COVID-19: Employers can still make commercial decisions regarding their workforce

Much has been said in the media about how employers cannot make changes to their workforce without the consent of employees, or that accessing the Government’s COVID-19 Wage Subsidy means you can’t make changes to your workforce. However, those blunt messages risk sending a simplistic message which does not reflect the commercial reality of the world that businesses are now operating in.

Employers still have the ability to make decisions around the shape and structure of their business and can take steps to change the way the business operates, including employees’ hours and pay.

Employers can still make commercial decisions about their workforce, even in this unprecedented time of an Alert Level 4 lockdown. However, employers must now carefully navigate ordinary employment law principles and their interrelationship with the practical limitations of the lockdown, and some complexities arising from the wage subsidy scheme.

The Employment law team at MinterEllisonRuddWatts set out some of the “myths”, and how employers can still make commercial decisions about their workforce, so long as they act in good faith and consult with their employees.

1. It is not true that employers have to apply for the Government’s subsidy

The first myth we tackle is the suggestion that if employees want their employer to apply for the Government’s COVID-19 Wage Subsidy, they must do so. This is patently untrue.

Not all employers will meet the criteria needed to apply for the wage subsidy scheme. If an employer applies for the wage subsidy, it must make a declaration as to several things, including that:

  • it meets the reduced revenue threshold necessary to qualify;
  • it will make its best endeavours to retain employees at 80% or more of their usual income levels for the 12 week subsidy period;
  • none of the employees named in its Wage Subsidy application will have their employment terminated for redundancy during the subsidy period (this is one of the new rules around the subsidy implemented recently and it only applies to those employers who made their application after 4pm on 27 March; and
  • it will participate in government audits in the future to assess its compliance with the declaration.

Some of these matters are inherently subjective, and up for debate, particularly around the steps which equate to “best endeavours” to keep staff paid at 100% or at least 80% of more of their usual income.

Many employers will not want to put themselves in a position where they are making inherently subjective judgement calls to safeguard or save their business which can later be subject to audit and review, or legal challenge in the courts. Further, many employers are concerned about the effect of committing to a loss of flexibility around the structure of their workforce for the next 12 weeks especially when their revenues are predicted to drop or have done so already.

Many of their employees may earn well over the value of the weekly wage subsidy and employers may be worried about whether they can responsibly commit to pay 100% (or at least 80%) of their wages and salaries for a 12 week period (as required by the declaration).

Ultimately, there may be good business reasons not to seek the wage subsidy and commit to the restrictions attached given the current environment of extreme uncertainty. Wage costs are not the only costs businesses need to be watching carefully.

Unless a business has a high degree of confidence that they can and will continue to meet the requirements of the wage subsidy declaration then they will not be in a position to apply for the subsidy and take on those obligations. To suggest they must do so is incorrect.

2. It is not the case that employers can (and should) delay decisions on redundancies because it won’t cost them anything, as they can simply keep staff on and pay them only the subsidy

It is not a complete answer to employers’ concerns about the subsidy to say that the employer can simply take the wage subsidy and pass only that payment onto employees, thereby incurring no additional cost.

First, as the declaration for the subsidy is now drafted, employers could only do that with the written agreement of their employees, something which the unions have indicated they are not recommending their members do. Further, even with agreement, employers are still bound to use “best endeavours” to pay more than the subsidy. The inherently subjective nature of the assessment required in assessing “best endeavours” means employers would carry significant risk of being told later on (such as following a government audit) that they didn’t comply with this. If that occurs, they may have to pay the wage subsidy back, or worse. It is therefore risky for businesses to simply to pass on the wage subsidy and delay making decisions about whether to make staff redundant.

In addition, whilst employees remain employed, even at wage subsidy only levels, annual leave will continue to accrue, adding to the business’ balance sheet. Other costs may also accrue.

Some people are saying that passing on the wage subsidy only (and not paying more) is a better alternative to redundancies. However, that course of action currently attracts significant employment law risk including wage arrears claims for the full 100% of wages (and any contractual allowances/benefits). Unless employers who are struggling financially can be protected from such claims then they will need to decide which option attracts less risk for their business. As part of this assessment, employers will need to consider whose interpretation of “best endeavours” is likely to prevail at the time of a future government audit and weigh up the uncertainty of union rhetoric about employers’ obligations to continue to pay at 100% and the financial consequences of the threat of potential litigation.

This uncertainty and potential liability may make it deeply unattractive for some employers to apply for the wage subsidy.

3. It is wrong to suggest that employers cannot ask their employees to use annual leave, and cannot direct them to do so if agreement cannot be reached

Statements that employers cannot direct employees to use annual leave, or even ask them to do so, are wrong.

The Government has confirmed that obligations under the Employment Relations Act 2000 and other legislation (such as the Holidays Act 2003) remain in place. Under the Holidays Act, employers can ask their employees to use their annual leave, and if agreement cannot be reached then employers can direct staff to take (entitled) annual leave by giving them 14 days’ notice (this is provided for in section 19 of the Act).

Employers who are receiving the wage subsidy, must confirm in their declaration that they will not unlawfully compel or require any of the employees named in the employer’s application to use their leave entitlements for the period the employer receives the subsidy in respect of those employees. But that requirement is specifically caveated with a footnote saying, “other than as you are lawfully permitted to do, including as provided for in an employee’s employment agreement”.

