Litigation Part 6A: Managing restructurings involving “vulnerable” workers
Tim Clarke, Partner, Bell Gully1
Introduction and summary
1.
2.
This paper examines the employee protection arrangements for “vulnerable” workers in the event
of a business restructuring under subpart 1 of Part 6A of the Employment Relations Act 2000
(ERA). Under the legislation, vulnerable workers have the right to:
(a)
elect to transfer to the new employer on the same terms and conditions;
(b)
bargain with the new employer for redundancy entitlements if made redundant for
restructure-related reasons;
(c)
apply to the Authority to determine redundancy entitlements where the parties cannot
agree.
In summary, the legislation is complex and unsatisfactory in a number of important respects:
(a)
The fact that an employee may choose whether to transfer to a new employer (as opposed
to transferring automatically) creates significant uncertainty for the parties in terms of
staffing levels and costs. In particular, a new employer may inherit substantial liability for
transferring employees’ accrued entitlements.
(b)
Clients (or service users) may decide to change service provider (for example, because of
poor quality services) but still inherit the old provider’s workforce.
(c)
Employers also can find the transfer rights of employees burdensome, particularly if
transferring employees are poor performers or only part of their role transfers and they are
faced with the prospect of multiple employment. The general consensus among employers
is that Part 6A imposes unduly onerous obligations on them, and creates a barrier to open
services.
Overall scheme of Part 6A
3.
The Employment Relations Amendment Act 2004 inserted a new Part 6A in the ERA providing for
statutory continuity of employment protections in situations of business restructuring. Part 6A sets
out a two-tiered framework of employment protection applicable to restructuring which results in
an employee’s work being undertaken by a new employer (so that the employee is no longer
required by their employer to perform the work).
4.
The object of Part 6A (subpart 1) is to preserve the employment conditions of specified categories
of employees in a context of frequent business restructures in the industries in which they work.
The rationale behind the 2004 statutory protections was to manage a potential disadvantage to
employees arising from a repeated renewal of their employment agreements which came about
as a consequence of constant restructuring. Evidence at the time suggested that employees’
terms and conditions of employment were reduced following each round of restructuring, as new
more competitive employment agreements replaced previous ones. On the other hand,
legislators expressed a desire to retain a degree of flexibility in the provisions to accommodate the
viability and efficiency of the market.
1
The author gratefully acknowledges the assistance of Deborah Doak in the preparation of this paper.
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5.
Subpart 1 of Part 6A provides specified categories of “vulnerable” workers (identified in Schedule
1A of the ERA) with the right to:
(a)
elect to transfer to the new employer on the same terms and conditions (section 69I), with
continuous employment including for the purpose of service-related entitlements (section
69J);
(b)
receive notice from the current outgoing employer of the right to make an election to
transfer under section 69G (see obligations of current employer below);
(c)
bargain for alternative arrangements with the current employer (such as to remain with the
current employer or depart on agreed terms) (section 69H). Importantly, any agreed terms
should be recorded in writing, as this will preclude the employee from subsequently electing
to transfer to the new employer (notwithstanding the alternative arrangements agreed);
(d)
receive payment of redundancy entitlements from the new employer in the event of a
subsequent redundancy for reasons relating to or circumstances arising from the transfer
(section 69N). (An employee who elects to transfer under section 69I will not be entitled to
any redundancy entitlements from the outgoing employer as a result of the transfer).
6.
In respect of a transferring employee who is bound by a collective employment agreement,
section 69M provides that the new employer will become a party to the collective agreement in
relation to that employee. This means that the employer will be required to comply with the terms
of the collective agreement in respect of that employee (and will be party to an employment
relationship with the relevant union(s)). However, the collective agreement will not apply to the
employer’s other employees even if they fall within the agreement’s coverage clause. In a
business sale situation, the union would normally seek to initiate bargaining with the new
employer.
7.
In practice, section 69I can have unwelcome consequences for service user enterprises, for
example, where the services in question are poorly performing. A frustrated service user may go
through the process of terminating an ill-performing contract and engage a new service provider,
only to find that the same poorly performing individuals have become employees of the new
provider. In other words, neither the service user nor the provider can determine the workforce
that the provider inherits.
