Adapting to a new environmentDecember 28, 2015
Mergers, acquisitions and other restructures trigger complex legal issues.
Today, organisational change and restructuring is common and is often critical to business success. Indeed, the need for renewal and change has been spurred on significantly by challenging domestic conditions, growing uncertainty in the global economy and businesses striving to ensure profitability and sustainable competitive advantages.
A business that designs and executes a restructure well can add substantial value to their financial bottom line, as well as potentially creating long lasting cultural transformation. On the flip side, if change is not handled strategically and smoothly, there can be serious implications, including costly employee claims, ongoing payroll liabilities and damage to workforce morale. This article looks at organisational restructures through the prism of workplace relations and briefly outlines some of the key factors to consider.
Restructures can take many forms: internal reshuffles, mergers, acquisitions and divestures, or ‘simply’ up or down-sizing an existing workforce. Sometimes, restructures only involve changes to direct relationships with staff. Frequently, however, they also involve a range of interrelated or concurrent third party transactions (eg, share or asset transfers, change of employing entities, etc), each with their own legal, commercial and practical implications.
No matter the model you adopt, it’s critical for everyone in your team – whether they’re commercially, legally or operationally focused – to understand the mix of planned transactions, risks and alternatives and to keep up with any decisions or assumptions that change along the way. This can be tricky, particularly if you’re only delegated with a discrete part of the project, operating within tight commercial timeframes, or dealing with stakeholders who keep changing their minds. However, the matrix of workplace relations risks (including costs and timeframes) can blow out significantly if scenarios change, so it’s vital to keep abreast of what underpins your restructure, or is triggered by it.
Ultimately, any successful workforce change process requires forward thinking, careful and strategic planning and timely execution. The extent and nature of these processes will vary depending on the objectives, deadlines and resources but, wherever practicable, you should always include these fundamentals to ensure you capitalise on opportunities and avoid pitfalls:
- Be clear about the purpose and intended outcomes of the restructure. This includes knowing what you are (and aren’t) prepared to pay or risk to achieve them and being open minded enough to adapt to alternative possibilities. Restructures don’t always take you where you think they will when you start, so it’s important to be clear with your decision-makers and advisors about your overriding preferences and tolerances (especially if they could change!). Doing this will help ensure that, wherever you end up, it will be the best destination for you.
- Seek professional advice as early as possible, and pick your advisory team carefully. You wouldn’t ask a podiatrist to perform cosmetic surgery, so why expect a property or commercial lawyer to understand the nuance of workforce regulation and strategy? Often, it will be more cost effective and less stressful to get all your trusted advisors together in front of a whiteboard early, rather than relying on any one of them to dominate.
- Once you have your overall strategy in place, clearly map out the key action items, timeframes and responsibilities needed to execute it smoothly – and, importantly, how you will communicate with each other when planned actions are completed or when complications arise.
- Have an exit plan and a ‘Plan B’: develop a risk mitigation and fall back plan so that you can anticipate and avoid roadblocks wherever possible or, if necessary, choose a fall back destination in case your first choice becomes unreachable or unattractive. Sometimes, the grass is only greener until you’re actually on the other side, and you’ll be stuck there if you’ve destroyed the bridge behind you.
- Remember that completing a restructure is only the beginning of the journey. Once all the transactions are over, there’s still a lot of hard work to come. You’ll still need to help your workforce adapt and thrive in the new environment you’ve created for them. This means your restructure plan cannot only be about whether you get there, it also needs to factor in how you get there without damaging people along the way.
Of course, this all seems pretty simple in theory, until you’re in the thick of it, with a looming commercial deadline and stakeholders breathing down your neck! At times like that what you probably want most is someone to show you how to find the easiest path through complexity and one that allows you to reach the destination in one piece and with enough energy and enthusiasm to make the most of it when you do! That’s when getting good advice early can make all the difference. So let’s have a look at some of the key legal issues we may be able to help you with in two common types of restructure: upsizing and downsizing.
Key legal risks: upsizing
When you’re taking on new staff, or a new line of business, it’s crucial to get the right people, with the right skills for the right jobs. But you also want to make sure they fit in, don’t cost too much and can be removed easily if they don’t turn out to be what you expected. Of course, like any recruitment process, you need to start with the basics: defining the role, managing candidate expectations, selecting on merit, setting appropriate remuneration and ensuring you have compliant contracts in place before work starts. But when you’re dealing with a ‘bulk’ on-boarding process there can be added complications.
