September 2014. . . In the last couple of years we have seen some major shifts in redundancy case law. It is now more difficult to make staff redundant, and employers are at greater risk of facing personal grievance claims from redundant employees.
The key change is that the Employment Relations Authority or Court will now look more closely at the employer’s commercial reasons for making staff redundant.
Up until recently, the courts largely accepted the employer’s commercial reasons for the redundancy, so long as those reasons were genuinely held and not simply invented to hide ulterior motives. To a significant extent the courts recognised that the employer was free to organise its business, as it saw fit.
This has shifted. The employer’s business case will now be examined more closely; the Authority or Court will ask whether or not a fair and reasonable employer could make this business decision. If the answer is “no” then the dismissal will be unjustified, and the employer potentially faces substantial compensation for lost earnings, hurt and humiliation and legal fees.
This change in approach from the courts gives well-advised employees much greater scope to challenge proposed redundancies, request information and (if they wish) slow the process down. It also means that any subsequent Authority or Court hearings are likely to be longer, and more expensive.
The key point that employers have to think harder and more clearly about their business reasons for proposing redundancies. Their reasoning need to be robust and clearly documented, before the redundancy process starts.
As well, employers still need to meet all other legal requirements when making staff redundant. These requirements include:
Click below for more information, including some more practical advice and an example of how the law applies.
Practical advice: what do employers have to do?
When making staff redundant employers need to have robust reasons which make sense and can withstand scrutiny. Employers should expect to have their business decisions challenged and questioned by the employee or their lawyer, and by the Authority or Court.
Here are some brief and general practical tips:
A cautionary tale…
A 2013 case  illustrates what can go wrong for employers, and how even accountants can (apparently) get the numbers wrong.
An accounting firm made a staff member redundant. The employee had been hired less than a year before, and was promised “long term” work.
The employee took her case to the Authority and initially lost. However she then appealed to the Court and won a large victory. The employer had to pay her $65,000 in lost earnings, $20,000 in compensation and $16,000 costs.
The employee was made redundant because, amongst other things, the accounting firm believed it was making a $60,000 loss, and that its financial position had worsened after the employee had been hired. However it later emerged that the employer had made a mistake: the firm was in fact going to make a $60,000 profit.
That error made all the difference. While the employer’s profitability was poor, the Court said that this had been the case for some time, and that there was no evidence that the employer’s position had deteriorated significantly since the employee was hired. Rather, the firm made a mistake when it hired the employee. The Court said that the business would not have taken on another staff member if it had understood its true financial situation at the time.
The Court also did not accept the employer’s claim that its staff were not busy. The Court found the employer had acted too quickly and had involved the employee in the redundancy process because of a mistaken belief that it had to use a “last on/first off” principle.
For these reasons the Court said that the employer had not met the required standard, and that the dismissal was unjustified.
Important note: This article is necessarily brief and general. It is not a substitute for legal advice about your specific situation, and should not be used or relied on as such.
Brake v Grace Team Accounting Limited. See also Simon Maxwell Edwards v Two Degrees Mobile Limited andTotara Hills Farm v Hamish Davidson, reinterpretingSimpsons Farms Ltd v Aberhart andGN Hale & Sons Ltd v Wellington Caretakers IUOW.