8.
Subpart 3 protects other employees by requiring that employee protection provisions (EPP) must
be included in their employment agreements. An EPP should set out a process that the employer
must follow in negotiating with the new employer regarding affected employees. This paper does
not consider further the provisions of subpart 3.
What is restructuring?
9.
Section 69B defines “restructuring” for the purpose of subpart 1 as contracting out, contracting in,
subsequent contracting or selling or transferring an employer’s business (or part of it) to another
person.
10.
The original Part 6A (inserted by the 2004 Amendment Act) contained a more restrictive definition
of restructuring. The earlier definition was limited to three types of restructuring situations:
entering into a contract or arrangement under which the employer’s business (or part of it) was
undertaken for the employer by another person, terminating such a contract or arrangement if the
work was to be carried out by another person, or selling or transferring the employer’s business
(or part of it) to another person.
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11.
In Gibbs v Crest Commercial Cleaning Ltd2, the Employment Court held that the 2004 definition
did not extend to subsequent contracting or second generation contracting as it was otherwise
known. In that case, employees of a cleaning contractor engaged to clean for kindergartens
asserted a right to transfer to the respondent cleaning company when it successfully tendered for
renewal of the cleaning contract. The Court was not satisfied that Parliament intended such
restructurings to be included, and held that the employees were not covered by subpart 1 (the
2004 model) on the basis that there was no transfer between the outgoing employer and Crest
Commercial Cleaning Ltd, the new incoming employer.
12.
As a consequence of the Gibbs decision, an amended Part 6A was inserted in 2006 which
specified that the protections should apply in subsequent contracting situations.
13.
Section 69C(5) now defines subsequent contracting as a situation where:
(a)
person A has an agreement with person B under which B performs work for A; and
(b)
the work or some of the work is actually performed by employees of B; and
(c)
the agreement expires or is terminated; and
(d)
A enters into an agreement with person C under which C performs the work for A.
Who is protected under Part 6A?
14.
Schedule 1A identifies the employees who are covered by subpart 1 of Part 6A. It includes
employees who provide cleaning or food catering services in any place of work, and cleaning,
food catering, caretaking, orderly and laundry services in specified sectors or work places.
15.
The specified categories of workers are considered to be at risk or “vulnerable” because they
have little bargaining power, they work in sectors and/or industries that restructure frequently and
the restructuring tends to undermine the workers’ terms and conditions of employment.
16.
However, the legislation makes no reference to the term “vulnerable workers”, and therefore
whether an employee is “vulnerable” should not form part of the test to determine whether an
employee is protected under the legislation. This was confirmed last year by the Employment
Court in Matsuoka v LSG Sky Chefs New Zealand Ltd3. The Court held that in a subsequent
contracting situation concerning a catering contract with Singapore Airlines, a senior employee
with a six-figure salary package and supervisory duties (and a minority shareholding in a parent
company of his employer) was entitled to elect to transfer to the incoming contractor, LSG. This
means that employees who are not “vulnerable” in the traditional sense but who are engaged in
providing a qualifying service may nevertheless be eligible to transfer.
17.
Specifically, in relation to food catering the Employment Court in the Matsuoka case held that
employees performing only delivery functions (without handling or preparing the food) would fall
within Schedule 1A, and therefore be eligible to transfer.
18.
The categories of protected workers are not set in stone. Section 237A of the ERA sets out a
process by which the Minister of Labour can vary the categories specified in Schedule 1A. To
qualify, a proposed new category of employees must satisfy certain criteria. They must have
limited bargaining power and work in a sector where restructuring occurs frequently and tends to
undermine employees’ terms and conditions of employment.
2
Gibbs v Crest Commercial Cleaning Ltd [2005] ERNZ 399
3
Matsuoka v LSG Sky Chefs New Zealand Ltd [2011] NZEmpC 44
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Public companies
19.
Part 6A continuity of employment protection provisions may trigger disclosure requirements under
New Zealand Stock Exchange rules, which are activated when changes in a public company’s
position affect its competitiveness.
Multiple employment
20.
