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The Human Resources Institute of New Zealand

Human Resources Institute of New Zealand (HRINZ) is the professional body for those involved in Human Resource Management and the development of people.

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Contracting Out

As part of the Minimum Employment Standards Review, the Government formed the Advisory Group on Contracting Out. This Advisory Group commenced work in February this year. The function of the Group was to examine the possibility of legal intervention to ensure the continuity of employment upon the merger or sale of a business or the contracting out of a function. The Advisory Group presented an initial report to the Minister in April this year. The Advisory Group, in a smaller form, now requires submissions from appropriate bodies by the 6th of September. Clearly, intervention of this nature will have an impact on organisations generally and the implementation issues will also affect HR practitioners. Human Resources Institute of New Zealand will present a submission to the Advisory Group and members’ views on the legislative proposal are urgently sought.

The Human Resources Institute of New Zealand acknowledges the help provided by Cullen The Law Employment Firm in preparing a considerable amount of the following information and their willingness to share it with us.


BACKGROUND

Reproduced with permission from Cullen The Employment Law Firm

The Employment Relations Act was passed into law amid some controversy.  Some chestnuts were put to one side by the Government at the time it passed the legislation, whilst at the same time limiting the controversy to a degree. 

One of these chestnuts related to the issue of contracting out.  The Service Workers Union has long been concerned about the issue of contracting out in hospitals.  Cleaning companies in hospitals for example, tender for the cleaning contracts on a regular basis.  Often the lowest tender is successful.  Where the tender is won by a new contractor, the existing staff are often not retained or only certain employees are offered ongoing employment.  The argument goes that these employees are often required to carry heavier workloads and work longer hours.  To a lesser extent, the same problem also applies to orderlies and kitchen staff in a hospital environment.

The issue of concern to the Service Workers Union does have merit.  However the difficulty is that the solution being proposed would spread the net well beyond the problem and the solution would appear to create even greater problems than the initial difficulty that the Unions want to address.

THE THREE COMMITTEES

Reproduced with permission from Cullen The Employment Law Firm

The Minister of Labour, Margaret Wilson, constituted three committees to look at areas of ongoing concern.  One is looking at the Holidays Act, one is looking at equal employment opportunities, and the other is looking at the contracting out issue.

The committees are made up of union and employer reps, plus one or two others. 

In addition, Government has had drafted new legislation on health and safety. The new draft Bill is likely to surface in the next couple of months. Areas of particular concern to employers were the very high fines proposed in the earlier discussions documents. These are likely to be retained in the new Draft Bill. A second issue was the ability of workers or unions to give stop work orders where they consider there is a health and safety reason for doing this. It also gives the union the ability to influence matters such as hours of work and days of work and other issues that may be both industrial and have a health and safety factor. So while there are of course health and safety issues involved in the legislation, which would be of concern to employees and employers of like, some of the remedies proposed in the Bill may not find favour with employers generally.

Of all the above issues, it is contracting out that is moving with alacrity. 

CONTRACTING OUT

Reproduced with permission from Cullen The Employment Law Firm

When first introduced, the Employment Relations Bill attempted to address the issue of providing protection to employees in the event that their work was contracted out or the business that engaged them was sold or transferred.

The relevant clause in the Bill was the subject of considerable debate during the Select Committee process. Concerns were expressed about the impact on the proposal on the employers’ ability to organize their businesses.  Unions viewed the proposed clauses in the Bill as inadequate for a number of reasons, including its failure to protect job security.  When the Act was passed it gave the responsibility to those negotiating collective agreements to come up with their own solution to this problem. 

The Union movement was dissatisfied with the outcome, and the Government wanted to get its legislation through without further controversy.  However, at this time the government indicated that it intended to reconsider this issue during the so-called Minimum Employment Standards Review. 

In December 2000, as part of that initiative the Government appointed an advisory group to consider ways of protecting employees that are affected by contracting out and/or the sale and transfer of business.  The Group’s terms of reference were to advise the government on the current situation and possible future policy options for protecting the wages and conditions of work of staff in the event of a business being sold or transferred, or where the work of such staff is contracted out. 

On 10 August, a position paper (attached ) was made available for interested parties.  The Ministerial Committee on contracting out is interested in having some feedback on the position paper.  There will be hearings in Auckland, Wellington and Christchurch for this purpose.  The hearing in Wellington is on 20 August 2001, Christchurch is on 21 August and Auckland is on 4 September 2001.

This paper is to give you a brief outline of the clause and the possible ramifications for employers if the clause in its current form becomes law. 

A SUMMARY OF THE DRAFT CLAUSE

Reproduced with permission from Cullen The Employment Law Firm

The Unions have proposed at the Committee meeting a draft clause that they say would meet their concerns.  It is attached.  The object of the clause is to ensure job security and continuity of the terms and conditions of work where a business or part of a business is being sold or transferred. 

