Recession-Proofing Your Remuneration Packages
Recent figures show that currently one in three businesses in New Zealand is contemplating redundancies in light of the current economic climate and global recession. Accordingly, the focus for employers is very much on looking at possible ways in which they can reduce costs. One such way, that may avoid the need for redundancies, is to consider the reduction or removal of employee benefits.
A number of companies provide employees with a variety of benefits including cars, car allowances, health insurance, and superannuation. Such benefits are often provided at a significant cost to the business, which is fine when times are good, but less so in the current economic climate. The first issue for an employer looking to cut employee benefit costs is to determine is whether the benefit is a contractual term, or whether it is truly discretionary. The significance of this distinction is that an employer cannot unilaterally revoke or change any contractual entitlement, without the employee’s consent. By comparison, where a benefit is genuinely discretionary and does not form part of the employee’s terms and conditions, it can generally be revoked or varied without the employee’s consent.
The next issue is how you determine whether a benefit is a contractual term, or whether it is genuinely discretionary. If a benefit is included in the employee’s individual employment agreement, unless it is specifically expressed as being a discretionary benefit, it will form part of the employee’s contractual terms and conditions. For this reason, we recommend that benefits are not included within employees’ employment agreements and are instead referred to in separate policy documents. If an employer must refer to the benefit in the employment agreement it should be clear that the benefit is discretionary, and if appropriate, in accordance with any applicable policies.
The next aspect is whether the benefit is discretionary or whether the terms of the benefit are discretionary. Put another way, whether the employer has the right or ability to withdraw the benefit entirely, or whether they can simply amend the terms of the benefit being offered. By way of example, whether there is an obligation to provide a car, but flexibility around the make and model of the car that is provided, or whether the employer has the right to withdraw the provision of a car entirely. This will be a question of fact in each case, depending on the wording of the employment agreement and/or applicable policy.
One of the leading cases on employee benefits sheds further light on the issue. In Cuttris v Carter Holt Harvey, Carter Holt sought to discontinue the retirement benefit it provided at one worksite and replace it with a benefit under a policy that was in place at Carter Holt’s other worksite. In this case, the retirement benefit was described in the company’s policy manual, but was not otherwise incorporated into the employee’s employment agreement. Further, the employee’s employment agreement contained a clause which allowed for policies to be amended by the employer from time to time. The employee in question, Mr Cuttris, challenged Carter Holt’s attempt to withdraw the retirement benefit. He argued that Carter Holt could not unilaterally withdraw his entitlement to a retirement benefit under the policy as the benefit was such a substantial part of his remuneration package that the policy could be withdrawn unilaterally.
The Court held that although the retirement benefit was a financial benefit, and in fact a substantial benefit in this case, this did not automatically elevate it to a contractual term. Given that the retirement benefit was a term of a policy, and Carter Holt had reserved the right to amend its policies, the Court held that Carter Holt was entitled to delete the policy and withdraw the benefit, even if it effectively disadvantaged Mr Cuttris.
The good news for employers is that despite this strictly legal position, given the current economic climate, it may be possible to be more flexible in terms of employee benefits. For example, where an employer is facing significant financial pressure, it is open to the employer to approach employees in good faith and explain they cannot afford to continue to provide the entitlement, and seek their consent to remove the entitlement, either temporarily or permanently.
While it is open to employees not to agree to the removal of a term or condition, where it is couched as an alternative to more drastic measures such as restructuring or redundancy, employee’s may be more willing to accept such reductions, particularly on a temporary basis.
Working out whether benefits are in fact contractual, or discretionary, can be difficult and it may be best to seek legal advice if you are unsure about the status of an entitlement or the approach to take initiating negotiations with your employee.
This article was written for HRINZ publication by Jennifer Mills, Partner and Isobel Foote, Solicitor.