Redundancy in New Zealand: What employers must pay and how to manage it

Published Thursday 23 July 2026

Table of contents

• What is redundancy pay in New Zealand?
• Do you have to pay redundancy compensation in NZ?
• What is a fair redundancy process in NZ?
• How do you calculate final pay and redundancy entitlements?
• How do you communicate and document the process?
• Simplify redundancy payroll and final pay with Xero
• FAQs on redundancy pay in New Zealand

Key takeaways

• There is no statutory redundancy compensation under NZ law; only contractual redundancy entitlements where agreed.
• Follow a fair redundancy process in NZ: consult in good faith, apply clear selection criteria, and consider redeployment before deciding.
• Final pay must cover notice, outstanding annual leave, alternative holidays, and earned amounts; tax any compensation as extra pay.
• Standardise steps, letters, and records to simplify compliance and reduce risk during redundancy consultation in NZ.

What is redundancy pay in New Zealand?

Redundancy in New Zealand occurs when a role is no longer needed for business reasons, not because of the employee's performance or conduct. Common triggers include restructuring, downsizing, technology changes, or the closure of a location or business unit. When a position is disestablished, the employee's job ceases to exist, and the employment relationship ends.

Unlike some countries, redundancy pay law in NZ does not require employers to pay statutory compensation simply because a role is made redundant. Instead, redundancy entitlement in NZ arises only where the employment agreement, collective agreement, or workplace policy explicitly provides for it. If your contract or policy promises redundancy compensation, often expressed as a number of weeks' pay per year of service, you must honour that commitment.

Regardless of whether contractual redundancy pay applies, employers must always pay final pay obligations. These include:

• notice pay (or pay in lieu if the employee leaves before serving notice)
• outstanding annual leave accrued under the Holidays Act 2003
• alternative holidays for public holidays worked but not yet taken
• earned wages, commissions, or bonuses up to the last day of employment
• any other amounts owed under the employment agreement

Final pay is a legal requirement. Redundancy compensation, if any, sits on top of that. Understanding this distinction is the first step toward managing redundancy clearly and compliantly.

Do you have to pay redundancy compensation in NZ?

You don't have to pay redundancy compensation unless you have agreed to it in an employment agreement or policy. New Zealand employment law doesn't impose a statutory minimum redundancy payment. If your employment agreement, collective agreement, or written policy is silent on redundancy compensation, you are not legally required to pay it.

However, you might include redundancy clauses in your employment agreements to attract and retain staff, or because industry norms or collective agreements set expectations. Common formulas include:

• Weeks per year of service: for example, two weeks' gross pay for each completed year, capped at a maximum (such as 12 or 16 weeks)
• Fixed lump sums: a set amount regardless of tenure
• Tiered scales: higher compensation for longer service or senior roles

If your agreement or policy contains such a clause, it becomes a binding contractual obligation. You must calculate and pay the redundancy entitlement accurately, alongside all final pay items. Failing to do so can lead to a personal grievance claim for unjustified dismissal or breach of contract.

Even when no contractual redundancy pay exists, you still owe notice (the period stated in the agreement, or reasonable notice if none is specified), accrued leave, and any other earned amounts. These final pay obligations are non-negotiable and governed by the Holidays Act 2003 and the Employment Relations Act 2000.

What is a fair redundancy process in NZ?

A fair redundancy process in NZ is one that meets both the substantive and procedural tests for justified dismissal. Substantively, the redundancy must be genuine, driven by real business reasons, not a pretext to remove an employee. Procedurally, you must act in good faith, consult meaningfully, apply objective selection criteria, and consider redeployment before finalising the decision.

Redundancy as a last resort

Redundancy should only be used when there is no reasonable alternative. Before beginning a formal process, you're expected to genuinely consider whether the role can be saved through other means.

Alternatives worth exploring before proceeding include:

• reducing hours or moving to part-time arrangements
• redeploying the employee to a different role within the business
• offering voluntary redundancy to other staff
• pausing non-essential recruitment or contractor spend

If you genuinely consider these options and document your reasoning, you're more likely to show the redundancy process was fair and justified. Document the alternatives you considered and why they weren't viable before moving to the next step.

