Posted on: Nov 24, 2014

An important Court of Appeal decision has been released which changes the substantive justification for redundancy

Introduction

The statutory test of justification, which requires the analysis of “what a fair and reasonable employer could have done in all the circumstances” is to be applied to all dismissal situations. A dismissal for redundancy requires the same level of justification as that of a dismissal for misconduct or any other reason. Despite this seemingly equal requirement for justification in law, what we have been seeing in practice is that an employer’s decision to dismiss for redundancy has been somewhat less scrutinised by the Courts than a decision to dismiss for cause, without any real requirement for the employer to prove their business case, other than to show that it was ‘genuine’ and not constructed out of ulterior motives. However, this law has now changed as a result of a Court of Appeal decision that has been released.

The early days

During the 1980’s there were many redundancy cases examined which involved an investigation into the commercial nature of the redundancies. The result was that an employer’s decision to terminate employment for redundancy must be genuine, unavoidable and fair and reasonable in all the circumstances or the dismissal may be unjustified.

The G N Hale & Son Ltd v Wellington etc Caretakers etc IUW [1] judgment cleared up the Labour Court’s earlier suggestion that for a redundancy to be justifiable it must be ‘unavoidable’, as in they could only arise where the employer’s capacity for business survival was threatened.

The Court of Appeal corrected this law in the Hale judgment, where Cooke P said:

… this Court must now make it clear that an employer is entitled to make his business more efficient, as for example by automation, abandonment of unprofitable activities, re-organisation or other cost-saving steps, no matter whether or not the business would otherwise go to the wall… The personal grievance provisions … should not be treated as derogating from the rights of employers to make management decisions genuinely on such grounds. Nor could it be right for the Labour Court to substitute its own opinion as to the wisdom or the expediency of the employer’s decision. When a dismissal is based on redundancy, it is the good faith of that basis and the fairness of the procedure followed that may fall to be examined on a complaint of unjustifiable dismissal … the Court and the grievance committees cannot properly be concerned with an examination of the employer’s accounts except in so far as it bears on the true reason for dismissal. [Emphasis added]

This created the new approach in determining substantive justification for redundancy that the Authority or the Court could only inquire as to the genuineness of the employer’s decision and the procedure adopted, and were not to substitute their views on management decisions for those of the employer, provided the redundancy was not a charade.

The statutory test of justification

Since the Employment Relations Act (No 2) 2004 came into effect in December 2004, the test of justification has been qualified by s 103A that provides that the question of whether a dismissal or an action was justifiable must be determined, on an objective basis, by applying the test of whether the employer’s actions, and how the employer acted, were what a fair and reasonable employer could have done in all the circumstances at the time the dismissal or action occurred. The Courts therefore needed to re-examine the standard for determining justification of a dismissal in light of the new legislation.

The Employment Court’s first interpretation of s 103A was in the context of an unjustified dismissal claim in Air New Zealand v Hudson [2] ,where the defendant was a customer service agent employed by Air New Zealand at Auckland International Airport. In this case the Court found Air New Zealand’s investigation of the main allegation was seriously flawed, and was not conducted in a way that a fair and reasonable employer would have conducted it. Further, it concluded that Air New Zealand did not weigh all the circumstances under which the alleged misconduct occurred.

In reaching its decision, the Court reviewed the development of the common law relating to justification for dismissals prior to the enactment of s 103A, and provided a summary of the position. This included acknowledging that the early common law tests had required the Court objectively to assess the justification for dismissal and to balance a number of factors to determine whether it was justified, however, that later the test evolved to give the employer considerably more discretion to dismiss. By 2000, the role of the Employment Relations Authority and the Court had been become somewhat limited by common law to reviewing the reasonableness of the employer’s decision in each case to assess whether it fell within a range of options rather than focusing on all of the circumstances which, in the past, had been found to have been relevant.

The Court then went on to intrepret the new legislation and concluded that the effect of s 103A was to separate out the employer’s actions for consideration. It required the Authority or the Court to consider those actions against what a fair and reasonable employer would have done. On the face of it, s 103A widened the Court’s inquiry to enable the employer’s subjective decision to be examined against a universal objective test rather than an individualised subjective one and in the light of all relevant circumstances. The conclusion was that s 103A gave the Court an opportunity to objectively evaluate the subjective decisions of an employer against the standard of a ‘hypothetical’ fair and reasonable employer.

In Simpsons Farms Ltd v Aberhart [3] the Employment Court first considered how the s 103A test applied in relation to dismissals for redundancy. It was found that the test did apply to redundant situations, and not just to dismissal for cause. However, the Court did not consider that the statutory changes we intended to revisit longstanding principles about substantive justification for redundancy exemplified by judgments such as Hale. So long as an employer acted genuinely and not out of ulterior motives, a business decision to make positions or employees redundant is for the employer to make and not for the Authority or Court, even under s 103A.

So following Simpsons Farms, employers were somewhat safeguarded in that as long as they conducting a genuine redundancy, then the substantive reasoning for that redundancy was not going to be scrutinised by the Court.

The times are changing

In 2013 the case of Rittson-Thomas T/A Totara Hills Farm v Hamish Davidson [4] came along to start shaking things up. In this case, Chief Judge Colgan confirmed that the test of what a fair and reasonable employer could have done in all the circumstances does applyto the substantive reasoning for redundancies. This was a new proposition to consider. Chief Judge Colgan noted that some enquiry into the employer’s decision is required, in order to establish that a hypothetical fair and reasonable employer could also make the same decision in all of the circumstances. This was the first real indication that the law relating to redundancies was changing.

