Consultation obligations: When do employers need to tell employees about a business sale?

When employers are selling their business, a critical question always raised is when to consult with employees and is this required before the business goes unconditional. The latest Employment Court case provides guidance for employers about their good faith obligations and when an obligation to consult arises.

Employer’s good faith obligation

Section 4 of the Employment Relations Act 2000 (the Act) requires any proposal of an employer that could have an adverse effect on an employee’s employment to provide the potentially affected employee with access to all information relevant to that proposal. An employee must be provided with a reasonable opportunity to comment on the proposal, and that the employer must consider that feedback with an open mind, before a decision is made. Previous judgments have made clear that a proposal is something more definite than the contemplation of possibility, i.e. a definite course of action has crystalised. 

Despite these good faith requirements, in the context of the sale and purchase of businesses, it is common practice for employers not to tell an employee until after a Business Sale and Purchase Agreement has been signed, in order to avoid unintended disclosure that may jeopardise the commercial position. In doing so, employers rely on an exception set out in section 4(1B) of the Act; that an employer is not required to provide access to confidential information “where it is necessary, for any other good reason, to maintain the confidentiality of the information (for example, to avoid unreasonable prejudice to the employer’s commercial position).”

Employers are understandably cautious about the timing of disclosures and consultation. If a vendor's consultation process is done poorly, they run the risk of facing personal grievance claims and having upset employees pre-settlement, which could adversely impact the business and potential profit on completion. 

Surprisingly, reliance on the confidentiality and commercial sensitivity provisions, and the nuanced aspect of consultation (i.e. when the obligation to consult crystalises), has been largely untested in New Zealand case law. However, the Employment Court has released a decision which provides guidance on when it might not be appropriate to rely on the section 4(1B) statutory exception.

Employment Court decision in Birthing Centre Limited v Matsas & Others

In Birthing Centre Ltd v Matsas [1], a birthing centre that was struggling financially and negotiated with the (then) regional DHB to take over its operations. The union and staff were not informed of those negotiations, and learned only about the decision to transfer the staff from the birthing centre to the DHB after the decision was made. 

The birthing centre argued that confidentiality was necessary to preserve the commercial interests of the DHB. Further, that if consultation took place before agreement was reached, then gossip and speculate would have a detrimental impact on the public confidence in services of the birthing centre.

However, the Employment Court held that in the circumstances of the case, the birthing centre hadn’t explored ways of consulting in ways that preserved confidentiality regarding the proposed change, and it was held to have breached its good faith obligation to consult. 

In coming to its decision, it considered the development of good faith obligations within the Employment Relations Act, and its amendments. [2]

What is the impact of the Employment Court’s judgment on consultation obligations for employers when proposing to sell a business?

The decision should not be read as a blanket overriding of commercial sensitivity of a transaction by good faith consultation obligations. There may be circumstances where a transactions commercial sensitivity is such that an employer could not reasonably consult with employees (and a union if relevant). For example, some regulatory obligations such as a requirement to notify the market may be relevant. 

Advice for employers proposing to sell their business

A critical lesson for employers is that before making a decision about whether there is a good reason around commercial sensitivity not to consult prior to a sale going unconditional, employers should genuinely explore (and record) how consultation may be achieved in ways that could preserve the confidentiality of commercially sensitive information, while the good faith obligations could be discharged. That is, by waiting until a Business Sale and Purchase Agreement is entered into and had gone unconditional before speaking with employees, an employer is at risk of being deemed to have moved beyond a crystalised proposal to a decision. At that stage, it becomes challenging for an employer to assert that it would have an open mind and that employee feedback may be able to alter the decision. Accordingly, it will be difficult to establish that good faith obligations have been met.

Consultation obligations are not straight forward, particularly in commercially sensitive transactions. Employers are wise to tread cautiously and take a proactive approach in seeking specialist employment advice early to mitigate inherent risks when contemplating the sale of a business. 

Specialist employment law advice

If you require assistance, or have any questions about employment law matters including the sale of business, restructuring and redundancies, the specialist employment law team at DTI Lawyers can assist. You can contact us by email at [email protected] or phone 07 282 0174.

We note that since the publication of this article, the Court of Appeal has affirmed the Employment Court's ruling that the birthing centre had unjustifiably dismissed its employees without proper consultation or redundancy payments. The Court of Appeal dismissed the company's application for leave to appeal, concluding that the Employment Court correctly applied the relevant provisions of the Employment Relations Act, and the company's challenges on questions of law were declined.