Section 69I(3) expressly contemplates that the election of an employee to transfer may result in
multiple employment (i.e. employment by more than one employer at the same time) where either:
(a)
only part of the employee’s work is affected by a restructuring; or
(b)
the work performed by an employee will be performed by or on behalf of more than one
new employer.
21.
By way of illustration, in a restructure affecting an employee whose role encompasses both food
catering and entertainment duties, the employee could elect to transfer only the part of their role
comprising catering duties. In that event, they would be employed simultaneously by the
incoming contractor in respect of their catering duties, and by the current employer in respect of
their entertainment duties (if retained by the current employer, or if not, they would be redundant
in respect of those duties).
22.
An example of the second scenario set out in section 69I(3) could be where a retailer engages an
independent contractor to provide cleaning services at three of its shops, and the contractor
employs a cleaner to perform the work. If on expiry of the contract, the retailer enters into a new
contract with the incumbent contractor in respect of only two of the shops and a further new
cleaning contract with a different contractor in respect of the third shop, the cleaner could elect to
transfer to the new contractor in relation to the third shop, and remain an employee of the first
contractor in relation to the other two shops.
23.
In practice, multiple employment can result in complex arrangements and additional costs for
employers. Further, the question of which employees are directly affected by a restructure (and
therefore entitled to elect to transfer) may not be clear. For example, where employees have
generic skills and are not dedicated to specific contracts, they may all be familiar with the part of
the business or contract that is the subject of a restructure. In these circumstances, the
“management prerogative” of an outgoing employer may extend to deciding how to restructure its
remaining business and selecting employees to be given the option to transfer according to future
requirements.
24.
This issue arose in the Matsuoka decision, which concerned the transfer of a catering contract
with Singapore Airlines from Pacific Flight Catering (PFC) to a competitor contractor, LSG. PFC
employees, including Mr Matsuoka, were not dedicated to specific airlines, and the nature of the
work across airlines was substantially the same. In fact, Mr Matsuoka provided a wide range of
duties for a number of different airlines, the respective proportions of which fluctuated according
to business needs and flight schedules. The Court accepted that multiple employment could
result from a restructure under Part 6A where there was a clean division of job duties between
different employers. However, in the Court’s view the circumstances of this case were such that
the only workable interpretation of section 69I(2) was that in electing to transfer to LSG, Mr
Matsuoka did so as a full-time employee. It was relevant that his work was affected by the
restructuring to the extent that his employment with PFC was to be terminated for redundancy.
On this basis, the Court concluded that a transfer other than full-time would not be on the same
terms and conditions as required by the legislation.
Liabilities of incoming employer
25.
Part 6A does not expressly address who is liable for transferring employees’ accrued
entitlements, such as holiday pay, annual leave, alternative holidays and sick leave following a
restructuring. Parliament intended that the transfer of accrued entitlements would be considered
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during commercial negotiations, allowing the parties a greater degree of flexibility to address the
matter.
26.
However, section 69J(2)(a)(ii) requires an incoming employer to recognise the accrued
entitlements of transferring workers (because the right to elect to transfer is on the same terms
and conditions and with continuity of service, including for the purpose of service-related
entitlements). This means that the costs of accrued entitlements generally lie with the incoming
party (unless paid out or otherwise funded by the outgoing employer.)
27.
This approach has created confusion among employers and employees, and in some cases, it
has resulted in increased costs and even employment relationship problems. There are a number
of cases currently before the courts seeking orders for the incoming employer to be paid or
reimbursed for any accrued entitlements that they have inherited from the outgoing employer.
28.
A 2009 Government discussion document seeking submissions on Part 6A mooted amending the
legislation to require outgoing employers to resolve these liabilities at the point of transfer,
including the possibility of paying out employees. The effect would be to extinguish employee
entitlements on the date of transfer but otherwise retain their continuity of service. Alternatively,
the discussion paper contemplated introducing a statutory obligation on the outgoing employer to
transfer outstanding liabilities to the incoming employer to clarify the issue.
Obligations of outgoing employer
29.
Under section 69G, an employer who is proposing a restructure is subject to certain notice
obligations in respect of affected employees.
30.
