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Redundancy: The times they are a changing….

Geoff Bevan

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.

Read more »

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:

  • Always start by looking at your employment agreements and policies.  Do those documents say anything about how redundancies need to be implemented?  If so, you need to follow what they say.
  • Always prepare a written business case saying why you are proposing to reduce staff, and why you have provisionally chosen the particular staff for redundancy.  This document will normally be provided to the employee.  The business case should give a clear picture of the situation now and what you are expecting if the proposal is implemented.  Cover both the bigger picture (financial / structural) and the affected employee’s particular work.  What work are they doing now?  How will this work be done in the future?
  • Make sure you have documents (such as financial accounts, or sales figures) to support the claims in your business case.  Either provide these at the start of the process or be prepared to hand them over on request.  Remember the employer has a proactive obligation to provide information relevant to the potential dismissal.   There are some exceptions, but these are currently fairly limited and the boundaries are fairly uncertain.   Ask what information the employee needs (and can reasonably expect to have) in order to have that conversation.
  • Consider getting some outside/independent views about your business rationale (even if you simply ask another manager in another part of the business to critically review your proposal).  That review doesn’t necessarily have to be detailed or expensive – you just need someone who will take a truly independent and common sense look at what you are saying, and ask hard questions.
  • As always, follow a proper process which allows for meaningful consultation.  Get professional advice about this if you need to.  The key message is simple: it’s fine to have a tentative view that your proposal is the best way forward and redundancies are needed, but the decision to make staff redundant can never be made until you have properly consulted.  Employers come unstuck when they first make the decision and then use the process simply as a way of getting to where they want to be. Take the process slowly, and have a genuine conversation with the employee about whether the business should or shouldn’t make them redundant. 
  • Merely telling the employee about your proposal and then asking if they have any other ideas will almost never be enough.   Ideally, consider some alternatives in your written business case, and clearly and simply explain why you don’t believe they are preferable.  Similarly, make sure that you genuinely consider any alternatives proposed by the employee and again clearly say why they are not preferred, if that is the case.
  • Watch your language.  Refer to the “potential”, “likely” or “proposed” redundancy. It’s a proposal, not a done deal.
  • If you need to selectstaff, remember that you need to consult about two separate topics: (1) should the proposed new structure go ahead and, if it does, (2) who should be selected for the new roles (and what should the selection process look like)?    
  • Ensure any selection process is fair and transparent, and the employee has the chance to comment on how that process will work before it goes ahead.  Exactly what information needs to be provided during that process is a contentious issue.  Currently the law suggests that employees might have a right to see your assessment about them and about other internal candidates.  Parliament is currently considering law changes which will set more sensible limits around the type of information employers have to provide.  
  • When filling new positions the law requires you to give your existing staff a clear preference. You must redeploy redundant employees to any available new position when they can reasonably do the role, even if some training is required.  Redundant employees often have the right to be directly offered new roles, even though those new roles are clearly different, or the employer could go to the market and find someone better (this is also a fairly new development, which often catches employers out).

A cautionary tale…

A 2013 case [1] 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. 

[1]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.


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