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.

Firing someone for poor work performance or behaviour can be stressful, and telling someone their role is no longer required is often an emotional experience for everyone in your workplace.

But each scenario must follow a different 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.

Termination versus redundancy

In New Zealand, employment can only be terminated for ‘for cause’. This means you need to have a justifiable reason.

Dilshen Dahanayake, Solicitor, MinterEllisonRuddWatts, explains that justifiable reasons may include serious or repeated 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 notice of termination – the length of notice is usually set out in the employment agreement. But if the termination relates to serious misconduct, notice is generally not required.

Dahanayake explains that redundancy is a specific form of termination and has specific legal requirements.

“Redundancy is where an employee’s role becomes surplus to business requirements,” he says. “This might occur where an employer restructures its operations, or where an economic downturn means that work is no longer available for certain roles.”

Before employment can be terminated for redundancy, Dahanayake says employers must take certain steps to ensure termination is justified.

“First, the employer must consult the employee on the proposed disestablishment of the employee’s role,” he says. “This involves providing the employee all relevant information about the proposal and an opportunity to give feedback on the proposal.”

After considering the employee’s feedback and the available information, if you decide to disestablish the role, you must consider if there are other roles in your organisation that the employee could be redeployed to.

“If there are no redeployment opportunities available, the employee’s employment may be terminated due to redundancy,” says Dahanayake.

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 and holiday pay up to their final day of work.

Dahanayake says their employment agreement will 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 for the unworked notice period as a lump sum.”

Dahanayake adds that, in some circumstances, employees might be entitled to redundancy compensation.

“In New Zealand, there is currently no statutory entitlement to redundancy compensation, so this will only be payable if the employer and employee have agreed to it 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?

Making an employee redundant requires a genuine business reason.

“An employer should not use a redundancy process as a cover-up for dismissing an employee for some other reason,” says Dahanayake. “This is known as a sham redundancy.”

If an employee believes their employment has ended by way of a sham redundancy, Dahanayake says they may have an unjustified dismissal claim.

“If they do, the employer could be ordered to reinstate the employee to their role, and/or to pay lost wages and hurt and humiliation compensation,” he says. “In addition to the potential remedies that could be awarded, defending an unjustified dismissal claim can be costly and time-consuming.

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 Dahanayake.

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.

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