The employer must provide employees with a reasonable opportunity to exercise their right to
transfer, and specifically details of the date by which an election must be exercised, and
information sufficient for the employees to make an informed decision about whether or not to
make an election. The information to be provided must include the name of the new employer,
the nature and scope of the restructuring, the date on which the restructuring is to take effect and
how to make an election. In contracting in and subsequent contracting situations, the incoming
party is under a corresponding obligation to give the outgoing employer sufficient notice of (and
information about) the restructuring to enable the employer to comply with its obligations under
section 69G.
31.
In addition, subpart 2 of Part 6A sets out an outgoing employer’s statutory obligations to disclose
on request (and update if necessary) “employee transfer costs information” to a new potential
employer.
32.
Employee transfer costs information is defined as meaning information about employment-related
entitlements of employees who are eligible to transfer, including the number of employees, their
wages, salaries and working hours, and the cost of service-related entitlements and any other
entitlements.
33.
A request for employee transfer costs information may only be made for the purpose of deciding
whether to terminate an agreement or let it expire, or negotiate, or enter into or tender for an
agreement, in circumstances where a restructuring within the meaning of section 69B would
result.
34.
Disclosure of employee transfer costs information must be made in sufficient time for the
information to be taken into account. The information must be provided to the extent practicable,
in such a way that protects the privacy of the individuals concerned and in aggregate form. This
means that generally a new employer will not have access to details of individuals’ terms and
conditions until after the transfer has taken place.
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35.
In LSG Sky Chefs New Zealand Limited v Pacific Flight Catering Limited 4, the High Court found
on an interim basis that in a subsequent contracting situation where an incumbent contractor lost
a tender for a catering contract to another contractor, there was no duty of care owed between the
competing contractors. The parties disputed which employees were eligible to transfer due to
(among other factors) the level of transfer related costs inherited by the new employer, comprising
employees’ accrued leave and redundancy entitlements. LSG had tendered for the contract then
held by PFC without first requesting this information and presumably failed to factor in these costs
into its tender. In finding that PFC owed no duty of care to LSG, the High Court commented that
the objective of Part 6A was to protect vulnerable workers and not to regulate the affairs of
competing businesses.
36.
The decision in the PFC case highlights the practical difficulties faced by parties in situations of
subsequent contracting where there is no employment relationship or contractual nexus between
them. A party’s failure to comply with obligations to provide information can create significant
difficulties in terms of preserving existing relationships with employees and service users.
37.
A prudent incoming party or potential new employer would be well advised to request employee
transfer costs information in relation to a restructuring at an early stage, prior to submitting a
tender or deciding whether to enter into or terminate an agreement. Failure to do so could result
in hidden labour costs, with possible adverse implications for the competitive financial position of
the business.
38.
Where competing contractors in a subsequent contracting situation become parties to a dispute,
certain jurisdictional issues may arise. The Employment Relations Authority’s jurisdiction to hear
injunction proceedings or an application for compliance orders is questionable where there is no
“employment relationship” (as defined in section 4(2) of the ERA) or contractual relationship
between the parties.
39.
Under section 162 of the ERA, the Authority’s powers to grant injunctive relief are limited to any
matter related to an employment agreement. In Healthcare of New Zealand Limited v Capital
Coast District Health Board5, the Authority declined to grant injunctive relief to an outgoing
employer to prevent the DHB service user from terminating the existing contract between them
(so as to protect the status quo) because the matter did not relate to an employment agreement.
The Authority found that it was merely a commercial arrangement between two significantly
resourced parties, even though employment consequences flowed from it. Those employment
consequences were not in the Authority’s view sufficient to fall within the terms of section 162.
40.
In terms of other possible claims, arguably, an outgoing employer will have no standing to enforce
Part 6A obligations owed by an incoming party to transferring employees.
Redundancy
41.
Under section 69N, a protected worker (under Schedule 1A) is entitled in certain circumstances to
receive redundancy entitlements from the new employer in the event of a subsequent redundancy
for reasons relating to, or circumstances arising from, a transfer.
42.
