Redundancy And Sick Leave In New Zealand: Employer Compliance Guide

Making roles redundant is never a fun part of running a business. But when an employee is on sick leave (or takes sick leave mid-process), things can get confusing quickly - especially if you’re trying to do the right thing while still keeping your business moving.

In practice, redundancy and sick leave questions usually come down to two things:

• Process: are you following a fair and lawful redundancy process (even if someone is unwell or away)?
• Payments and entitlements: what do you pay, what can you deduct, and what leave applies at what time?

This guide explains how redundancy and sick leave interact in New Zealand, what your compliance obligations look like as a small business employer, and the steps you can take to reduce risk (and stress) while treating people fairly.

Note: This article provides general information only and doesn’t take into account your specific circumstances. If you need advice about a particular situation, it’s best to get tailored legal advice.

Why Redundancy And Sick Leave Get Complicated

Redundancy is a form of termination where the job is no longer needed for a genuine business reason - for example, you’re restructuring, losing a contract, automating work, or closing a location.

Sick leave, on the other hand, is a minimum entitlement under the Holidays Act 2003 (once eligibility is met), and it’s also tied closely to your wider good faith obligations in the employment relationship.

These two issues collide because a redundancy process is not just an “end decision” - it’s a process you must run fairly. If the employee is off sick, you might be tempted to pause, push ahead without them, or assume they’re not engaging.

That’s where employers can get into trouble.

Common risk areas we see for small businesses include:

• Timing issues: starting or finishing redundancy while an employee is on sick leave can create allegations that the sickness was the “real reason”.
• Consultation mistakes: not giving the employee a genuine opportunity to provide feedback because they were absent or unwell.
• Paperwork gaps: not having a clear process or not aligning your steps with the employee’s Employment Contract.
• Final pay confusion: misunderstandings around notice, sick leave, annual leave, and what gets paid out.

The good news is: with a clean process and clear communications, you can usually manage redundancy and sick leave in a way that’s both compliant and practical.

What The Law Requires (In Plain English)

In New Zealand, redundancy is mainly governed by case law principles and the “good faith” obligations in the Employment Relations Act 2000, plus whatever is set out in the employment agreement.

Separately, sick leave minimum entitlements are governed by the Holidays Act 2003.

Even though redundancy is a “business decision”, you still need to follow a fair process. That generally means:

1) There Must Be A Genuine Business Reason

You should be able to clearly explain why the role (or positions) are no longer needed. Examples include:

• a downturn in work or revenue
• a restructure to improve efficiency
• loss of a major client or contract
• closure or relocation of a site

If the “real reason” is performance or misconduct, redundancy is usually the wrong pathway - and it can create significant legal risk.

2) You Need A Proper Consultation Process

A fair redundancy process usually involves:

• presenting a proposal and the reasons for it
• providing relevant information (so the employee can respond meaningfully)
• giving genuine time and opportunity for feedback
• open-mindedly considering feedback before making a final decision

Consultation isn’t just telling someone “this is happening”. It’s an actual opportunity for them to influence the outcome (even if the outcome is ultimately the same).

3) If You’re Selecting Between Employees, Use Fair Criteria

If you’re disestablishing one of multiple similar roles, you generally need fair selection criteria (skills, experience, performance history, qualifications, etc.) and you need to apply those criteria consistently.

This is a common point of dispute when a person is on sick leave, because absence can be (wrongly) used as a proxy for “less reliable” or “less available”. If absence relates to illness or disability, this can become particularly sensitive.

4) Notice And Termination Must Follow The Contract (And The Minimum Standards)

The employment agreement will usually set out notice periods and other termination terms. You also need to think about how final pay will be calculated (more on that below).

If you’re considering ending employment immediately and paying notice instead of requiring the employee to work it, make sure you understand how payment in lieu of notice works. In practice, this is safest where it’s allowed by the employment agreement or agreed with the employee - otherwise you can risk a breach of contract (even if you pay the money).

If you’re not sure your current documentation supports the steps you’re taking, it’s worth getting advice early, rather than trying to patch it up at the end.

Can An Employee Take Sick Leave During A Redundancy Process?

