Pay cuts and redundancies – how a company lost $280k

Four employees who were terminated by the management of a large oil and gas company in Taranaki have been awarded almost $280,000 in lost wages, reimbursements and compensation by the Employment Relations Authority (ERA)

In a determination released mid-May, the ERA found the oil and gas company guilty of breaching good faith as an employer, after it made the four employees redundant “out of blue” after it claimed it was in a dire financial position due to falling oil prices and the outbreak of the Covid pandemic in 2020.

The four employees initially took pay cuts – which was a breach of their employment agreements – believing if they did so, their jobs would remain. The ERA found that the decision to deduct 30% from each of the employees’ salaries was done without the informed consent of any of them.

What followed soon after the pay cuts was their roles were made redundant without any consultation, leaving them collectively feeling hurt and humiliated with a loss of their dignity. The four former employees argued that their dismissals were unjustified and the process – or lack of it – unjustifiably disadvantaged them because they were not given a chance to consult on the redundancies.

Failure to follow the correct employment process resulted in a combined Hurt & Humiliation compensation order for the hurt caused of $74,000. The ERA also ordered compensation for lost wages and reimbursement of the pay that was cut prior to the terminations to be paid to a collective total of $278,589.

All four employees expressed shock at their terminations with no apparent indication redundancy was going to occur. To add insult to injury, one of the employees was required to spend a week training another colleague on their role prior to their employment officially ending.

A representative of the oil and gas employer advised the ERA urgent steps were needed to reduce costs and losses, and redundancies were “absolutely necessary” to restructure the business as a result of the Covid pandemic and financial challenges.

The company justified the redundancies because it believed consultation was not necessary because of an “exceptional circumstances provision” in the employment agreements.

However, the legislation this employer believed it was acting under had long been changed in 2004 and the ERA determined the employer did not consult. It scolded them for not consulting in such a process, noting consultation in any proposed restructuring was mandatory in New Zealand.

The ERA determined it was possible the employees might have been dismissed on the basis of wrong information when consultation might have corrected that, and the resulting outcome was that all four employees had been unjustifiably dismissed.

Further – in a damning decision around process, the ERA found the oil and gas company guilty of breaching good faith as an employer.

Employer Learnings

• Any variations to an employee’s terms and conditions cannot be done unilaterally – they must be made with both party’s agreement • An employer must have a genuine commercial reason for restructuring • In the event of a restructuring situation, consultation is compulsory • If an employee raises a personal grievance in respect of the restructure or any resulting redundancy, the employer’s consultation process, decision making process and reasons for undertaking the restructure will all come under scrutiny • Ignorance of employment law changes (dating back to 2004!) does not protect an employer

This case is a timely reminder for employers to ensure they have appropriate Individual Employment Agreements and relevant HR Policies in place for their workplaces, or at the very least, a fit-for-purpose redundancy clause in their Individual Employment Agreements.

Safe Business Solutions