Statutory protection for employees when their work is contracted out, or the business of their employer is sold or transferred ("CO/STB"), can currently be found in ss4 and 54(3)(a)(ii) of the Employment Relations Act 2000 ("ERA"). (Section 4 relates to good faith, and s 54(3)(a)(ii) provides that all collective agreements ("CA's") must contain a provision setting out what will happen in the event of CO/STB. Protection for some workers can also be found in their contract with their employer, given that most employers deal with CO/STB as a redundancy situation and may provide for transfer or redundancy compensation. However, many workers are employed on individual employment agreements that contain no redundancy provisions.

Provision of further statutory protection for employees affected by CO/STB was considered during the enactment of the ERA. This type of statutory protection is common in other countries. The Employment Relations Bill originally contained a clause providing that where employees were party to a CA, their employment was protected for the life of the CA, despite any changes to the ownership of the business.

However, the clause was the subject of lively debate during the Select Committee process. Employers objected to it strongly because of the impact on their ability to organise their businesses in the manner they chose. Unions were no happier because the protection only extended to employees covered by CAs.

Rather than delaying the passage of the Bill while this issue was resolved, the Government removed the clause, substituting s 54(3)(a)(ii) as a holding measure, and in December 2000, Labour Minister, Margaret Wilson and Associate Labour Minister Laila Harre, set up an Advisory Group to report to the Government on CO/STB. The CO/STB Advisory Group was part of the second wave of industrial law reform by the current administration, which also includes advisory groups reviewing equal employment opportunities and the Holidays Act.

The focus of the CO/STB Advisory Group's work was to assess the adequacy of existing protection in this area and any possible policy interventions that could improve the level of protection, particularly for low-paid employees. The interim report of the advisory group was issued in April 2001, and the final report was due to be presented to Government at the end of October or early November 2001.

Adequacy of existing protection for workers affected by CO/STB
A UMR Research Report commissioned by the Department of Labour found that although white collar workers were likely to sustain similar employment conditions in the event of CO/STB, blue collar workers were more likely to sustain downward pressure on their working conditions. This was particularly so in the case of women, Pacific Island, or Maori workers, who worked on scattered and isolated sites with low levels of unionisation. Many of these workers are now experiencing the 3rd or 4th generation of contracting out.

The state sector reported that it had experienced large scale restructuring during the late 1980's and 1990's. In response to this, redundancy formulae were negotiated, and in particular, technical redundancy formulae were negotiated into employment agreements, providing that if the new employer did not offer equally favourable terms and conditions of employment, redundancy compensation would be payable. Employers in the public sector reported that this arrangement worked well for a period of time.

However, the state sector is now experiencing "second generation" contracting out, which, combined with the decollectivisation of employees over the last decade, meant that "non-core" workers such as orderlies, kitchen staff, and cleaners have lost technical redundancy protection because they are now working as contractors.

The Service and Food Workers Union ("SFWU") submitted that legislative reform is needed to address problems faced by workers and should require all existing workers to continue to be employed on their existing terms and conditions of employment in the event of CO/STB. The SFWU submitted that legislation should address the disproportionate effect that CO/STB has on Maori, Pacific Island, and women workers. The SFWU also submitted that legislative change should address the issue of employers using contracting out as a device for deunionisation of the workplace. Further, the SFWU submitted that legislative change should extend protection to workers on individual employment agreements.

The CTU made similar submissions, arguing that the change of legal entity (the owner of the business) should not be a device to unilaterally change terms of employment. The CTU also submitted that redundancy should not be left entirely to bargaining. (However, in the event the Advisory Group determined that redundancy was outside its terms of reference and would only be considered where it directly affected the CO/STB issue, and not as an issue in itself.)

Employer representatives strongly opposed any further regulatory intervention, arguing that current protection for workers is adequate and that if any action is needed, it should be limited to monitoring the relevant sections of the ERA. The employer view was based on arguments about business efficiency, encouragement of entrepreneurship, and the impact of regulation on economic growth.

Employer representatives also argued that one of the models being seriously considered (the European Union Acquired Rights Directive (98/50/EC)) ("the EU Directive"), was not an appropriate model because of the relative differences between the UK and the New Zealand economies.

Possible policy interventions
Options put forward to the Advisory Group for law reform included