Core elements of a fair process

The following elements form the foundation of any fair redundancy process in New Zealand:

1. Genuine business reason: Document the commercial, operational, or strategic driver, for example, reduced demand, cost pressures, or technology change. The reason must be real and demonstrable.
2. Good faith consultation: Notify the affected employee(s) in writing, explain the proposal, invite feedback, and genuinely consider their input before deciding. Consultation is not a tick-box exercise; it must be open-minded.
3. Objective selection criteria: If choosing between employees in similar roles, apply fair, transparent criteria (for example, skills, performance, qualifications, length of service). Avoid subjective or discriminatory grounds.
4. Consideration of redeployment: Actively look for suitable alternative roles within the business. Offer any vacancies that match the employee's skills and experience, and allow reasonable time to consider.
5. Reasonable notice or pay in lieu: Provide the notice period in the agreement, or reasonable notice if none is specified. Pay in lieu if you require the employee to leave immediately.
6. Clear, written decision: Confirm the redundancy in writing. State the reasons, outline final pay and entitlements, and explain the employee's right to raise a personal grievance.

Steps to run a fair redundancy process

Follow these steps to ensure your redundancy process meets legal requirements and demonstrates good faith:

1. Prepare the business case

Document why the role is no longer required. Gather financial reports, restructure plans, or strategic reviews to support your rationale. Ensure the decision is business-driven, not personal. This documentation becomes crucial if the employee challenges the redundancy later.

2. Set objective selection criteria

If more than one person could be affected, define clear, measurable criteria in advance (for example, qualifications, performance ratings, skills match). Apply them consistently and keep records. Avoid criteria that could be seen as discriminatory or subjective.

3. Consult in good faith

Write to the employee(s) outlining the proposal, the reasons, and the proposed timeline. Invite them to a meeting, allow them to bring a support person, and genuinely listen to their concerns or alternatives. Document all consultation steps. This is your opportunity to demonstrate that you're open to feedback and alternative solutions.

4. Assess redeployment options

Review current and upcoming vacancies. Offer suitable roles in writing, provide job descriptions, and allow reasonable time for the employee to consider. If no suitable role exists, document your search. The employee must have a genuine opportunity to consider alternatives before the redundancy proceeds.

5. Consider feedback and decide

Weigh the employee's submissions and any new information. If you proceed, confirm the redundancy in writing. If you change course, explain why and document the outcome. This step shows that consultation was meaningful, not just a formality.

6. Confirm the decision and pay final entitlements

Issue a formal redundancy letter, calculate final pay (including any contractual redundancy compensation), and process payment promptly. Provide a detailed breakdown. Clear communication at this stage helps maintain the employment relationship's dignity.

7. Document the process

Keep a complete file: business case, consultation letters and notes, selection records, redeployment evidence, decision letter, and final pay calculations. Retain these for at least six years. Good documentation protects you if the employee raises a personal grievance.

Common consultation mistakes to avoid

These common errors can undermine an otherwise fair redundancy process:

• Pre-determining the outcome: Deciding to make the role redundant before consulting makes the process misleading when consultation must be genuine.
• Vague or shifting criteria: Applying subjective criteria, or changing criteria mid-process, undermines fairness and invites challenge.
• Rushed timelines: Giving insufficient time for the employee to respond or consider alternatives can render consultation inadequate.
• Poor record-keeping: Failing to document consultation meetings, redeployment searches, or selection rationale leaves you exposed if a grievance is raised.
• Ignoring alternatives: Not genuinely exploring redeployment, reduced hours, or other options can make the process procedurally unfair.

Avoiding these pitfalls reduces legal risk and demonstrates respect for the employee, even in difficult circumstances.

How do you calculate final pay and redundancy entitlements?

Calculating final pay and any contractual redundancy entitlement in NZ requires precision. The process has two parts: first, work out the statutory final pay items owed under the Holidays Act 2003 and the employment agreement; second, add any contractual redundancy compensation if applicable. Present both clearly in the final pay statement.