Direction of leave in accordance with section 19 of the Holidays Act is something an employer is “lawfully permitted to do”, so even the wage subsidy does not restrict employers from reaching agreement with their employees on the use of leave or directing them to do so on 14 days’ notice, if agreement cannot be reached.

It is important to remember that under the Holidays Act there is a difference between “entitled leave” and the current year’s “accrued leave” (even if a payroll system treats them all the same!). Employers can only direct staff to use annual leave that they are entitled to as a result of them having completed a continuous year’s service. However, employers can reach agreement with employees on the use of both entitled and accrued annual leave.

Some employers have asked about whether they can make leave in advance available to employees. The answer is yes, so long as employers reach agreement with employees about it. One thing employers will want to consider is how much leave in advance they are willing to grant as there are two issues arising if employers provide too much:

  • First, if employees are allowed to use up a large amount of leave in advance, that can create health and safety concerns later if they are then restricted from taking leave.
  • Second, if employers grant a large amount of leave in advance, and thereby create a large ‘leave debt’ for employees, they may have trouble recovering that cost if employees resign later, or employees may feel they cannot resign as they will be concerned about how to deal with the leave debt they have.

4. It is not necessarily correct that employers have to continue to pay their staff 100% of their wages or salary in circumstances where they are not working

There have been several media comments (especially headlines) saying employers must continue to pay employees fully even when, as a result of the Alert Level 4 Lockdown imposed by the Government, those employees cannot perform their work. The unions have also adopted this approach in discussions with many employers. While there may be room for debate on this issue, it is not as clear cut as the unions and others are saying.

The common law regarding employment, or a contract of service (as opposed to a contract for services (i.e. an independent contractor arrangement)), centres on the concept that if an employee is ready, able and willing to work for the employer, then the employer has an ongoing obligation to provide work and pay them (unless they take steps to lawfully terminate that relationship). There is a fundamental connection between employee and employer in an “of service” relationship which creates that obligation.

A lot of commentators are saying employees are meeting their end of that bargain, so employers must pay. But it isn’t that simple and may not actually be correct.

Whilst employees may in theory be ready and willing to work – they are currently prevented, by Government direction, from doing so if they are required to attend at an employer’s premises to carry out their work. The current Alert Level 4 Lockdown is as much a direction to employees that they cannot go to their employer’s premises for work as it is a direction to employers that they cannot operate their work premises (assuming they are not essential services).

This analysis may vary if the nature of an employee’s role means they can fully work from home. If an employee is not able to carry out their work through no fault of the employer or employee, but as a result of Government’s direction, then the question of whether any wages are payable, and by whom, is up for debate.

5. It is not the case that reorganising, or restructuring, a business is no longer a business owner’s prerogative

Businesses are entitled to make genuine commercial decisions about how they run their business and can make changes that affect employees so long as the changes are substantively justified and are made following a fair process. COVID-19 does not change those general principles, although it is relevant to considering whether the actions taken, and how the employer acted, were reasonable in all the circumstances.

At one extreme (from an employee’s perspective) is the right to disestablish an employee’s role, and for them to be made redundant if there is no other suitable role for them to be redeployed to in the business. The simple reality is that if employers retain the right to do that (which they do absolutely if they are not within the post 4pm on 27 March 12-week wage subsidy period), then they must be able to make other, less drastic, decisions such as reduction of hours.

The key here is ensuring the changes employers wish to make are substantively justified, and that a fair process is followed.

Let us think about this in terms of a 4-day week. It may be entirely appropriate for an employer to consult with employees and implement a 4-day week following consultation, so long as there is good reason to do so, and employers give employees a reasonable opportunity to seek advice and provide feedback on the proposal and incorporate that feedback into their decision making. This process is important, and something employers should seek advice on. To suggest that this option is not available to employers is simply wrong.

If employers are receiving the wage subsidy then there are restrictions on what they can do in this regard, but not in respect of things that they can reach agreement with their employees on. So, employers can still consult with their employees including during the 12-week wage subsidy period and see if agreement can be reached. If not, then employers will need to wait for the 12-week wage subsidy period to pass before taking further action (employers who applied for the wage subsidy pre 4pm on 27 March are in a slightly different situation).

Other things to think about

In addition to the myths discussed above, there are a plethora of other issues employers are dealing with right now. Below are some examples of what we are talking with employers about:

  • Employees working for essential businesses who refuse to work when they are otherwise fit and able to.
  • Health and safety considerations for employees working from home, and those working in essential services.
  • Whether employers can run truncated and ‘remote’ consultation processes with employees.
  • Creative alternatives to redundancy.
  • The hidden detail in the Government’s wage subsidy scheme (e.g. What does “best endeavours” mean in this context? How do you prove a 30% decline in revenue?)
  • Whether employees on leave without pay have entitlements to the unemployment benefit.
  • How does the Alert Level 4 Lockdown affect employees on temporary work visas?
  • What will things change if we drop to an Alert Level 3 Lockdown and what should employers be putting in place now to manage this change?
  • How will the Government’s wage subsidy payment be audited in future and to what extent could an employer be liable for a breach of the rules?
  • What constitutes an essential service?
  • How can employers ensure compliance with their obligations under the Privacy Act 1993 when applying for the Government’s wage subsidy? Do employers need to obtain express consent?

Our employment experts have been busy assisting clients with all of these issues and more. If you would like to discuss your business’s response to these issues, or any other employment or health and safety matters, please contact us.

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