Closing or selling your business?

We see many employers who decide to close down or sell their business and haven’t realised their good faith obligations extend to consulting with their employees before they make the final decision.

In a recent case a Whangarei woman whose employment was terminated because the business was closing down has been awarded more than $6000 for humiliation and other entitlements because she was not consulted about closing the business before the decision to close was taken.

Ms Saroz started work for Flower Feva Limited (Flower Feva) in June 2009 as the Florist Manager – and only employee. Flower Feva was situated in the Palmers Garden Centre in Whangarei. Ms Saroz was made redundant when Flower Feva ceased trading on 19 May 2014.

In May 2013 Mr Damian Luiten, the Director of Flower Feva, handed Ms Saroz a memorandum recording the decline in Flower Feva’s financial position and setting out some options to save money. Mr Luiten says it must have been obvious to Ms Saroz that the business was not doing well in the 12 months before it closed. Mr Luiten even suggested that because Ms Saroz was the only person working in the Flower Feva shop she must have somehow contributed towards its decline.

On 19 May 2014 Mr Luiten called Ms Saroz to a meeting and announced that he was closing down the Flower Feva business. Ms Saroz was handed a letter of termination which advised she was being made redundant that day because the business was closing. Ms Saroz’s employment ceased immediately.

In order for a dismissal to be justified it must meet the justification test in the Employment Relations Act. A fair and reasonable employer is expected to comply with its statutory obligations which include the duty of good faith and the four procedural fairness tests of the Act.

Mr Luiten says that even if he did not follow a proper process for making Ms Saroz redundant she still had access to information in her capacity as manager of the business so was acutely aware of its deteriorating financial position.

Mr Luiten says Ms Saroz was provided with sales reports weekly and that the two of them spoke frequently (almost daily) about the business and his concerns about its lack of profitability. However Ms Saroz had limited information about the overall business because it was effectively being run by Mr Luiten.

Section 4(1)A of the Act requires an employer who is proposing to make a decision which may adversely impact on an employee’s ongoing employment to provide that employee with relevant information andthe opportunity to comment on it before a final decision is made.

Mr Luiten says good faith requirements were complied with because Ms Saroz could have found the information herself.

Employment Relations Authority member Rachel Larmer said in her report that she found that the situation described by Mr Luiten did not meet the requirements of s.4(1A) of the Act and that Flower Feva had breached its good faith obligations. Flower Feva was obliged to provide Ms Saroz with relevant information about her ongoing employment – it could not assume she already had access to it. Ms Saroz was simply told she had been made redundant. She was not given any information before being made redundant much less an opportunity to comment on relevant information before she was dismissed.

During the Authority’s investigation Ms Saroz conceded that her redundancy dismissal was substantively justified because Flower Feva shut down its business due to financial issues.

Ms Larmer considered this was a realistic concession to make because at the date Ms Saroz’s employment terminated Flower Feva owed $74,000 rent arrears, it owed its shareholders $70,000, it had $23 in its bank account so could not pay staff and had considerable unpaid debts to it suppliers.

Ms Larmer did not consider it likely that there were any counter suggestions that Ms Saroz could have made in the circumstances that would have enabled the business to have turned around its financial situation even if a fair and proper process had been adopted.

The outcome was the Authority’s finding that Flower Feva was unable to justify Ms Saroz’s dismissal because it failed to follow a fair or proper process before making her redundant. Although there was a good reason for making Ms Saroz redundant (namely the Flower Feva business closed) the circumstances were such that Flower Feva still could and should have properly consulted with her before that occurred.

Because Ms Saroz’s dismissal was substantively justified she was not entitled to lost remuneration and her remedies were therefore limited to distress compensation. Ms Saroz was awarded $6000 for humiliation, loss of dignity, and injury to feelings and other entitlements she claimed.

Key learnings for business owners:

1. Good faith requires the business owner to:

  • consult with its employees about the proposal to sell or close its business (since that decision may have an adverse effect on its employees’ continuing employment);
  • provide affected employees with access to relevant information about the proposed decision;
  • allow employees to comment on the information provided, before any decision is made.

2. Review your employment agreements to determine your obligations. Your employment agreementsshould contain an “employment protection provision” which sets out the procedure you will follow when negotiating with a purchaser about the sale of your business.

3. If you are selling the business you should negotiate and discuss possibilities of redeployment of your employees with the purchaser. If applicable, you should ensure that you insert appropriate provisions in the Sale and Purchase Agreement that deals with how employees may be transferred to the purchaser.

4. Make sure you give your employees the requisite notice and pay any redundancy or accrued (but untaken) annual leave entitlements due to them.