Fire at will: Government to remove unjustified dismissal protections for high earning employees

Minister for Workplace Relations Brooke van Velden has today announced law changes to prevent high earning employees from raising personal grievances for unjustified dismissal.

In a statement the Minister said the proposed income threshold of $180,000 per year will cover approximately 3.4 percent of the workforce and these employees will be unable to raise a personal grievance over their dismissal. That income threshold will then be adjusted annually to match increases in average weekly earnings.

While this will only impact a small portion of the workforce, the change is significant and would entitle employers to 'fire at will' in a way commonly associated with employment law in the United States. Employers would not be required to have a good reason for dismissal, or to follow any process. This is unheard of in New Zealand outside of a 90-day trial period.

The new rules are expected to largely mirror the provisions for 90-day trial periods (which have seen a resurgence since being reinstated for all income thresholds). Much like the provisions around 90-day trials, employers will still need to give the employee their contractually required notice (or make a payment in lieu). We expect to see employees over the threshold negotiating for longer notice periods as a result of the changes, in order to ensure they have contractual protection covering them for the period required to find new employment. We may also see new terms defining "termination for cause" in order to set termination entitlements. Alongside this, employees are likely to prioritise incentive payments and other benefits in lieu of higher salaries as the proposed $180,000 threshold will only apply to the employee's base salary and will not factor in other payments. Much will depend, and we can expect much argument in the future, on what constitutes "basic salary."

There will likely also be unintended 'channelling' effects around the salary threshold. Employers will not wish to put in place a salary which is just over the threshold, and likely compensate the employee with a longer notice period, but see the employee gain personal grievance rights when the threshold is set higher in following years. Changes in the threshold are therefore likely to pull up executive salaries accordingly. Similarly, employees just below the limit will not welcome a small salary increase which takes away their statutory protection - we might see the first examples of salary increase variations being refused.

For those on existing agreements which provide for high salaries, we can expect a transition period in which contract negotiations become much more fraught, perhaps particularly in the public sector where collective agreements apply e.g. medical specialists and managers.

The Minister argues the policy will provide greater labour market flexibility by allowing employers to take a chance promoting high performing employees without risking disruptive and costly dismissal processes if it doesn't work out. Her statement also suggested the policy, which has its origins in the National-Act Coalition agreement, will benefit workers who want to move up the career ladder while preventing poor senior management from damaging the culture and morale of businesses. However, senior employees tend to have more negotiating power when it comes to their contractual terms - it is possible the potential costs of performance processes and unjustified dismissal claims will simply be replaced by contractual 'break' costs, and court claims over contractual interpretation.

Finally, we can now expect an increase in disadvantage and unlawful discrimination claims (which will still be permitted under the proposed changes), similar to trends seen in the UK due to the restrictions on unfair dismissal claims.

Employers should start thinking now about how they will address these changes with their senior staff. Legislation implementing these changes will be introduced in 2025, but it will impact contract negotiations well before the law comes into force

This article was written with the assistance of Dan Smith, Solicitor, and Dugal Thompson, Summer Clerk in the Employment team