The clause imposes certain obligations on the transferor and the transferee in these circumstances:

30 days prior to the date of the sale or transfer the Union (if applicable) and the employees must be notified.

  1. Any notification will have to include the following matters

    1. date of the proposed transfer
    2. reasons for the transfer
    3. identity of the buyer, including how to contact them
    4. implications of the transfer for the employees
    5. the date by which employees must choose not to transfer
    6. implications for an employee who chooses not to transfer, including redundancy compensation.

     

  2. Transfer includes a transfer of a business or part of a business, including by way of sale, change in legal status, merger, division, lease, contracting out, contracting in, subcontracting and succession to contract.

  3. The clause provides that every employee employed by the transferor and affected by the transfer shall, as of the date of the transfer, be employed by the new employer unless the employee chooses not to transfer. 

  4. Any rights and obligations arising from an employment contract existing shall, on the date of transfer, be transferred from the transferor to the transferee.  This includes the terms of any individual agreement or collective agreement in force, any conditions of work and any service based entitlements.

The clause also provides that:

  1. Every employee affected by the transfer who chooses not to  transfer, must notify the transferor and transferee parties within no later than 10 days before the transfer.

  2. Unless otherwise agreed in writing, for these employees, their employment shall terminate on the date of the transfer and they will be entitled to redundancy compensation according to a formula in the clause.

  3. A transferor or transferee who fails to comply with this section is liable to a penalty under the Employment Relations Act in respect of each employee affected by the non-compliance.

IMPLICATIONS OF THE PROPOSED CLAUSE

Reproduced with permission from Cullen The Employment Law Firm

  1. First, it seeks to provide certainty of employment in respect of situations where there are restructures and sales.  This certainty of employment may defeat the employer’s prerogative to manage where the business is being sold or transferred.

  2. By establishing a formula for a minimum redundancy payment, it imposes such a payment even if the parties themselves have not agreed to one.

  3. The parties can contract out of this however.

  4. An employee who does not wish to transfer will be eligible for redundancy compensation (unless they have contracted out) even if it is a case of technical redundancy and they have been offered substantially the same terms and conditions of employment with the new employer.

  5. In today’s competitive environment, to be successful, businesses often choose to focus their efforts and resources on their core competencies.  The obvious method of achieving this is by out-sourcing functions that are not core.  Where a company decides to out source by selling or transferring part of the business, this proposed clause transfers any existing rights and obligations of the old employer to the new employer. Since the obligations of the old employer are automatically transferred to the new employer, the new employer has no choice but to be bound by the same terms and conditions of the old employer may have agreed to in respect of those employees. This will cause complications because current staff will be on different terms of employment to transferred in staff.  This is a recipe for industrial disharmony. 

  6. The draft clause as it stands allows the employees to choose whether they transfer over or not to the new employer.  This has implications for example for the Information Technology industry where the value of a sale of a business lies in its employees. Under this clause the employees could choose not to transfer to the new employer even where offered identical terms and conditions and thus be eligible for redundancy compensation.  So there is an incentive for them to refuse to transfer because of the redundancy complication, which is likely to be mandatory, notwithstanding the fact that it may be possible for the parties to deliberately contract out of it.  This would have an impact on the value of the business being sold since there would be little to offer to the potential new owners.

  7. If all the existing employees demanded to be employed by the new employer, on exactly the same terms and conditions, doing exactly what they were doing before, even if there was obvious duplication in areas or lack of relevance and necessity of work, at the time of transfer, an employer would have no option other than to accept the situation.  The clause ignores the issue that part of a decision to sell a business or to contract out work may be because the labour costs are simply too high to be sustained.

  8. For example, Call Centers are widely used by the Telecommunications, and Banking industries. If the proposed clause became law, then companies who employed call center staff and chose to contract this service out would be caught by the clause. The transferee would be obliged to employ all the employees, on their current terms and conditions, who chose to transfer over, and the transferor would be obliged to pay those who chose not to transfer even if offered the same work and conditions by the new employer.  This includes sick leave and other service related benefits.

  9. This concept also works in reverse. If these industries decided to provide the call center service “in house” and attempted to bring back this service, then they would have to accept all the employees that were employed by the contractor and subsequently also accept any obligations in force.

  10. The definition of ‘transfer’ is wide.  The definition of ‘transfer’ in the draft transfer clause appears to go considerably beyond the concept of the transfer of a business or an identifiable sub-part of the business which itself is characteristic of the economic unit.

  11. It is conceivable that should a Bank decide to change solicitors from Firm A to Firm B, then the clause would be triggered.  The banking team at Firm A could decide that they want to be transferred to Firm B.  Alternatively they could demand redundancy from Firm A.  We assume the bank has a contract with A and later B for the handling of all its legal work.

