Change to income threshold for unjustified dismissal

Many employers will welcome news that New Zealand will exclude high-income earners from personal grievance claims for unjustified dismissal, with an amendment to the Employment Relations Act planned for 2025.

Current challenges for employers

Unjustified dismissal protections are a key aspect of New Zealand’s employment landscape.  However, limitations on the ability of employers to exit highly paid but poorly performing employees in a timely manner has long been a point of frustration for businesses.

What will the changes mean?

Under the proposed changes, employees earning $180,000 per year or more will no longer be able to raise personal grievance claims for unjustified dismissal. With the removal of unjustified dismissal protections, businesses will be able to address underperformance or misalignment within their high earner population by simply terminating employment in line with contractual notice periods.

The proposed income threshold of $180,000 per year will only factor in regular base salary, and excludes other types of income such as incentive payments and benefits. Such exclusion may help to minimise litigation around what remuneration components make up total remuneration when considering whether an employee meets the high income threshold.

However, the proposed changes preserve the ability to raise other types of personal grievance.  Trends from overseas jurisdictions with similar unjustified dismissal thresholds indicate we are likely to see an increase in alternative grievances or reframing of disputes around disadvantage and unlawful discrimination.

Practical considerations

Legislation implementing these changes will be introduced in 2025. However, employers and senior or specialist employees alike would benefit from considering the impact of these changes ahead of time.

• Performance management
  

  Despite being a welcome relief for many employers, the proposed amendments should not be seen as a green light for employers to entirely disregard their existing best practices around performance and conduct management. Setting clear expectations and giving regular feedback remains a valuable part of the employment relationship.  However, with the upcoming changes, employers should feel encouraged to have open and frank conversations with their high earning employees at an earlier stage, where performance may not be hitting the mark.

• Employment documentation

  Law changes are always a good time to cast a critical eye over your existing employment documentation. Are your individual employment agreements for senior employees still fit for purpose?  Do you have robust anti-discrimination and harassment policies in place given the potential rise in these types of claim?

• Negotiations with high earners

  High earning employees may look to negotiate agreements which opt back into the protections (although this is unlikely to be palatable to most employers) or negotiate other contractual protections such as longer notice periods and pre-agreed severance terms.  Employees are also likely to prioritise incentive payments and other benefits rather than higher base salaries.  Employers can expect more protracted contractual negotiations by employees with specialized skill sets, or who are working outside of major city centres, or other such conditions where finding alternative employment in the event of a dismissal may be more challenging.

Looking Ahead

While this amendment will undoubtedly provide businesses with greater flexibility in managing high-earning roles, fair processes remain valuable to maintain trust within the workplace.

If you require specific advice or would like to find out more about how these changes may affect your business, please contact our Employment Law team.