In most cases, yes - if the employee is entitled to sick leave and they’re genuinely unwell or injured, they can take sick leave even if a redundancy process is underway.

From a compliance perspective, the key is not to treat sick leave as “non-cooperation” by default. Instead, you should ask: can they still participate meaningfully?

When You Should Pause Or Adjust The Process

If the employee is too unwell to engage (for example, they’re hospitalised, heavily medicated, or dealing with an acute mental health episode), pushing forward without adjustments can create a real risk that the process is not fair.

Practical options can include:

• extending deadlines for feedback
• offering a phone or video consultation rather than an in-person meeting
• allowing a support person to attend
• providing information in writing, in clear and digestible form

If the absence relates to mental health, it’s worth being particularly careful about tone and process. Many workplaces now see employees taking time away for mental wellbeing, and your approach should be consistent with your health and safety duties. (If helpful, this can overlap with how you manage a mental health day off work in a compliant way.)

When You Can Continue (Even If They’re Away)

You don’t automatically have to freeze everything indefinitely. If you can show that:

• you provided the proposal and information,
• you offered reasonable ways for them to respond,
• you allowed reasonable timeframes (taking their situation into account), and
• you genuinely considered any feedback received,

…then you may be able to progress the process lawfully, even if the employee remains on sick leave.

The line between “reasonable adjustments” and “unreasonable delay” depends on the circumstances, so this is one of those points where tailored advice can be extremely valuable.

Can You Require Medical Certificates?

Employers can ask for proof of sickness or injury in certain situations under the Holidays Act 2003 and the employment agreement.

As a general rule, if an employee is sick for 3 or more consecutive calendar days, you can require proof (such as a medical certificate). If you want proof within the first 3 consecutive calendar days, you can generally only require it if you agree to pay the employee’s reasonable costs of getting that proof.

In a redundancy context, you should be careful not to use medical certificate requests as a pressure tactic. Keep it consistent with your usual policy and explain what you need and why (for example, confirming the employee is not fit to attend a meeting, rather than probing for unnecessary medical detail).

Can You Make Someone Redundant While They’re On Sick Leave?

There’s no blanket rule that says you can’t make a role redundant just because an employee is on sick leave.

But from a risk-management perspective, you need to be very clear that:

• the redundancy is for a genuine business reason, and
• you followed a fair process (including consultation), and
• the employee’s illness or absence was not the real reason for ending their employment.

In other words, it’s possible - but it’s also a situation where employers can face claims if the process is rushed or if communications are handled poorly.

Be Careful With “We Need Someone Who Can Be Here” Reasoning

Small businesses often feel the operational impact of absence more sharply than larger employers. That’s understandable.

However, if the driver is essentially “we need someone who isn’t sick”, that’s usually not redundancy - and it can raise complex issues (including potential discrimination risk). If the real concern is ongoing inability to perform duties due to health, that’s a different legal pathway and should be managed carefully.

Consider Redeployment And Alternatives

Part of a fair redundancy process is considering alternatives, which can include redeployment to another suitable role (if one exists).

If you’re also looking at alternatives like reducing hours across the team instead of making roles redundant, make sure you understand the rules around reducing staff hours - because changing hours is not something you can usually do unilaterally.

Final Pay: How Sick Leave And Redundancy Payments Interact

Final pay is one of the most common sources of disputes when redundancy and sick leave overlap, because employers and employees often assume different things about what gets paid out.

Here are the key components to think about.

1) Notice Period And Sick Leave

If the employee is sick during the notice period, the usual position is that:

• they can take sick leave (if entitled and genuinely unwell), and
• you still pay them as required (sick leave is paid leave), and
• the notice period generally continues to run unless your agreement says otherwise.

If you’d rather end employment immediately and pay out the notice, make sure you do it correctly - payment in lieu of notice is usually safest where it’s provided for in the employment agreement or agreed with the employee.

2) Sick Leave Is Not “Paid Out” On Termination

Unlike annual leave, sick leave is generally not paid out when employment ends. If an employee has unused sick leave at termination, it typically lapses.

That means if an employee is on sick leave up to (and including) their last day of employment, you pay sick leave for those days as they occur (subject to entitlement and evidence requirements), but you don’t add unused sick leave as a termination payout.

