Some employment agreements provide for redundancy compensation but do not set the amount. Under the Employment Contracts Act 1991 (ECA), the Employment Tribunal could not decide on the amount of redundancy compensation if the employment contract was silent on this issue.

But the Employment Court in Vaughan v Canterbury Spinners Limited, has now held that the Authority under the Employment Relations Act 2000 (ERA) has jurisdiction to decide the level of redundancy compensation in some circumstances.

The clause directed that the employer "shall negotiate a level of redundancy compensation ... with the employee's representative" and that this "negotiation shall involve the employer making an offer of redundancy compensation ..." These two things did in fact occur. The employer entered into negotiations about the level of redundancy compensation to be paid to Mr Vaughan and other Union members and also made an offer of redundancy compensation. The parties used the mediation service to assist in these negotiations. However they could not agree on the level of redundancy compensation and each party argued for its proposed formula.

The National Distribution Union representing Mr Vaughan argued for a formula that involved four weeks wages for the first year of service or part thereof and two weeks for every subsequent year of service or part thereof. On the other hand the employer argued for a formula that provided four weeks pay for the first year of service but only three weeks pay for three subsequent completed years of service. So the dispute between the parties was about the adequacy of the redundancy compensation to be paid.

Under section 46 of the ECA the disputes procedure expressly excluded the Tribunal and Employment Court from fixing the level of compensation or specifying a formula for fixing the level of compensation where an employment contract dealt with the issue of redundancy but did not specify these things. The ERA does not contain this restriction.

The essential issue between the parties in Vaughan was whether there were any provisions in the ERA, which had a similar affect to section 46 of the ECA.

Section 161(2)(a) bars the Authority from making determinations about bargaining or fixing new terms and conditions of employment. The Employment Court decided that this did not prevent the use of disputes procedure in Mr Vaughan's circumstances.

It looked to the Timbercraft line of cases decided under the Labour Relations Act 1987. It held that the determination of rights and obligations arising from existing contractual provisions does not involve the Authority making a determination about any matter relating to bargaining.

The clause at issue in Timbercraft provided:
All employees to be declared redundant shall receive not less than four weeks notice of termination of their employment. The Union will be notified before notice of termination of employment is given to the employees. This notification period shall be for the purpose of negotiating a redundancy agreement.

The Court of Appeal held that this clause was not a permissive clause and it did not provide for any additional variation to the award. It rather provided for a particular course of action to follow from a particular event. Hence the disputes procedure was available because the issue was one of application or operation of the award and did not involve the courts in the fixing of a new term or condition.

In a similar vein the Employment Court in Vaughan held that Mr Vaughan was not trying to get the Authority to fix new terms and conditions. This was an employment relation problem about the interpretation application or operation of the redundancy compensation clause. So it was not barred by s161 of the ERA and could be dealt with as a dispute under section 129.

The result is that the Employment Relations Authority can determine the level of redundancy compensation payable to employees in some circumstances. This is possible where the employment agreement requires compensation to be paid but does not provide the amount to be paid or a formula for working out that amount. The Authority's decision in such circumstances will be based on submissions made by the parties on the issue of reasonable levels of compensation.

We do not agree with recent commentary suggesting that the Vaughan decision creates uncertainty. All it says is that if the employer agrees to pay compensation in an employment agreement but leaves the amount to be negotiated, that term will be enforced. So if the parties cannot agree on the level of compensation, the Authority can fix it!

The Vaughan case is a reminder to employers to check over their employment agreements to see if they contain a clause that refers to the payment of redundancy compensation but does not fix the amount. If the employment agreement says nothing about redundancy compensation the Authority does not have jurisdiction to insert a new term of condition requiring it. But if an agreement contemplates redundancy compensation and does not set the amount the Authority can set it.

Employers may have some 'house cleaning' to do in this regard. It remains to be seen if this jurisdiction will be stretched to allow the Authority to determine redundancy compensation amounts when there is no express term contemplating it.

Further changes to redundancy law are being foreshadowed by the Government's advisory group investigating existing protection for employees affected by a business sale, transfer or contracting out. As part of its investigation, the advisory group is looking at whether workers should have an entitlement to redundancy compensation if their employer is restructured and they do not obtain a new position. The redundancy proposal is contained in draft legislation prepared by the advisory group, although it has not yet been finalised. The fact that such a proposal would apply to the private and not the public sector is the subject of some controversy, to which Associate Minister of Labour, Laila Harre, has suggested that a more extensive review of redundancy law may be required. We will report to you further when the final report of the advisory group has been tabled.

This article is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this article.

Copyright Phillips Fox, 2001

Contact:
John Hannan, Partner: john.hannan @phillipsfox.com,
Rick Hargreaves, Solicitor: rick.hargreaves@ phillipsfox.com