The reform implements recommendations from The New Zealand Initiative’s 2021 research note “Nothing Costs Nothing: Why unjustified dismissal procedures should not apply to the highly paid.” As I wrote in this column in 2021, protecting ordinary workers from arbitrary dismissal makes sense.
But extending these protections to highly paid executives has backfired. When senior management is underperforming, the whole business suffers. Poor leadership affects productivity, damages workplace culture, and ultimately threatens the viability of the enterprise.
Yet under current law, even before firing an underperforming CEO, boards must first develop a performance improvement plan, consult about that plan, and then monitor performance over an extended period. All the while, the business – and the jobs of ordinary workers – may be in jeopardy.
The timing of van Velden’s announcement could not be better. In 2014, the Productivity Commission singled out poor managerial capability as a critical factor in New Zealand’s low productivity growth. Nearly a decade later, the productivity gap between New Zealand and Australia continues to widen.
Studies show that overly stringent dismissal regulations come with hidden costs for employees. They reduce wages and salaries. They also increase the average duration of job seekers’ unemployment. That is because firms factor in the costs and risks of potential dismissals when making hiring decisions and setting wages. Making dismissal processes more flexible at the senior level should benefit all workers.
The consequences of poor management are clear in day-to-day business operations. Australian boards and business owners can act decisively when things are not working out with senior staff. But here in New Zealand, they must navigate a procedural minefield.
The reform also has solid international support. The International Labour Organisation has accepted Australia’s high-income exclusion because it applies to “persons in executive positions or positions of responsibility or trust.” New Zealand’s new approach follows this proven model.
Importantly, high-income earners will not be left without legal protection either. They retain both their personal grievance rights for discrimination and harassment and their common law rights to bring actions for wrongful dismissal if their employer breaches their employment contract.
The current reform improves on past attempts at change. In 2017, National MP Scott Simpson’s private members’ bill attempted to address the issue but was ultimately voted down. That bill proposed letting employees earning over $150,000 opt out of all personal grievance provisions. Its approach was too broad. It affected all types of personal grievances, not just unjustified dismissal. The opt-out mechanism was also too complex.
Van Velden’s reform is more targeted and practical. The $180,000 threshold is lower than the $250,000 threshold recommended in the Initiative’s research note but aligns with the Government’s current top tax rate threshold. It will be adjusted annually with average weekly earnings. At this level, the threshold captures only about 3.4% of the workforce. These are the senior executives and technical specialists whose roles have outsized impacts on business performance. The $180,000 threshold ensures the reform targets only those in genuine leadership positions.
This indexation approach differs from Australia’s, where the high-income threshold is adjusted through regulatory changes. Van Velden’s proposed automatic adjustment will provide greater certainty and predictability for both employers and employees.
The reform also introduces welcome flexibility. Employers and employees remain free to negotiate their own dismissal procedures or opt back into the standard protections. This provision recognises that one size may not fit all and ensures that protections remain available by mutual agreement.
Critics may argue the reform undermines workers’ protections. But that would be missing the point. The current regime puts ordinary workers’ jobs at risk by making it harder to address poor performance at the management level. A failing business puts everyone’s employment at risk, regardless of their dismissal protections. And the new regime will still protect ordinary workers from unjustified dismissal.
The reform should also create more opportunities for career advancement. Employers are especially cautious about hiring and promoting senior staff when employment protection laws make it hard to fire underperforming senior management. Now, employers will be more willing to give promising candidates a chance in senior roles, knowing they can make changes if needed.
Some may question whether New Zealand should follow Australia’s lead on labour market reform. But this flexibility may help explain why Australian workers are about 30% more productive than their Kiwi counterparts. And they earn commensurately more.
The Government deserves credit for tackling this issue. Excluding high-income earners from unjustified dismissal protections is a significant step in the right direction. It shows the Government understands that sometimes doing less can achieve more.
Removing impediments to good business leadership will benefit workers at all levels of the workforce. This reform is a win for both businesses and workers – and for New Zealand’s productivity.
