Redundancy Pay in New Zealand: How to Calculate What You Owe
New Zealand has no statutory redundancy pay formula — but collective agreements, individual employment agreements, and good faith obligations all create payment obligations. This guide explains how to calculate redundancy pay correctly under NZ law.
New Zealand has no statutory redundancy pay formula. The Employment Relations Act 2000 (ERA 2000) does not prescribe how much an employer must pay when making someone redundant. Unlike Australia (where the National Employment Standards set a minimum redundancy scale) or the United Kingdom (where statutory redundancy pay is mandated by length of service), NZ employers are not legally required to pay any redundancy compensation beyond accrued entitlements under the Holidays Act 2003 — unless their employment agreement says otherwise.
This surprises many people. It also means that the actual redundancy entitlements in any given situation depend entirely on what the employment agreement says.
This guide explains the framework for calculating redundancy pay in New Zealand, what you always owe regardless of agreement terms, and how to structure the final pay correctly.
What You Always Owe (Regardless of the Employment Agreement)
Three categories of payment are always owed at the end of employment, regardless of whether the termination is a redundancy:
1. Accrued Annual Leave
Under the Holidays Act 2003, every employee is entitled to be paid for all accrued but untaken annual leave on termination. The rate is the greater of:
For most salaried employees, OWP and AWE will be similar. For employees with variable pay (bonuses, overtime, commissions), AWE may be materially higher.
The formula is: weeks of leave owed × max(OWP, AWE)
Example: An employee has 2.5 weeks of untaken annual leave. OWP is $1,600/week. AWE is $1,750/week (due to recent project bonuses). You owe: 2.5 × $1,750 = $4,375.
2. Pay in Lieu of Notice
Unless the employee is working out their notice period, you owe pay in lieu of notice at the ordinary weekly pay rate. The ERA 2000 does not prescribe a minimum notice period — this is set by the employment agreement, subject to a general requirement that it be reasonable.
Most NZ employment agreements provide 4 weeks' notice. Senior roles often specify 6 to 13 weeks. Check the IEA (and any collective agreement) for the actual figure.
Example: Notice period is 4 weeks. OWP is $1,600/week. Pay in lieu of notice: $6,400.
3. Any Other Accrued Entitlements
This includes:
Redundancy Compensation: What the Employment Agreement Says
Contractual redundancy compensation is separate from the statutory entitlements above. Whether you owe it, and how much, depends entirely on the employment agreement.
Individual Employment Agreements (IEAs)
Look for a clause headed "Redundancy", "Termination by way of Redundancy", or "Severance". The clause will typically specify:
If no redundancy clause exists, there is no contractual entitlement to redundancy compensation. The employee receives their statutory entitlements only.
Collective Agreements (CAs)
Collective agreements typically provide more generous redundancy provisions than individual employment agreements. Common CA provisions include:
Where a collective agreement applies, it governs. The employer cannot substitute the CA terms with IEA terms for employees covered by the CA.
Worked Example: Calculating Redundancy Pay
Scenario: An employer is making a Customer Service Manager redundant. The employee has 6.5 years of service. Their employment agreement specifies:
Employee details:
Calculation:
| Component | Calculation | Amount |
|---|---|---|
| Redundancy compensation | 6 complete years × 3 weeks × $1,800 (capped: 18 weeks × $1,800) | $32,400 |
| Pay in lieu of notice | 4 weeks × $1,800 | $7,200 |
| Accrued annual leave | 3.2 weeks × max($1,800, $1,850) = 3.2 × $1,850 | $5,920 |
| Total | | $45,520 |
Note: the 18-week cap on redundancy compensation is applied — 6 years × 3 weeks = 18 weeks, which is exactly at the cap. If the employee had 7 years of service, the redundancy component would still be 18 weeks (not 21).
Common Calculation Mistakes
Using annual salary ÷ 52 instead of OWP
Some employers default to salary ÷ 52 as the weekly rate. This is often wrong. Ordinary weekly pay includes regular allowances and may be higher than base salary ÷ 52 for employees with regular additional pay components. Always start with OWP as defined in the Holidays Act 2003.
Ignoring AWE for annual leave calculation
The Holidays Act 2003 requires you to use the greater of OWP and AWE for annual leave on termination. Employers who always use OWP may underpay employees with variable income.
Counting partial years as full years
Most employment agreements specify "completed years of service" or "complete years". A 6.5-year employee typically receives 6 years' worth of redundancy compensation, not 6.5. Confirm what the agreement specifies.
Not checking for collective agreement coverage
Some employers assume an employee is on an IEA when they are actually covered by a collective agreement — particularly where the CA was in force before the employee's IEA was signed. Collective agreements bind all employees who are members of the signatory union and doing work covered by the CA.
Miscalculating annual leave accrual
Annual leave accrues from the employee's anniversary date, not the financial year. An employee who started on 1 March has their annual leave anniversary on 1 March each year, regardless of when your financial year ends.
Redundancy and Tax
Redundancy pay is taxable income in New Zealand. It is paid through the payroll in the normal way and is subject to PAYE. There is no special tax rate for redundancy payments under NZ law (unlike Australia, where eligible termination payments can receive concessional tax treatment).
If the redundancy payment pushes the employee's income materially above their usual rate for the pay period, consider using a secondary tax code or applying a lump-sum rate to avoid an underpayment of PAYE. Consult your payroll provider or accountant for the correct approach.
Documenting the Calculation
A written redundancy calculation is not legally required, but it is strongly recommended. When an employee challenges the final pay (which happens more than you might expect), the documented calculation is your first line of defence.
The document should include:
Keep this on the personnel file for at least 7 years (the ERA 2000 limitation period for wage and time records is 6 years; personal grievances must be raised within 90 days of the event).
Using Restructured for Redundancy Calculations
Restructured includes a built-in redundancy calculation tool for employees in the affected roles list. It:
The calculation is a starting point — not a substitute for reviewing the actual employment agreement clauses. But it reduces manual calculation errors and ensures the format is consistent across all affected roles.
*This guide provides general information about redundancy pay calculation in New Zealand and does not constitute legal advice. The correct calculation depends on the specific terms of the employment agreement. For advice on your situation, consult an employment lawyer or contact Employment New Zealand.*