Terminating employment agreements because of COVID-19

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: 26 May 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 applies to all employment relationships – regardless of the circumstances that we find ourselves in. This includes anything that has been agreed to in an employment agreement.

Deal with each other in good faith

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

Employers and employees may be considering changes that involve impacts on the continuity of employee’s work, such as changes to job descriptions, reducing hours of work or, where no alternative arrangements can be found, redundancy may be considered. These changes must be discussed in good faith, and using agreed consultation processes. 

In the current situation, there may be circumstances where consultation on changes can be truncated if the employer genuinely needs to make rapid adjustments to cope with their circumstances under COVID-19 alert restrictions, but truncated processes must still occur in good faith, and provide opportunity for workers to seek advice.

Guidance on workplace change processes

Access to financial support

COVID-19 Wage Subsidy Scheme

The Government’s Wage Subsidy Scheme supports employers and their staff to maintain an employment connection and ensure an income for affected employees.

COVID-19 Wage Subsidy – Work and Income (external link)

A Wage Subsidy Extension has been announced and will take effect from 10 June 2020.

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. Online applications open on the Work and Income website from 8 June 2020.

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 may be needed to manage physical distancing requirements),
  • 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 should be recorded in writing.

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, 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.

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, and 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.

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 applied for the COVID-19 Wage Subsidy for any employees after 4pm on 27 March 2020, must retain those employees for the duration of the period of the wage subsidy or they will be in breach of their obligations and will need to repay the wage subsidy.

If you have already made your staff redundant

If you have made staff redundant because of the impact of COVID-19, you should think about re-hiring your employees and applying for the Wage Subsidy if you have not already done so. Businesses who have already made employees redundant can apply for the COVID-19 Wage Subsidy if they re-employ those employees before they apply and if those employees were:

  • employed by the business as of 17 March 2020 (when the COVID-19 Wage Subsidy Scheme was introduced); and
  • the business’ reason for making them redundant was because of COVID-19; and
  • the business did not apply for the COVID-19 Wage Subsidy for the employees.

If an employer dismisses an employee and reinstates or re-employs them within 1 month, the employee’s employment must be treated as continuous for the purposes of entitlements under the Holidays Act.

It is expected that employers and employees would operate in good faith and employers would look to reinstate or re-employ the worker on the same terms and conditions.

Wage Subsidy Scheme

Wage Subsidy and redundancies

The Wage Subsidy obligations state that employers should retain their employees for at least 12 weeks if employers used their name to apply for the subsidy.

If you are a Wage Subsidy recipient and considering making your employees redundant, you should read about the Wage Subsidy Extension (external link) . This extension is designed to give employers more time to understand the new operating environment and to determine if they can continue to trade.

If an employer has to make an employee redundant during the subsidy period:

  • they can use the Wage Subsidy to pay the employee any notice period arising from the redundancy, and
  • they must repay any balance of the Wage Subsidy to Work and Income that’s left after the notice period has been paid.

An employer cannot use the Wage Subsidy to make any contractual redundancy payments to an employee.

The COVID-19 Wage Subsidy obligations are in the declaration that employers agreed to when they applied through Work and Income.

Obligations if an employer applied before 4pm on 27 March — Work and Income (external link)

Obligations if an employer applied on or after 4pm on 27 March — Work and Income (external link)

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

In many cases, workers will still be able to do the majority of their usual duties by working from home. In those cases, an employer would not be able to terminate the employment  on ‘frustration of contract’ grounds.

There will be circumstances where the restrictions under the Alert Level system have disrupted businesses in such a material manner that the employer would be unable to determine with any certainty how they may be able to resume operations. Whether this would amount to a sufficient justification for termination of the contract would depend on the specific instances of each agreement, and the practical requirements of the job.

The Government introduced the COVID-19 Wage Subsidy Scheme to support employers to keep their workers employed wherever possible. The wage subsidy will relieve the financial burden on the employer and support employment arrangements to stay in place (even if the employee is unable to work temporarily).

COVID-19 Wage Subsidy Scheme

By applying for the subsidy, employers must make best endeavours to pay their employees at least 80% of the normal salary/wage, and to at least pass on the full value of the Wage Subsidy and maintain the employment relationship.

If the employee’s normal wage is less than the relevant wage subsidy rate, the employee should be paid their normal wage and the employer can use the remainder of the subsidy to support the wages of other employees.

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 Wage Subsidy.

This process can be sped up if the employer genuinely needs to make rapid adjustments to cope with their circumstances and the impact of COVID-19, but 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 be done under a very tight timeframe where the circumstances require it. 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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