Calculate final pay step by step

Final pay must include all amounts the employee has earned or accrued up to the last day of employment. Key components include:

1. Notice pay or pay in lieu: If the employee works their notice period, pay their regular wages for those days. If you require them to leave immediately, pay in lieu of notice, that can be gross pay for the notice period stated in the agreement, or a reasonable period if none is specified.
2. Outstanding annual leave: Calculate any accrued but untaken annual leave at the employee's ordinary weekly pay or average weekly earnings (whichever is greater). The Holidays Act 2003 sets the formula.
3. Alternative holidays: Pay out any alternative holidays owed for public holidays worked. These are valued at a relevant daily pay or average daily pay rate.
4. Earned wages, commissions, or bonuses: Include any unpaid wages, commissions earned up to the termination date, or pro-rated bonuses if the agreement or policy entitles the employee to them.
5. Lawful deductions only: Deduct only amounts the employee has authorised in writing (for example, repayment of an advance) or that you are legally required to deduct (like tax, student loan repayments, KiwiSaver contributions). You cannot offset other amounts without consent or a court order.

Add contractual redundancy compensation

If the employment agreement or policy provides for redundancy compensation, calculate it according to the formula stated. Common examples include:

• Two weeks' gross pay per year of service, capped at 12 weeks: An employee with five years' service earning $1,000 per week gross would receive 5 × 2 = 10 weeks, or $10,000 gross.
• Fixed lump sum: For example, $5,000 regardless of tenure.
• Tiered scales: Higher rates for longer service (for instance, one week per year for zero-to-five years, two weeks per year for five-plus years)

Always use gross pay (before tax) as the basis, and apply the formula to completed years of service unless the agreement specifies otherwise. If the agreement is ambiguous, seek legal or HR advice before finalising the calculation.

Tax on redundancy pay in NZ

All final pay items, including notice, leave, and any redundancy compensation, are subject to PAYE (Pay As You Earn) income tax. Inland Revenue (IR) treats redundancy payments as extra pay, which means you must:

• Apply the employee's tax code to the total payment.
• Deduct student loan repayments if the employee has a student loan (at the standard 12% rate on amounts over the threshold).
• Check KiwiSaver settings, as redundancy compensation is generally not subject to KiwiSaver contributions, but final pay for notice and leave is.

File the final pay details via payday filing as you would for any regular pay run. Include the gross amounts, PAYE, student loan deductions, and KiwiSaver contributions (if applicable) in your employment information return.

For tax and compliance queries, consult Inland Revenue's guidance on lump sum payments and final pay.

Worked NZ examples

You’re only required to pay out redundancy compensation where it’s covered in the employment agreement, collective agreement, or workplace policy. Here’s an example of how to work out how much redundancy compensation to pay when it is included in a contract, agreement, or policy:

Contractual redundancy compensation working:

• Employee: John, five years' service, $1,500 per week gross, four weeks' notice
• Agreement: provides two weeks' pay per year of service (max 12 weeks)
• Notice: 4 weeks × $1,500 = $6,000
• Annual leave: 2 weeks accrued × $1,500 = $3,000
• Alternative holidays: nil
• Subtotal: $9,000
• Redundancy compensation: 5 years × 2 weeks = 10 weeks × $1,500 = $15,000
• Gross final pay: $9,000 + $15,000 = $24,000
• PAYE and deductions: Apply John's tax code to $24,000 (lump sum tax rules may apply; assume 33% for illustration) = $7,920 PAYE; student loan 12% on amount over threshold (assume $2,000 over) = $240; KiwiSaver on $9,000 only (3% employee, 3% employer on notice and leave, not on redundancy compensation).
• Net pay: Approximately $15,840 (exact amount depends on tax code, thresholds, and KiwiSaver settings)

This example illustrates the importance of clear calculations and correct tax treatment. Always verify tax codes, thresholds, and KiwiSaver rules with IR or your payroll provider before processing final pay.

How do you communicate and document the process?

Clear, timely communication and thorough documentation are essential to a fair redundancy process in NZ. They demonstrate good faith, reduce misunderstandings, and protect you if the employee raises a personal grievance. Every step, from the initial proposal to the final pay statement, should be confirmed in writing and filed securely.

