Redundancy pay knocked down but not out in public sector

Tuesday, 23 April 2024

The silver-lining for thousands of public servants facing the threat or reality of losing their jobs is that the vast majority will be entitled to a redundancy payment.

Overall, these are likely to be more generous than they could expect in the private sector, employment experts say.

Public Service Commission spokesperson Grahame Armstrong said it didn’t offer agencies advice on what redundancy entitlements they offered candidates when they hired employees.

“Like all employment provisions, these are conditions set by each employer. They may change over time, reflecting circumstances and employment negotiations.”

But a Victoria University study estimated that in 2022 about three-quarters of public servants who were covered by collective employment agreements were entitled to six weeks’ redundancy pay after one year, plus two weeks pay for every subsequent year of service, on top of their notice period.

Some public sector workers had more generous provisions, such as eight weeks pay plus four weeks for each year of employment, but those contracts would date back to the 1980s or ‘90s, so wouldn’t be common, it found.

Bridget Clarke, a senior director at recruitment firm Robert Walters, said it was now reasonably common for redundancy payments — including those in the public sector — to be capped at six months’ pay.

Employment lawyer Barbara Buckett said that was also her experience but she had also seen contracts where redundancy pay had been had instead been capped at $30,000.

Clarke said there was “really no standardisation across the public sector”.

“We've seen an example of one large central government agency that has a minimum redundancy package of four months pay after one year’s service.”

Another offered only one month’s pay with no recognition for the number of years in service, she said.

Some recognised the contiguous periods of employment staff had at different central government agencies when calculating the service-based component of redundancy packages, rather than only the years they had spent at the last agency that employed them, she said.

But, at the same time, she was not aware of any agencies attempting to claw back redundancy pay if staff lost their jobs and then immediately found work at a different department.

Agencies have provided limited information on their recent redundancy costs, which will reflect the mix of staff shown the door as well as the generosity or otherwise of their contracts.

The Ministry of Business, Innovation and Employment (MBIE) reported that it paid $6.3m in redundancy entitlements to 138 staff in its latest cost-cutting round, which equates to $47,000 per worker.

Previous research indicates the cost of public service redundancies worked out at $70,200 per worker in 2023, down from about $97,000 in 2022.

Clarke said redundancy entitlements in the public sector were typically more generous than in the private sector.

“We are hearing some large private-sector employers in Wellington are offering ‘three months’ regardless of tenure.”

Redundancy entitlements are also simply more common in the public sector, which Buckett said reflected the higher level of unionisation.

Even if workers had signed up to an individual employment agreement, its terms would commonly reflect benefits offered in any collective agreement, she said.

That said, Buckett was aware of “one terrible situation” where a union had negotiated away redundancy provisions in a collective agreement with a state-sector employer without the knowledge of employees, some of whom had worked there for more than 20 years.

Many private businesses scrapped redundancy entitlements altogether following the passage of the Employments Contracts Act, after which individual employments contracts became more common, Buckett said.

Employers had a relatively free hand when deciding what entitlements to offer people on individual contracts as losing a job through redundancy wasn’t usually high on people’s minds when they were negotiating to start a new role, she said.

“The private sector has tended to ‘slash and burn’ redundancy compensation,” she said.

That trend accelerated in the wake of the GFC in 2008, according to Victoria University’s research.

Senior lecturer Stephen Blumenfeld said that also was the era during which the practice of capping redundancy payments became commonplace.

“Employees who had been with employers for 20 years or more were being made redundant and employers realised that by not capping they were paying out two years’ salary and so forth.”

There have been calls for reforms that would mean state-sector employees would not be entitled to redundancy payments if they immediately found work with a different government agency.

But, on the flip-side, workers’ advocates have also suggested redundancy payments should be taxed as if they were a stream of earnings, rather than a lump sum.

That would help ensure people who were made redundant near the end of a tax year — when they had already earned close to a year’s pay — would be less likely to need to pay income tax on the whole of their redundancy payment at their highest marginal tax rate.

The Labour government introduced a tax rebate of six cents in the dollar on redundancy payments in 2009 to address just that perceived unfairness, but the rebate was scrapped soon afterwards in 2011.

Blumenfeld said Victoria University was no longer tracking trends in redundancy entitlements as MBIE — which had been partly funding that research — decided to bring that work in-house after the university’s most recent 2022 study.

But he said the ministry had ironically decided to axe the unit that research was being transferred to as part of its recent cost-cutting measures.