In June, Workplace Minister Brooke van Velden introduced a bill to Parliament which would amend the Employment Relations Act 2000 (the Act). There are a range of changes that are being proposed which we have written about previously, but one of the most significant is a proposed bar on high income earners raising personal grievances for unjustified dismissal.
The proposed law change has passed its first reading and is currently before the Select Committee. Given it is a Government bill, it is expected to pass and we anticipate that it will come into effect towards the end of the year or in early 2026.
Although that may still seem a long way out, it is important for employers to start thinking early about how this law change will impact their workplace, employee relations, recruitment and remuneration processes going forward.
Who is affected by the law change and what will it mean in practice?
As it stands, the law change will impact employees who earn a salary or wages over $180,000; a threshold that will then be adjusted annually once the new law comes into effect.
Employees who earn over this income threshold will not be able to legally challenge a decision to terminate their employment (including disadvantage claims about the process leading up to termination), unless the employee and the employer expressly agree to allow the employee to do so. Effectively, this means a default position for high income earners where they can be dismissed without the employer needing to establish cause, needing to work through the existing termination procedures and needing to provide the employee with information about the reason for the termination.
The law change will have no impact on employees who earn below this threshold, and they will continue to have the right to pursue claims for unjustified dismissal where they consider they have grounds to do so.
How will the law change be phased in?
As it stands, the Government is proposing that the new income threshold kick in immediately for all new hires, or for employees who change roles within a business for any reason other than restructuring.
In the case of existing employees, the existing legal protections will remain in place for a 12-month transition period. During this period, employees and employers will be expected to negotiate over whether or not the employee will retain their unjustified dismissal protections and if not, what alternative arrangements (if any) may be put in place. If no alternative agreement or variation is entered into, the employee will not be able to raise a claim of unjustified dismissal after the 12-month transition period.
What will the law change mean for salary packages and remuneration review processes?
As explained earlier, the law change will impact higher earning employees, who receive base salary or wages over and above $180,000 per annum. Importantly, the income threshold does not take into account discretionary or at-risk payments like bonus or commission payments. It is also not pro-rated for part-time employees.
As it stands, employees generally want as much of their remuneration as possible to be guaranteed rather than at-risk. However moving forward, it is likely that the law change may prompt prospective employees to negotiate for remuneration packages with a lower base salary and higher at-risk component, in order to ensure they retain their unjustified dismissal personal grievance rights.
In the case of existing employees, remuneration review processes may also become more complicated for higher paid employees. As it stands, many employers simply notify staff whether or not they are receiving a pay increase each year and if so, how much it will be. Generally, employees are not actually asked to agree to the pay increase given the reality that no employee is going to turn down more money when nothing is being asked of them in return.
However, a scenario that will invariably arise going forward is one where an employee who is earning just below the proposed income threshold is given a pay increase that causes them to exceed it. Here the employee effectively has the choice – take more money and lose their protections against unfair dismissal, decline the pay increase, or negotiate for a different arrangement altogether. Employers need to be prepared for this possibility and should factor it into their planning for remuneration reviews moving forward.
Why would employers agree to give back unjustified dismissal protections to high-income earners?
It is fair to say that many employers will be happy with this proposed law change, and will not want to “opt into” giving unjustified dismissal protections to high-income earners. This is because the law change will give employers far greater flexibility in terms of exiting high-income employees from the business without needing to work through time consuming and (often) costly termination processes.
However there will still be many high earning employees with strong bargaining power, or in competitive recruitment markets, who are able to persuade the employer to preserve their right to raise unjustified dismissal claims. This is no different to how many employees already have the leverage to resist attempts by employers to include trial periods in their employment agreements.
Some employers may also need to take a broader view of the impact of this proposed law change, and weigh up the impact of having a split in its workforce between those who are protected from unfair dismissal, and those higher income earners who can effectively be ‘fired at will’. In some workplaces – and particularly where there is a clear role delineation between higher and lower paid employees – this may be fine. In other workplaces, differing treatment based on remuneration may prove counter-productive from a cultural or recruitment perspective.
What are some of the alternative arrangements to think about?
At first glance, the proposed income threshold presents a binary choice for employers and high income employees between having a legal protection against unjustified dismissal or not. However, the reality is that there will be a wide range of employment arrangements that employers and employees can consider for high income earners. For example:
- Longer notice periods which will provide an employee with greater financial security against abrupt or unexpected dismissals;
- Lump sum termination payments which are triggered where the employer opts to terminate on a no-fault basis, or before a certain date or event. Such arrangements are already used occasionally at CEO or executive level in the context of ‘no fault termination’ clauses.
- Bespoke contractual dispute resolution processes that need to be followed before termination, and which can give rise to a breach of contract claim if they are not adhered to.
- Limited unjustified dismissal rights. This would in effect be a half-way house approach where some protections are retained for the employee, while also keeping some flexibility for the employer to dismiss without risk of legal challenge. For example, employers and employees may agree to differing categories of dismissal (for example fault based and no-fault terminations) that can and can’t be challenged through the raising of personal grievances.
These are just examples of possible options and it is fair to say that there is plenty of scope for employers and employees to be creative when negotiating what arrangements will be put in place if the proposed income threshold comes into force.
The proposed amendment represents a significant shift for employers and senior employees, as it encourages more upfront negotiations of exit terms and clearer contractual frameworks. While it offers employers greater certainty in relation to dismissals, it also places more weight on employment agreements to clearly set out and define any agreed exit arrangements. It is therefore important to start thinking and preparing early for how this change may impact your workplace and recruitment processes.
Special thanks to Partner Alastair Espie, Senior Solicitor John Gray-Smith and Solicitor Nicole Chong for preparing this article.
If you have any questions about these proposed changes or how you and your business can prepare, please do not hesitate to contact our employment team who will be happy to assist.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
