Restructuring in a COVID World - What You Need To Know

19 June 2020

Recently there has been a lot of misinformed comment about the obligations of employers in restructuring situations.

It is plain that an employer must have genuine reasons and a conduct a fair process, but in the current environment, what does that mean in practice?

Genuine Reasons

At the start of Level 4 Lockdown the outlook was very bleak for most employers, particularly those engaged in activities deemed “non-essential”.  It is hard to imagine a situation with greater justification for restructuring.  Most businesses were looking at the stark reality of no revenue for at least 4 weeks, which turned out to be almost 7 weeks for those who could not trade in Level 3 either.

The situation was catastrophic and the future uncertain.  The immediate need was to stop the cash burn and focus on saving the business for the future so it could survive, then revive and hopefully thrive at some point in the future.  If a business closes and the core infrastructure is destroyed, there is usually no way back.

Now we’re in Level 1 and seeing an upswing in revenue for many businesses, but that doesn’t mean the problem has gone away.  There is a body of opinion to say that the current activity is largely pent up demand from lockdown and we will soon see a flattening of demand for a period.  The latest GDP figures for the March quarter show a 1.6% decline, compared with the 0.4% increase projected by the RBNZ before COVID-19 hit.  The March quarter only accounts for one week of lockdown so the June quarter figures will be much worse and the ANZ Bank Chief Economist is predicting a decline of 19%.  According to the Government’s own budget, GDP will decline by 10.4% for the year to December 2020 and unemployment is projected to hit 9.8% by September 2020 (that’s 270,000 people).  These factors must result in a reduction in discretionary spending, which will impact most businesses to some degree.

Some people who are currently facing restructuring, argue that there is no justification for proceeding because of the upswing in revenue post-lockdown.  For a start that completely overlooks the damage from a lack of revenue for 7 weeks, as well as the expected reduction in discretionary spending, but the fact is an employer has the right to re-organise its business in a more efficient manner, provided the procedure is fair. Put another way, the employer does not have to be suffering financially to justify changes aimed at making the business more efficient.

Fair Process

The key elements of a fair process are presenting a well-developed proposal, consulting with those affected and inviting feedback, genuinely considering any feedback before making a final decision on the new structure (which could be in the original or an amended form) then undertaking selection processes where relevant, considering redeployment options for surplus staff and finally issuing notice and providing other entitlements under the relevant employment agreements.  On the latter point, if no notice is specified, “reasonable” notice must be given (likely to be about 4 weeks).  There is no entitlement to compensation unless the employment agreement expressly provides for it.

The first thing to get right in the process is a well-developed proposal that conveys the thinking that has gone into its design.  The proposal should be in writing explaining the reasons for the proposed changes, comparing the current structure with that proposed, describing where the work of the surplus positions is intended to be reallocated (recognising that some functions may no longer be carried out), the selection criteria proposed for contestable roles, the proposed timetable, the support services available and so on.

The duration of the consultation period has been the most contentious issue recently, particularly where the organisation has in normal times operated a more leisurely process with longer timeframes.  As to how long the period should be, that very much depends on the circumstances at the time.  s103A of the Employment Relations Act provides that the question of whether a dismissal or an action was justifiable must be determined, on an objective basis, by assessing whether the employer’s actions, and how the employer acted, were what a fair and reasonable employer could have done in all the circumstances at the time the dismissal or action occurred.

Clearly, at the start of lockdown there was justification for acting swiftly.  To consider that, you need to transport yourself back to 25 March and recall how bleak and uncertain the outlook was at that point in time.  Many SME business owners were fearful of losing their whole life’s work.  There was no guarantee the lock down would be restricted to 4 weeks and for some businesses it went on for almost 7 weeks.  The immediate need was to stop the cash burn, by reducing hours and/or pay, or making redundancies. In those circumstances there was justification for acting quickly (but not recklessly).

In some cases, affected employees complained about only having two or three days for feedback.  It’s not the number of days that is relevant, but rather the quality of the engagement in the time available.  It must be remembered that in Level 4, most people subjected to redundancy processes were at home not working and so had more time than usual to focus exclusively on their feedback.  Similarly the employers concerned had more time to focus on the feedback and consider their final decisions. A notable feature of recent processes has been the volume of feedback.  It is not surprising that affected employees fight hard to retain their jobs because there are so few other opportunities at the moment, but the volume of feedback also indicates the employees affected had sufficient time to consider their responses to the proposals.

Now we’re in level 1 the situation is a little different.  However, if a business suddenly finds itself in a difficult situation, say due to the collapse or loss of a major customer, then there is still justification to react quickly.

It’s worth noting that most of our experience in this area tells us that people affected by restructuring just want the process over as soon as possible.  Nobody likes being held in a prolonged state of uncertainty, simply in an attempt to create the perception a fair process is being followed, when it is plain to all what the end result will be.  

Another key issue has been claims of pre-determination, particularly where the final structure is the same as the original proposal.  There is no reason to amend the proposal just so you can say you considered and responded to feedback.   If the senior leadership group has put sufficient time and energy into creating the proposal, you would like to think they know what they’re doing.  Whereas affected employees tend to see the world from their own perspective and are focused on saving their own job, the senior leadership team has to take a more holistic view.  In the end it’s the senior team that is charged with delivering the plan and saving the business so their ideas tend to prevail.  It’s worth remembering that even if the senior team make bad decisions about the new structure, that’s their right provided they apply a fair process, but they live and die by the decisions they make.

The bottom line of all this is that every business must be alert to the changing conditions it faces and take early and decisive action as necessary.

Footnote: Businesses applying for the wage subsidy post 4pm on 27 March are required to retain the employees for whom they claimed the subsidy, at least until the end of the 12 weeks period.  The same applies in respect of the wage subsidy extension – the employees concerned must be retained until at least the end of the 8 weeks period.