Section 69N applies only to employees whose employment agreements do not provide for
redundancy entitlements, or do not expressly exclude redundancy entitlements. Where an
employment agreement either provides for redundancy entitlements or expressly excludes them,
the provisions of the employment agreement will apply.
4
LSG Sky Chefs New Zealand Limited v Pacific Flight Catering Limited HC, 14/02/11
5
Healthcare of New Zealand Ltd v Capital and Coast District Health Board [2011] NZ ERA Wellington
175
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43.
Last year, the Court of Appeal held in OCS Ltd v Service and Food Workers Union Nga Ringa
Tota Inc6 in a subsequent contracting situation that employees could not bargain with the new
employer, OCS Ltd, for redundancy entitlements in circumstances where their employment
agreement (a multi-employer collective agreement) contained a clause precluding claims for
redundancy payments. The clause in question provided that:
The parties to this employment agreement agree that no claims for redundancy payments
will be made as a result of loss of employment due to downsizing of client contract or loss
of client contract.
44.
OCS successfully tendered for a cleaning contract at Massey University. Once cleaners
employed by the outgoing contractor had transferred to OCS, it commenced a consultation
process with them (and the union) in relation to proposed changes to terms and conditions of
employment which, if not agreed to, could result in redundancies.
45.
Previously, the Employment Court had reached the opposite conclusion to the Court of Appeal,
holding that the employees were entitled to bargain with OCS for redundancy entitlements, albeit
not monetary redundancy compensation. This was on the basis that the term “redundancy
payments” in the MECA clause did not expressly provide for or exclude all types of redundancy
entitlement.
46.
On appeal, the Court of Appeal considered that an employment agreement need not deal with all
conceivable redundancy entitlements in order to disapply section 69N. If the employment
agreement dealt with the “topic” of redundancy entitlements in any one or more respects, it had
addressed the issue of redundancy entitlements and section 69N would not apply.
47.
Where the parties cannot reach agreement in respect of redundancy entitlements, an employee
can apply to the Employment Relations Authority for an investigation and determination.
48.
Section 69N applies to redundancy entitlements in the event that an employee elects to transfer.
If an employee does not transfer, their existing employment is not affected and any entitlement to
redundancy compensation and notice of termination will be governed by the relevant employment
agreement. Section 69L expressly provides that the legislation does not affect any technical
redundancy provisions (disentitling an employee to redundancy compensation where the
employee may transfer to a new employer but elects not to do so).
Review of Part 6A
49.
Statistics recorded in 2008 estimate that subpart 1 of Part 6A affects almost 5,500 employers and
covers some 36,000 employees. A Government review discussion paper on Part 6A issued in
October 2009, posed a number of questions in relation to the relevance and desirability of the
current statutory protections for vulnerable employees. Specifically, the paper contemplated
certain amendments to improve the practical operation of Part 6A, expanding or narrowing the
coverage of the statutory protections and/or repealing all or part of the legislation. To date, no
further action has been taken in relation to the review.
Transfer of undertakings legislation overseas
50.
6
Statutory protection for workers following a transfer of an undertaking is relatively common in
overseas jurisdictions. However, most foreign transfer of undertakings regimes are not without
their problems and are also the subject of significant uncertainty (albeit in relation to different
issues to those experienced in New Zealand).
OCS Ltd v Service and Food Workers Union Nga Ringa Tota Inc [2011] NZCA 597
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European Union
51.
One of the most comprehensive models is the European Commission Acquired Rights Directive
(77/187/EEC). European Union member states are in turn required to implement the Directive by
way of national legislation.
52.
Under the Directive, relevant employment relationships automatically transfer to the transferee
(even if the parties oppose it), on the same terms and conditions as before the transfer. The only
exception is that the employees themselves can object to a transfer. Restrictions also apply in
relation to changing existing terms and conditions of employment.
53.
Importantly, the Directive covers situations of subsequent contracting – there is no requirement for
any contractual relationship between the transferor and transferee. Both the transferor and
transferee are obliged to inform affected employees of relevant details in good time, and member
states may impose on the transferor and transferee joint and several liability in respect of
obligations arising before the date of the transfer. Clearly, in a business sale situation, the parties
can expressly address the issue of liability in the sale and purchase agreement. However, such
recourse would not be available to outgoing and incoming contractor parties in a subsequent
contracting situation, since there is no contractual (or other) relationship between them.