3) Annual Leave Must Be Paid Out

Any outstanding annual leave entitlement must be paid out in the final pay. This is where redundancy processes often create confusion, especially if an employer tries to “use up” annual leave to reduce the final payout.

If you’re considering directing an employee to take annual leave during a restructure or notice period, check the rules first - it’s not always straightforward, and the timing and notice requirements matter. (This is a common issue in forced annual leave situations.)

4) Redundancy Compensation: Only If It’s In The Contract (Or Agreed)

In New Zealand, redundancy compensation is not automatically required by law. Whether it is payable depends on:

• what the employment agreement says (if anything),
• any workplace policy that forms part of the employment terms, and
• what you negotiate as part of the process (sometimes businesses agree to an ex gratia amount to support a smoother exit).

If you’re not sure what applies, get advice before you put numbers in writing.

5) Deductions And Set-Offs Need To Be Handled Carefully

Final pay can involve deductions (for example, agreed overpayments, unreturned property, or other authorised deductions). But deductions are regulated, and the safest approach is to avoid making deductions unless you’re clearly authorised to do so.

If you’re in doubt, get legal advice first - especially during redundancy, where emotions and scrutiny are higher.

A Practical Compliance Checklist For Small Business Employers

If you want a simple way to pressure-test your approach to redundancy and sick leave, here’s a practical checklist you can run through.

Before You Start

• Confirm the business rationale: write it down in plain English and gather any supporting numbers or operational information.
• Check your employment agreement: notice periods, consultation clauses, redundancy compensation (if any), and policies.
• Plan a realistic timeline: allow time for genuine feedback, especially if someone may be on leave.
• Prepare your documents: proposal letter, supporting information pack, and meeting invite wording.

During Consultation

• Give real information: enough detail so the employee can understand the “why” and propose alternatives.
• Invite feedback and keep an open mind: don’t present it as a done deal.
• Make reasonable adjustments if the employee is on sick leave: extend timeframes, offer remote meetings, and confirm discussions in writing.
• Document everything: keep notes of meetings, copies of emails, and decisions with reasons.

Decision And Termination Steps

• Consider redeployment: check if there are any suitable alternative roles (even if slightly different) you can genuinely offer.
• Apply selection criteria fairly: if you’re selecting between employees, ensure the criteria are objective and consistently applied.
• Handle notice correctly: decide whether the employee will work notice or be paid out, and align that with the contract.
• Calculate final pay carefully: include annual leave payout, outstanding wages, and any other entitlements.

If You Need An Interim Option

Sometimes small businesses are trying to buy time (for example, a contract ends unexpectedly and cashflow is tight). You might be considering temporary measures before a restructure is final.

If you’re thinking about a short-term pause in work, make sure you understand what an employee stand down is (and when it may or may not be lawful), because getting that wrong can create wage and good faith issues.

When To Get Advice

It’s worth speaking with an employment lawyer early if:

• the employee is on extended sick leave or has raised a mental health issue
• you’re selecting between employees and there’s potential for dispute
• you’ve had performance concerns and want to ensure you’re using the correct pathway
• you’re unsure whether redundancy compensation is payable
• you want to offer a settlement and need it documented properly

In these situations, getting Redundancy Advice upfront can save you a lot of time (and cost) later.

Key Takeaways

• Redundancy and sick leave issues usually come down to running a fair process and getting entitlements right - not just making the business decision.
• You can generally progress a redundancy process while an employee is on sick leave, but you should make reasonable adjustments so they can participate meaningfully.
• You can make a role redundant while someone is on sick leave if the redundancy is genuine and the process is fair - but the risk level is higher, so documentation and communication matter.
• Sick leave is usually not paid out at the end of employment, but sick leave taken during the notice period is generally paid (if the employee is entitled and genuinely unwell).
• Annual leave entitlements generally must be paid out on termination, and directing employees to take annual leave has specific rules you need to follow.
• Getting the redundancy process and final pay wrong can expose your business to disputes, arrears, and legal claims - so it’s worth getting advice early, especially in complex or sensitive situations.

If you’d like help managing redundancy and sick leave issues the right way, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.