What is happening?
Fears regarding the ripple effects of the Coronavirus (COVID-19), notably the potential for a recession and rising unemployment, have become a real concern in New Zealand. Particularly, as new unprecedented travel restrictions were recently put in place, to help prevent the spread of COVID-19. These came into effect on Monday 16th March at 1am.
Any person from any country, excluding the Pacific islands, is now required to self-isolate for 14 days upon arrival to New Zealand. All cruise ships have been banned from entering New Zealand’s territorial waters from 23:59 on Saturday, 14 March 2020, until at least 30 June 2020. Further, all New Zealanders are encouraged to avoid all non-essential travel overseas.
Although there are limited cases of COVID-19 (8 reported cases to date), the economic fallout of the Coronavirus will be felt deeply across the country. In particular, the requirement to be self-isolated upon arrival is likely to affect tourism significantly.
Airlines and the tourism sector are expected to be affected heavily, with Air NZ announcing a freeze on salaries and pay rises. Further, it is also cutting its long haul capacity by 85% and suspending flights to numerous destinations until the end of June 2020. On the domestic network, capacity will be reduced by around 30% in April and May 2020, but no routes will be suspended.
Additionally, the travel restrictions which applied to any foreigners who have been in mainland China or Iran will remain in place. This is likely to be affect a significant population of overseas students. The University of Auckland has frozen all new staff appointments, as the travel ban has potentially placed $30 million dollars of revenue at risk. Other education providers will also be affected by the travel ban.
These examples convey the potential for COVID-19 to have significant ramifications on New Zealand’s economy and business environment. Given the size of our tourism, exports and education sectors, the effects will be felt across most businesses in New Zealand. This will lead many businesses to take necessary step to keep afloat in these turbulent times. This may include a number of steps, which involve cutting costs. In terms of labour costs, this may include reducing the number of hours worked, cutting the cost of any discretionary benefits and spending or reducing the number of employees.
Restructuring – what’s required
COVID-19 and the measures imposed to prevent the spread of it presents a constantly changing landscape, with significant uncertainty around its implications into the future. Some businesses will face the tough choice of needing to restructure in order to cope.
An employer seeking to restructure its operations and with a view to disestablish existing positions will be required to both justify that course of action by reference to genuine business reasons, and by conducting a fair process of consultation with the potentially affected employees.
Although a business may be facing serious potential financial or economic circumstances, this will not excuse an employer from going through a fair and transparent process before deciding to disestablish a position or make an employee redundant.
We outline a number of requirements to consider when going through a restructuring process:
- Substantive justification – the employer must be able to establish that there are genuine business / commercial reasons for the proposed changes; and
- Procedural fairness – a fair process must have been followed, which includes the following:
- Information – the employer must prepare and provide sufficient and relevant information to the potentially affected employees about the proposed changes and the reasons for the same;
- Consultation – the employer must provide an adequate opportunity for the potentially affected employees to consider the information relating to the proposed changes and to provide their input on the same (including an opportunity to suggest potential alternatives);
- Genuine consideration – the employer must genuinely consider the employees’ input with an open mind before deciding how it wishes to proceed with the proposed changes;
- Consideration of alternatives – if the employer has decided to proceed with certain proposed changes and this involves disestablishing an employee’s existing position, the employer must consider and explore with the affected employees how to redeploy surplus staff to other positions (if any) that could potentially be suitable for the affected employee;
- Fair selection and process – where the proposed changes affect some but not all of the employees in a similar role, the employer needs to provide information on the proposed criteria for selecting the employee(s) who would be affected by the proposed changes. As part of the consultation process, the potentially affected employees must have the opportunity to provide their input into the process and criteria for selection; and
- Compliance with employment agreement and policies – in addition to the requirements imposed by law, the employer also needs to follow any other requirements contained in employment agreements and policies. This may include other procedural requirements, the length of notice periods and providing any redundancy compensation.
Where an employer dismisses an employee or takes a course of action which detrimentally affects the employee’s conditions of employment, the affected employee will have a right to raise a personal grievance. As such, it is important for an employer to justify its actions and the process undertaken before making its decision. If the employer does not meet its legal requirements, the employee could have grounds for a personal grievance claim for unjustified dismissal, or unjustified action causing disadvantage.
Is COVID-19 a genuine business reason for a restructure?
There are potentially significant ramifications arising from the unprecedented measures to control the spread of COVID-19. It is likely that the negative effects could warrant a restructure, and depending on how the business is (or will be) affected, this could be a genuine business reason for making changes, including making surplus workers redundant.
However, it is important to note that the Court of Appeal confirmed in Grace Team Accounting Limited v Brake that the courts are expected to question the reasons put forward by the employer, and assess whether the decisions made are fair and reasonable. As such, employers that are considering whether to restructure will need to ensure that there is a sound business case for its proposed changes, and to prepare and provide sufficient information about the proposed changes.
We note that the minimum wage is set to rise from $17.70 to $18.90 per hour, and that this decision was made at the end of 2019 when the economy was buoyant, and unemployment was still expected to remain low. However, some commentators have already suggested that this should be on hold, while the country deals with COVID-19. This suggestion has been rejected by the government. However, this was before the new travel restrictions were announced.
The chief economist of ANZ has been reported as stating that suspending the minimum wage increase is a “no-brainer”. The tourism and hospitality industries are expected to be heavily affected, and there are many employees in these sectors that are either on, or close to the minimum wage. At this time, such a large increase in the minimum wage could exacerbate the economic slow-down, and push businesses to take more drastic actions to manage their labour costs.
Employers ought to be proactive in considering what plans they should put in place to deal with the potential fallout arising from COVID-19 on their operations. There are potential steps which can be taken to manage the adverse effects on the business. If these steps are taken early enough, it may stave off more drastic measures later. In any event, employers have a duty of good faith to be honest and actively communicate with employees regarding the challenges they face, and any decisions they are having to make in the wake of this global pandemic.
Ideally, the unprecedented steps taken to control the spread of COVID-19 will be effective. Further, the Government is expected to work on further initiatives to support and stimulate the economy, and it is hoped that the need for businesses to undergo restructure will be minimised. To date, we have already seen the Reserve Bank lower the OCR rate by 0.75%.
Employers considering restructuring as a result of COVID-19 ought to seek legal advice to ensure they fully comply with the relevant requirements.