  12. The Clause also says that the employees and/or the union have to be notified 30 days prior to the date of transfer.  There is an issue in this case in terms of the timeframe proposed by the draft Clause because the parties themselves may be working within a shorter timeframe.  Also, commercial sensitivity may often mean that it is impossible to comply with this timeframe.

RECOMMENDATIONS

  • It needs to be borne in mind that the Draft Transfer Clause has not been accepted by the Government.  The working party is still receiving submissions from interested parties before finalizing a report to the Minister.  So all of these matters are very much in the melting pot still.

  • It is important for human resource practitioners and employers, like unions, to express their views on the proposal before the Committee.

  • We intend to co-ordinate a submission through this office and need your input.  Email hrinz@hrinz.org.nz urgently – by 31 August 2001.

HRINZ thanks Cullen The Employment Law Firm for their assistance with this information, contact Cullen The Employment Law Firm at ronni@cullenlaw.co.nz.

    Draft Transfer Clause

    1. Object

      Where a business or part of a business is being transferred, employees shall be entitled to protections in relation to their-

      1. job security; and
      2. continuity of terms of employment and conditions of work.

    2. Definitions

      “transfer” means the transfer of a business or part of a business, and includes transfer by way of sale, change in legal status, merger, division, lease, contracting out, contracting in, sub-contracting and succession to contract

      “business” means any undertaking –

      1. that is carried on whether for gain or reward or not; or
      2. in the course of which goods or services are acquired or supplied.

      “transferor” means any natural or legal person who, by reason of the transfer, ceases to be the employer in respect of the business or part of the business.

      “transferee” means any natural or legal person who, by reason of the transfer, becomes the employer in respect of the business or part of the business.

    3. Notification and Information

      1. Thirty days prior to the date of transfer, the transferor and transferee shall inform the union or unions that represent the employees or the employees (where there is no union representing the employees) affected by the transfer.

      2. The notification referred to in (a) shall include the following matters:

        1. the date of the proposed transfer;
        2. the reasons for the transfer;
        3. the identity of the transferee, including how to contact the transferee;
        4. the implications of the transfer for the employees;
        5. the date by which the employees must choose not to transfer; and
        6. the implications for an employee who chooses not to transfer, including any entitlement to redundancy compensation.

    4. Employment transferred

      1. Every employee employed by the transferor and affected by the transfer shall, as of the date of transfer be employed by the transferee, unless the employee chooses not to transfer in accordance with section (5).

      2. The transferor’s rights and obligations arising from an employment agreement existing on the date of the transfer shall, by reason of the transfer, be transferred to the transferee, including –

        1. the terms of any individual agreement or collective agreement and any additional terms and conditions of employment;
        2. the conditions of work; and
        3. service with the transferor for the purpose of any service based entitlements.

      3. Every employee transferred in accordance with this section, and in relation to the transfer, shall not be entitled to –

        1. any benefit under the employee’s agreement with the transferor in relation to redundancy; or
        2. make a claim against the transferor for unjustified dismissal in terms of section 103(1)(a) Employment Relations Act 2000.

    5. Choosing not to transfer

      1. Following notification of a transfer, every employee affected by the transfer may choose not to transfer to employment with the transferee.

      2. Every employee must notify the transferor and transferee if they do not wish to transfer to employment with the transferee no later than 10 days prior to the date of transfer.

      3. Unless otherwise agreed between the transferor and the employee, the employment of every employee who chooses not to transfer shall terminate on the date of transfer.

      4. Unless otherwise agreed in writing, every employee whose employment is terminated at the date of transfer in accordance with section 5(c) shall be entitled to redundancy compensation of at least x weeks pay for the first year of service with the business and an additional y weeks pay for every year of service thereafter.

    6. A transferor and a transferee shall not use a fixed term employment agreement to defeat the provisions of this section.

    7. A transferor or transferee who fails to comply with this section is liable to a penalty under the Employment Relations Act in respect of each employee affected by the non-compliance.

    The Advisory Group’s Task

    The Minister of Labour has asked the Group to undertake work on a generic intervention guaranteeing continuity of terms and conditions through the process of contracting out or sale or transfer of business.

    The Advisory Group is in its second phase of work, having submitted an initial report to the Minister in April.

    In this phase, the Group has been asked to consider further four options, identified in the Group’s initial report. These are three options defined by the NZCTU, and the Acquired Rights Directive of the European Union. The principles underpinning the four options have been combined by the NZCTU in the attached document

    The Group has been particularly asked to undertake the technical development of options, and an assessment of their likely impact.

    The Group will make final recommendations to the Minister in late September.

    Possible Points for Consideration

    • The object of an intervention
    • Key definitions
    • Notification requirements
    • Information provision
    • What is to be transferred
    • Employer and Employee choice
    • Technical redundancies
    • Penalties
    • Good faith issues
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