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NZ CA is an association of independent Chartered Accounting firms, proactively working together for the benefit of our clients.

Managing Risk in an uncertain economy

Published: 16th September 2019

Author: KnowHow.co.nz

A significant number of clients over the last two months have been reducing their staffing levels in response to a weakening and uncertain economy.

Reasons for Restructuring
● Increases in the minimum rate from $15.75 in 2017 to $17.70 at 1 April 2019
● Anticipating the minimum rate increases in 2020 and 2021 (indicative rates of $18.90 and $20 respectively)
● Relativity pressure on wages as a result of the minimum rate increases and living wage pressure
● Increased regulation resulting in business decisions to shrink overheads, maintain profitability and “wait it out”
● A move to automation
● Moving work offshore because of cost and regulation (Thailand, Samoa)
● A drop in tourism numbers causing reduced sales volumes

As one client (GM of a very large international retailer) put it:
‘The crazy thing is what these people don’t realise, is that companies won’t simply increase their over all wage costs, they will simply pay the extra money to the staff and then reduce staff numbers, meaning 2 out of 3 staff members will be earning more money, but one poor staff member will end up on the dole queue.’

In this substantial and well run business, the minimum wage increases, and associated relativity pressures will see $4.0 million over 4 years added to payroll. Money will be taken from other areas; job loss will continue; expansion and capital expenditure will be delayed.

Other restructures have not been driven by the minimum wage. Rather, Boards have decided that with a raft of industrial reforms in the pipeline and regulatory tightening, it is better to strip costs out, manage profitability with less capital risk, and wait for the current environment to pass.

Impact of a Weakening Economy
Job creation numbers have slumped – 10,000 a month in 2017 and negative 4000 in the last quarter.

The unemployment numbers released this week are not consistent with what business owners are saying, nor does it add up to the significant job loss seen at close range. But data takes time to work through and if the OCR does not work its magic, we are picking the next set of numbers will be different.

Tax increases, wage pressure, spending, regulation, business confidence at GFC levels – add this to the tensions in the international sphere and it is no wonder we are hunkering down.

We have our hands in our pockets, carefully evaluating any new expenditure and delaying. We are unsure what the Reserve Bank will do if they run out of basis points.

Time to Evaluate
For employers it is time to evaluate. Companies who knew their numbers and took early steps to contain costs and limit expenses managed through the GFC. They did not “cut into the muscle” but protected their core business and their key people by reducing all costs that could be stripped out–
and they didn’t dally – they acted.

It is important to continually assess a business in terms of underutilised resource, unnecessary costs, non-essential work, waste, and options to do things differently and more efficiently.

If there are changes you can make to protect your business in a weakening economy, and if that involves restructuring of employee positions, to protect the business as a whole, there are a few factors to consider:
● Having seen the “death by a thousand cuts” approach our advice is - if you are going to make changes – make them all at one time. If you make a series of changes over a period of months employees are likely to question their security, the viability of the business, the intelligence of management in not getting it right first time. Good employees will be waiting for the next raft of changes and assessing whether they should go before they are pushed.
● Employees become unsettled, concerned for their own security and afflicted by “survivor guilt”. It is particularly relevant in small, close teams and can affect the morale and productivity for some time.
● Employers need to factor in the impact on cashflow of the payment of annual leave entitlements and notice periods.

Risks of Getting it Wrong
There are strict requirements regarding consultation, providing relevant information and potential redeployment options before an employer can reach a decision to disestablish positions. It’s not rocket science but it is reasonably intricate.

If the process is found to be flawed and the outcome predetermined, employers face the risk of a personal grievance (PG) claim for unfair or unjustified dismissal. The financial risks of a PG are significant.

If a claim is successful the penalty, is a minimum of 3 months’ pay. There are now bands for compensation for hurt and humiliation which are differentiated by the level of damage or injury:
● Band 1 (low level damage or injury): awards up to $10,000;
● Band 2 (mid-level damage or injury): awards between $10,000 and $40,000; and
● Band 3 (high level damage or injury): awards above $40,000.

Add to this representation costs at Mediation or the Employment Relations Authority and the time and stress involved for you – it is not worth getting it wrong.

The economy is weakening. Whether we maintain modest growth or dip into recession there is always an argument to operate with the most efficient cost structure.

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