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Your business structure may change as it evolves and responds to market changes, and this often requires making some roles redundant in your business. This can be a difficult process for you as an employer but also for your employees. Therefore, you need to understand and follow best practices to make sure you treat your employees fairly and do everything you are legally required to do. This article will help you understand your business restructuring obligations and how to calculate redundancy pay in New Zealand. 

What Is Redundancy Pay?

Restructuring your business often involves losing roles that are surplus to your business needs. This process is known as redundancy. When you make an employee or seasonal worker redundant, you can pay them compensation, subject to the terms you agreed with them in your employment agreement. 

Your Employer Obligations

Whenever you need to make an employee redundant, you must follow a fair process. The Employment New Zealand website provides some guidelines to follow when making a change in your workplace. These include:

  • documenting your business case and proposal;
  • presenting your proposal to your employees;
  • gathering and genuinely considering your employees’ feedback;
  • confirming the new structure in writing and via a meeting or technology; and
  • implementing the change and opening the line of communication with your staff.

You may have also agreed to specific terms in your employment agreements on how to support your staff throughout a redundancy process. You must revisit these and offer the agreed support to your employees. 

Your employment agreement or policies may also state how much notice you need to give your employees in the event of redundancy. However, if there is no specific clause in the agreement, you must provide ‘reasonable notice’. The length of ‘reasonable notice’ depends on several factors, such as the reason for the redundancy and the employee’s length of service.

How to Calculate Redundancy Pay 

As an employer, you do not have a legal obligation under New Zealand law to make a final redundancy payment to your employees. However, you can agree to it in your employment agreement and specify how to arrive at the amount; for example, some standard methods include:

  • a fixed lump sum;
  • a lump sum determined by a period of time, for example, three months’ pay;
  • a number of week’s pay for a number of years of service; and
  • a maximum threshold of pay. 

The University of Otago offers a free voluntary redundancy pay calculator on their website to help their staff estimate their redundancy compensation based on their commencement date and current salary information.

Tip: Using a maximum threshold of pay is useful if you want to cap the total amount of the redundancy pay, particularly if you adopt a scale approach.

You can also offer other non-monetary benefits to compensate your staff, such as:

  • time off to attend job interviews;
  • counselling or outplacement support; or
  • leaving work before the end of the redundancy notice period.

You also need to include in your employees’ final pay, any unused annual leave and salary, along with any other entitlements, up to the termination date. 

Redundancy payments are subject to tax at the lump sum rate, and you have to deduct PAYE on lump sum payments, based on your employee’s tax code.

Key Takeaways 

In New Zealand, you are not legally required to pay redundancy compensation to your employees unless you have agreed to it in your employment agreement. You can pay redundancy as a fixed lump sum, fixed duration (three month’s pay), scale (a number of weeks of pay for a number of years of service) or cap it at a maximum threshold of pay. 

Whenever you need to make an employee redundant, you must follow a fair process and the guidelines provided by Employment New Zealand and (or) your employment agreement and policies. If there is no specific clause in the agreement, you must give ‘reasonable notice’, depending on several factors, such as the reason for the redundancy and your employee’s length of service.

If you need help understanding your business restructuring obligations or agreeing to redundancy compensation with your employees, LegalVision’s employment lawyers can help. Call 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Do I have to pay redundancy?

Under New Zealand employment law, you have no obligation as an employer to pay redundancy compensation to your employees unless you have agreed to it in your employment agreement.

How is redundancy calculated?

If you agree to redundancy compensation in your employment agreement, you should also state the amount of compensation. Some standard methods to calculate it include a fixed lump sum, fixed duration (three month’s pay), scale (a number of weeks of pay for a number of years of service) or capped at a maximum threshold of pay.

When can you make someone redundant?

To make someone redundant, you must follow a fair process. This includes having a valid reason to lose or merge the role and exhausting all other options first. You cannot use redundancy as a way to manage individual employee performance issues.

How much notice do I have to give an employee to make them redundant?

If there is no clause in your employment agreement specifying notice in the event of redundancy, you must give ‘reasonable notice’. The length of ‘reasonable notice’ depends on several factors, such as the reason for the redundancy and the employee’s length of service.

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