to agree to alternative working arrangements, (eg the company cannot afford to keep the employee or has changed its operating model)redundancy may be considered. 

Proposals that involve redundancy must be consulted on in accordance with good faith requirements and other employment law obligations, including any contractual consultation processes. 

Good faith requirements

Further information on redundancy

We recognise that these are unique and challenging circumstances and a ‘reasonable’ timeframe for negotiation and discussion with staff may be shorter than required for a process undertaken pre-COVID.

Government, businesses and workers all have the same aims: to support businesses to continue through this period, retain as many jobs as possible, and ensure that those jobs do not reduce in hours or pay, more than what is necessary. 

Where the circumstances require a hastened process to engage with staff on those issues, the Employment Relations Act 2000 allows flexibility in the processes, including consultation timeframes, to achieve workforce and workplace changes. The key is that both employers and employees must deal with each other in good faith throughout any process.

Employers must:

  • engage with employees and their representatives meaningfully
  • provide them with as much time as possible to consider and respond to any proposal for change
  • consider any feedback and concerns they raise.

Employees also have a duty to act in good faith. This duty should inform how they and their representatives receive and consider proposals put forward by the employer.

Good faith requirements

Employees who have been made redundant are entitled to work, or be paid, their notice period and redundancy entitlements as agreed in the employment agreement. Where no notice period has been agreed, a reasonable period of notice must be provided.

Employers who are receiving a wage subsidy should also read the information on wage subsidies and redundancies. 

Wage subsidies and redundancies

Liquidation/receivership

If an employer has been placed into receivership the receiver will have responsibility for decisions on running the business. Each situation will be different depending on the nature of the company in receivership. Contact the receiver for specific information about your situation if your employer has been put into receivership, or seek legal advice. You may wish to contact a Community Law Centre for advice or your union.

Community Law (external link)

Depending on the circumstances the receiver may cancel your existing employment agreement, or they may offer you a new employment agreement with different conditions. Employment laws still apply, and the receiver will be required to keep in regular contact with you and act in good faith.

Termination on ‘frustration of contract’ grounds

A frustrated contract is a contract that, after it was agreed, becomes incapable of being implemented, due to an unforeseen event (or events), resulting in the obligations under the contract being radically different from those considered by the parties to the contract at the start.

Employers would not be able to terminate the employment on ‘frustration of contract’ grounds where workers are able to do the majority of their usual duties.

There might be circumstances where the COVID-19 Alert Level restrictions disrupted businesses in such a material manner that the employer was unable to determine with any certainty how they may be able to continue or resume operations. Whether this would be enough to provide legal justification for termination of employment would depend on the specifics of each agreement and the requirements of the job.

Employers are strongly encouraged to seek specialist advice before relying on ‘frustration of contract’ grounds to terminate an employment agreement.

The Government introduced the COVID-19 wage subsidy schemes to support employers to keep their workers employed wherever possible and support employment arrangements to stay in place. 

Wage subsidy schemes

A requirement of wage subsidy schemes is to make best endeavours to pay employees at least 80% of their normal wages or salary. If the employee is continuing to work their normal hours, a reduction in their pay to 80% still requires good faith consultation and written agreement. However, this should never be less than the minimum wage.

Employers are required to pass on at least the full value of the relevant subsidy rate, except where the employee’s normal wages are less than the relevant subsidy rate. In this case, the employee should be paid their normal wages and employers can use any excess subsidy to help pay the wages of other affected employees.

If an employee is working (either from home or at a workplace), then they must be paid for each and every hour that they work at their agreed wage rate. This rate cannot be below the minimum wage rate.

Employers must still follow good faith and other employment law obligations, including any contractual consultation processes, when making proposals on how they will manage changes to work, hours or pay, if they are only passing on the subsidy.

This process may have been able to be sped up if the employer genuinely needed to make rapid adjustments to cope with their circumstances during the COVID-19 response period. However, the process should at a minimum involve a clear proposal being communicated to all staff, an ability to seek advice, with an opportunity to comment or respond, and the employer must consider all such comments or responses.

This could have been done under a very tight timeframe where the circumstances required it during the COVID-19 response period. Any unions present in the workplace must still be engaged with as part of this process.

Any agreed changes should be recorded in writing.

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