Required records to keep

Maintain a complete redundancy file for each affected employee, including:

• Business case and rationale: the strategic or operational reasons for the redundancy, supported by financial data, restructure plans, or board minutes
• Consultation letters and notes: copies of all written communications (proposal letter, meeting invitations, decision letter) and detailed notes of consultation meetings, including the employee's questions, concerns, and any alternatives they proposed
• Selection criteria and application:how criteria were applied, and the scores or assessments for each person
• Redeployment evidence: records of vacancies reviewed, roles offered, and the employee's responses (if no suitable role was available, note the search conducted and why no match was found)
• Notice and termination letters: copies of the formal redundancy decision letter, notice period confirmation, and any correspondence about the employee's last day
• Final pay breakdown: a detailed statement showing gross pay, PAYE, student loan deductions, KiwiSaver contributions, and net pay, broken down by component (notice, leave, redundancy compensation)
• Payday filing confirmation: evidence that you filed the final pay details with IR via payday filing, including the date and confirmation number

Retain these records for at least six years from the date of termination. The Employment Relations Act 2000 allows employees to raise a personal grievance within 90 days of the dismissal (or later if the employer consents to the grievance being raised after that period), so good records are your best defence.

Support options for employees after redundancy

Once redundancy is confirmed, directing your employee to available support is a practical and respectful step. It doesn't change your legal obligations, but it demonstrates good faith and can ease the transition for both parties.

Point your employee toward:

• Work and Income New Zealand: The Work and Income New Zealand portal provides income support, job seeker assistance, and retraining options for people who have lost their job.
• Employee Assistance Programme (EAP): If your business has an EAP in place, remind the employee they can access confidential counselling and career support.
• Career services: Community employment services and career advisors can help with CV preparation, job search, and skills assessment.
• Inland Revenue (IR): If the employee has questions about the tax treatment of their final pay, direct them to IR's guidance on lump sum payments.

You're not legally required to arrange these services, but signposting them in writing as part of your final communication adds to your record of good faith conduct.

Simplify redundancy payroll and final pay with Xero

You can use Xero to track employee earnings, leave, and final pay so you handle redundancy payments accurately and on time.

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FAQs on redundancy pay in New Zealand

Below are answers to common questions about redundancy pay, final pay, and the redundancy process in New Zealand. These FAQs complement the guidance above and help you navigate the practical and legal details with confidence:

What is the difference between redundancy and dismissal?

Redundancy is when you end a role for genuine business reasons and the job, not the person, disappears. Dismissal for cause is when you end employment because of the employee's conduct or performance, and it follows a different process with no redundancy pay.

Can I make a role redundant and then hire someone else to do similar work?

This is risky and can be challenged as a fake redundancy. If the role genuinely ceases to exist and you later create a different role with different duties or responsibilities, that may be defensible. However, if you simply rename the position or hire someone to do substantially the same work, the redundancy may be deemed unjustified.. If you need to fill a similar role soon after, seek legal advice before proceeding.

How much notice must I give for redundancy?

The notice period is set by the employment agreement. If the agreement specifies a notice period (e.g., two weeks, four weeks), you must provide that. If the agreement is silent, you must give reasonable notice, which is typically at least one to four weeks, but can be longer for senior or long-serving employees.

Do I have to pay redundancy compensation if the employee resigns before I make them redundant?

If the employee resigns voluntarily before you finalise the redundancy decision, they are not entitled to redundancy compensation (unless the agreement or policy says otherwise). However, if the employee resigns because you have clearly signalled the redundancy is inevitable and they feel they have no choice, this may be treated as a constructive dismissal, and they could claim redundancy entitlements.

What happens if I cannot afford to pay the redundancy compensation stated in the agreement?

Contractual redundancy compensation is a debt you owe the employee. If you cannot afford to pay it, you should seek legal and financial advice immediately. Options may include negotiating a payment plan with the employee (in writing), seeking short-term funding, or restructuring the business. Failing to pay a contractual entitlement can lead to a personal grievance claim, a debt recovery action, or insolvency proceedings.

Can I reduce redundancy compensation if the employee finds a new job quickly?

No, unless the agreement or policy explicitly allows it (which is rare). Redundancy compensation, if contractual, is owed in full regardless of the employee's post-employment circumstances.