If you’re acquiring a new workforce from another business, chances are the movement of workers will be treated as a ‘transfer of business’ under the Fair Work Act, whether or not you are actually buying a new business (or part of one). For example, if a competitor goes bust, you may decide to hire some of their old workforce so you can make the most of the gap in the market. Or you may decide to ‘insource’ work that you previously outsourced, so you can have more control over the function during a period of organisational growth.
When this happens, one of the main legal concerns is inheriting risk from the former employer – even if your business only has a seemingly remote ‘connection’ with them. For example, many businesses will inadvertently inherit from a former employer:
- An unhelpful enterprise agreement. This can create all sorts of difficulties for managing the new workers. You may be able to apply to the Commission to avoid this happening, but if you don’t it can result in:
- Having to pay more than expected, or being locked into difficult payroll structures;
- Restricting the way you manage rosters, duties and a range of other processes;
- Limiting or complicating your ability to dismiss under-performers or staff you no longer need; or
- Creating an inequitable environment where transferring employees are covered by one agreement and existing employees are covered by something completely different; or
- The requirement to recognise prior service and/or accrued entitlements. Even if the former employer pays out everything employees are owed before you hire them, you may still end up being responsible for contingent entitlements (like sick leave). Similarly, their years of service with the former employer could trigger a significant redundancy liability or unfair dismissal risk for your business later, even if you decide you no longer need them after a short time.
With careful planning, some of these liabilities can be avoided, but all too often we see employers failing to anticipate these contingencies before hiring the new workforce.
Key legal risks: downsizing
Many restructures involve roles being made redundant, resulting in redeployments or retrenchments, particularly when downsizing. However, although redundancy is common, the legal requirements associated with it are complex and often poorly applied in practice. It can be especially difficult to separate and be clear about each decision you make along the way if you’re dealing with a number of moving parts: employee consultations, retrenchment/redeployment selection processes, different but interrelated organisational layers. If you get it wrong, some of the risks include:
- Unfair dismissal claims. Yes, even if it’s a ‘genuine redundancy’ for tax or other purposes, you won’t be exempt from unfair dismissal claims unless you consult properly and jump through the other hoops in the Fair Work Act.
- Redundancy pay liability. Sometimes the cost of retrenching staff can seem more expensive than keeping them or staying in business! It’s important to calculate this liability correctly (and this can be tricky in itself) but there are also steps you may be able to take to reduce it (provided you plan ahead). For example, engaging workplace lawyers and insolvency practitioners before you start can often improve the bottom line significantly.
- Non-compliance penalties. Employers often overlook the consultation and other process obligations in the Fair Work Act and industrial instruments. However, failure to comply with these ‘technicalities’ can create significant risk. For one thing, it may expose you to unfair dismissal claims, but employers (and individuals involved) can be fined for non-compliance (up to $51,000 per breach for companies and $10,200 for individuals). For example, in November 2014, the Federal Circuit Court ordered Whitehaven Coal pay a $19,000 penalty for breaching its enterprise agreement during a redundancy process.
A large utilities business wanted to integrate multiple workforces, each covered by different industrial instruments that provided disparate terms and conditions of employment. The immediate need was triggered by a complex transfer of business transaction.
FCB helped the business develop a thorough transfer and integration plan, aimed at equalising pay and conditions among employees. Early on in the project, we identified a window of opportunity to make a series of applications to various tribunals, allowing the client to smoothen some of the industrial complexity. FCB then represented the client in making these applications successfully. As a result, the client now has a period of industrial certainty (and relative simplicity) while it implements the next stages of its integration.
Avoiding an outsourcing disaster
Our client sought FCB’s advice before submitting a tender to perform outsourced work. Under the Fair Work Act, outsourcing (or ‘insourcing’) can be deemed a ‘transfer of business’, even if there isn’t actually a business changing hands. We were able to advise the client about the implications of their transaction being a transfer of business.
Significantly, if they’d won the tender, the business would have inherited a transferring industrial instrument that imposed a higher labour cost base than anticipated. Armed with our advice, they were able to reassess the value of the commercial opportunity and decided not to proceed with their bid. In doing so, they avoided a commercially undesirable position and freed themselves up to consider alternative opportunities.