Last month, the High Court found on an interim basis that in a subsequent contracting situation where an incumbent contractor lost a tender for a catering contract to another contractor, there was no duty of care owed between the competing contractors (LSG Sky Chefs New Zealand Limited v Pacific Flight Catering Limited).

The decision has important ramifications for companies involved in a business restructuring which triggers the continuity of employment provisions for vulnerable workers in Part 6A of the Employment Relations Act 2000 (ERA).

The parties disputed which employees were eligible to transfer to the incoming contractor, LSG. One factor underlying the dispute was the level of transfer related costs inherited by the new employer, comprising transferring employees' accrued leave and redundancy entitlements. Under the law, these costs would transfer with the transferring employees and thus become LSG's liability. LSG had tendered for the contract then held by Pacific Flight Catering (PFC) without first requesting this information from PFC (and presumably failed to factor these costs into its tender), and therefore was concerned about its competitive financial position slipping as a result.

Implications for employers

Clearly, it is critical in a business restructuring situation caught by Part 6A for an incoming party to consider details of all transfer related costs before committing itself contractually. Transferring employees are entitled to continuity of employment on the same terms and conditions, and with their accrued leave entitlements.

The legislation provides for a right for certain qualifying parties to request disclosure of "employee transfer costs information" for the purpose of deciding whether to terminate an agreement or let it expire, negotiating an agreement, deciding whether to enter into an agreement or tendering for an agreement, where such actions would result in a restructuring. Essentially, it is the incoming employer in a business restructuring who is entitled to make such a request – this means the incoming contractor in a subsequent contracting situation; new contractor in a contracting out situation; service user in the case of contracting in; or purchaser/transferee in the case of the sale or transfer of the business. In a subsequent contracting situation, the incoming contractor can request the information from the service user, which in turn can require the outgoing contractor to provide the information.

Employee transfer costs information should include the number of employees entitled to transfer; their wages/salary and working hours; cost of service related entitlements (statutory and otherwise) and any other entitlements.

A prudent incoming party will want to request "employee transfer costs information" in relation to the restructuring at an early stage, prior to submitting a tender or deciding whether to enter into or terminate an agreement. This information allows the incoming party to factor into any proposal and/or commercial negotiations any costs related to the transfer.

All employees who will be affected by the restructuring are entitled to elect to transfer to the incoming party. If there is a mismatch between an outgoing party's restructure (and consequent reduction in staff) and the new employer's staff requirements, the new employer's recourse is to make any superfluous staff redundant.

Where a business is structured through dedicated teams of employees who service only one contract, it will be easy to ascertain which employees are directly affected by the restructure and therefore entitled to transfer. However, the issue is not so clear cut where employees have generic skills and are not dedicated to specific contracts, so that perhaps all employees have worked on and are familiar with the part of the business or contract that is the subject of the restructure. In these circumstances, the outgoing (existing) employer will need to identify how many of its employees will have no work following the restructuring. Based on that information, the employer has a "management prerogative" to decide how to restructure its remaining business and to select employees to be given the option to transfer according to its future requirements.

Vulnerable workers legislation – Part 6A

Part 6A provides continuity of employment protections for specified categories of "vulnerable" workers in the event of a business restructuring, which results in their work being performed by another employer. Restructuring includes first time contracting out, subsequent contracting, contracting in, and business transfers and sales.

Under the law, vulnerable employees (as defined) have a right to transfer to the new employer, as well as certain bargaining rights. Section 69I(2) provides that if an employee elects to transfer, then to the extent that the employee's work is to be performed by the new employer, the employee becomes an employee of the new employer on the same terms and conditions, and with accrued entitlements.

Vulnerable workers include employees who provide services in cleaning and food catering in any workplace, and laundry, orderly and caretaking services in specified workplaces.

The facts

PFC and LSG compete in providing catering services to airlines. LSG succeeded in a tender process for a service contract with Singapore Airlines, which PFC held at the time. The termination of the PFC agreement and signing of the LSG agreement amounted to subsequent contracting under Part 6A.

As a result of losing the Singapore Airline contract, PFC notified its employees that it would have to reduce staff numbers by up to 50%.

PFC employees were not dedicated to specific airlines. All employees had experience (and were competent to continue) working on the Singapore Airline contract. Given the reduction in its business, PFC carried out a selection process by reference to specified criteria which included ability to adapt, cross skill and work in different teams; leadership and the ability to work autonomously. Selected employees were given notice of the right to elect to transfer to LSG.

LSG objected to PFC's selection process, arguing that PFC owed (and breached) a duty of care to ensure that only and all affected employees were given notice of the right to transfer, and only in respect of the proportion of their employment working on catering for Singapore Airlines. In other words, rather than selecting certain employees to transfer on a full-time basis, PFC should have given all employees who had worked on the Singapore Airlines contract the option to transfer to LSG only for the portion of their working week spent on the Singapore Airlines contract. The employees would remain as part time PFC employees for the rest of the working week. LSG claimed that PFC's selection process allowed it to retain quality staff and pass on employees with larger accrued leave and redundancy entitlements.

No duty of care owed by outgoing contractor to incoming contractor

This was an application by LSG for an interim injunction, and therefore the Court was required to consider whether there was a serious question to be tried and which party the balance of convenience favoured.

The Court found that there was no serious question to be tried. Firstly, there was no duty of care between LSG and PFC. The relationship between the parties was based solely on the fact that some PFC employees elected to transfer to LSG due to the loss of the Singapore Airlines contract by PFC. The Court commented that the object of Part 6A was to protect vulnerable employees – not regulate conduct between competing businesses.

Further, LSG was to receive the right number and mix (in skill terms) of employees to perform the Singapore Airline contract. The Court applied the words "to the extent that the employee's work is to be performed by the new employer" in section 69I(2) to refer to all catering work, not just Singapore Airline catering work. This was because the nature of the work across airlines was substantially the same, and all PFC employees had worked on and were competent to work on the Singapore Airline contract.

The Court went on to find that given the urgency of the situation (PFC's contract with Singapore Airlines was due to expire in only 8 days), the balance of convenience favoured PFC. It would not be practicable for PFC to re-engineer its restructuring at this late stage. Further, it would be completely impracticable for competing businesses to share (and roster) a large number of employees to varying degrees.