54.
Under the Directive, it is not possible to dismiss an employee by reason of a transfer, unless there
are “economic, technical and organisational grounds” for doing so (ETO reason). This defence
clearly recognises an employer’s prerogative to manage its business.
United Kingdom
55.
Implementing legislation in the UK is called the Transfer of Undertakings (Protection of
Employment) Regulations 2006 (known as “TUPE”). The 2006 regulations replace the original
1981 version.
56.
TUPE regulates business transfers (defined as the transfer of the whole or part of a business as a
“going concern”), and “service provision change” which includes subsequent contracting.
57.
The regulations preserve continuity of employment and terms and conditions of employment of
transferring employees. Any dismissal in connection with a transfer is automatically unfair, except
for a transfer related dismissal for an ETO reason. However, even if a dismissal is not
automatically unfair, that does not mean it is automatically fair – it must still comply with the
general principles in the UK of unfair dismissal law.
58.
TUPE also contains information and consultation obligations, including a duty for the transferor (or
outgoing employer) to supply to the transferee employer “employee liability information” about
transferring employees, and a right for employees to object to the transfer.
Australia
59.
In Australia, both federal and state legislation provide protection to employees in the event of a
transfer of an enterprise. At federal level, transfer of business provisions under the Fair Work Act
2009 regulate business transfers from one national system employer to another.
60.
The Fair Work Act 2009 provides that a transfer of a business takes place if:
(a)
the employment of an employee of the old employer has terminated;
(b)
within three months of termination, the employee becomes employed by the new employer;
(c)
the employee’s work for the new employer is the same or substantially the same as the
work they performed for the outgoing employer;
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(d)
there is one or more specified types of connection between the two employers, including
through contracting out or contracting in work, or by way of a transfer between “associated
entities”.
61.
Certain workplace instruments (e.g. enterprise agreement, collective agreement, workplace
determination, award etc) applicable to transferring employees before the transfer will bind the
new employer. Further, a new employer may be required to apply a transferring industrial
instrument also to new employees who perform the same type of work (if there is no other suitable
instrument capable of covering new employees).
62.
As to employees’ accrued entitlements (comprising National Employment Standards
entitlements), where the old and new employers are not associated entities, the new employer
can choose whether or not to recognise a transferring employee’s service. If it does, all accrued
annual leave must transfer. If not, the old employer must pay the employee the amount of
accrued annual leave and redundancy compensation prior to the transfer. The new employer
must recognise a transferring employee’s accrued personal leave.
63.
There is no obligation under the Fair Work Act 2009 to notify employees of a business transfer or
what workplace instrument will apply. However, a Fair Work Information Statement issued in
respect of each new employee must contain an explanation of the effect on an employee’s
entitlements of a business transfer.
64.
The Fair Work Act 2009 contains certain statutory obligations concerning records of transferring
employees. The new employer must request the records from the outgoing employer, and the
outgoing employer is required to provide them at the time of the “connection” between the two
employers.
Canada
65.
As with Australia, Canada is a federal system and therefore provincial as well as federal
legislation govern labour relations.
66.
The federal legislation, the Canada Labour Code, deals with the effect of the sale of a federal
business, work or undertaking (or part of one of the above) on collective agreements. Sale for
this purpose has a broad legislative definition, encompassing any transfer or other disposition of a
business, including leasing it. In order for the provisions to apply, there must be a minimum
nexus between predecessor and successor employers. The federal law does not apply to
subsequent contracting situations where, for example, a party loses a contract to a competitor, or
situations involving only a transfer of assets or transfer of work. A part of a business has been
defined by the courts as a coherent and severable part of a business’ economic organisation or a
functional economic vehicle or a going concern capable of standing alone (similar to the TUPE
model)
67.
In the event of “sale” of a federal business, the employment of individuals employed in the
business is treated as continuous with the new employer, and the new employer is automatically
bound by any collective agreement(s) that is applicable to the employees on the transfer date. In
addition, any union acting as bargaining agent for the employees is preserved in this role.
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