Closely after the Employment Court’s position in the Totara Hills Farm case was decided, Brake v Grace Team Accounting Ltd [5] went before the Employment Court. This was a very unfortunate case, where the employee was offered a role with Grace Team Accounting Ltd (GTA) despite at the time being in a secure position at KPMG, whom she had worked for over eight years. The employee did not actively seek out a new position, but simply made an enquiry regarding the salary for the role that was advertised. She had not received a response to her enquiry so had left it at that until GTA contacted her to invite her to attend an interview. She was then offered a position, and despite replacing an employee going on maternity leave, it was confirmed with her that the position was permanent. It was even specified in writing that GTA envisaged her position “would be long term”.

Approximately six months after commencing her new position, GTA became concerned about their finances. This prompted a need to restructure the business, and a professional, external advisor was called in to assist with this process. It was decided that, Ms Brake’s position would be made redundant based on a “last on/first off” approach.

The employee was called into a meeting and informed that due to the recession impacting on the business, they were considering a restructure proposal in which Ms Brake’s position may be surplus to their requirements. She was then given time off work to consider the proposal and told a further, formal meeting would be held to explain to her the details of the proposal and seek her feedback.

Totally non-circumstantial as it turns out, the employee had told the employer of her long-term health issues (which were not affecting her work), only a few hours before this meeting was held. While it was established this was not actually associated with the redundancy of her position, it was very unfortunately timing, and understandably raised doubts for Ms Brake around the genuineness of her employer’s decision.

After going through the consultation process, GTA confirmed that Ms Brake’s position was disestablished for “economic reasons”, however, in the month following her dismissal, it was discovered that GTA had shown incorrect figures in the workings for the restructure process. The figures used to justify the redundancy had turned out to be inaccurate. The Court found that had the employer’s calculations for the redundancy proposal not been based on an error of $120,000 there would have been no immediate need for the redundancy of the plaintiff.

The Court then reviewed the position of Chief Judge Colgan in Totara Hills Farm and Judge Travis recorded his “complete agreement with the way the Chief Judge has explained the requirements of s 103A”. Judge Travis then went on to say he was satisfied that the law requires him to determine whether the decision GTA made to dismiss Ms Brake and how it was reached were what a fair and reasonable employer would have done in all the relevant circumstances.

The Court found that the actions taken by the employer were “not what a fair and reasonable employer would have done in all the circumstances” and found that the employer “failed to discharge the burden of showing that the plaintiff’s dismissal for redundancy was justified”.

Of great significance, is that although the Court found that the redundancy was “a genuine, but mistaken, dismissal”, it still found that the dismissal was substantively unjustified.

Ms Brake was found to have been unjustifiably dismissed and was awarded $65,000 lost remuneration (equivalent to approximately one year’s salary) and $20,000 compensation for hurt and humiliation.

This decision was then challenged and has now been upheld in the Court of Appeal. The Court of Appeal was required to answer two questions of law:

  1. Did the Employment Court apply the correct test under s 103A of the Employment Relations Act 2000 (the Act) for justification of dismissal on the grounds of redundancy? The Court of Appeal answered ‘yes’ [at 98]
  2. Did the Employment Court apply the correct principles when exercising its discretion to award remedies to the respondent? The Court of Appeal again answered ‘yes’ [at 116]. While the remedies awarded were larger than usual, the facts of the case meant that the correct principles were applied and the remedies were appropriate in these circumstances.

The Court of Appeal found:

[94] GTA acted precipitously and did not exercise proper care in its evaluation of its business situation and it made its decision about Ms Brake’s redundancy on a false premise. So it never turned its mind to what its proper business needs were but rather proceeded to evaluate its options based on incorrect information. We can see no error in the finding by the Employment Court that a fair and reasonable employer would not do this.

The new position

We now have to come to terms with the new way in which substantive justification for redundancy dismissals will be determined. With heightened scrutiny from the Courts, employers will need to exercise additional care in putting together business rationale for restructuring proposals, ensuring that the information relied upon for making decisions is correct, and that redundancy is what a fair and reasonable employer would do in all the circumstances. If there are any appropriate alternatives to redundancy, then these alternatives need to be thoroughly explored, considered, and adopted if it would be what a fair and reasonable employer would do in all the circumstances. This could mean a greater obligation will exist in terms of offering redeployment, re-training, or finding other alternatives to dismissal.

It’s going to take some time to see how far this new level of scrutiny will go and what new obligations it ultimately will create. In the meantime, we advise our clients to err on the side of caution, ensuring their business case is sound, and that all alternatives to dismissal are thoroughly explored. Basically, if a redundancy is avoidable, then it should be avoided. Contact our team to assist with your next change process, and together we will assist you to get both the substantive and procedural justification right.


[1] G N Hale & Son Ltd v Wellington etc Caretakers etc IUW [1991] 1 NZLR 151 (CA).

[2]  Air New Zealand Ltd v Hudson [2006] 3 NZELR 155 (EC).

[3] Simpson Farms Ltd v Aberhart [2006] 1 ERNZ 825 (EC).

[4] Rittson-Thomas TA/ Totara Hills Farm v Hamish Davidson [2013] NZEmpC 39.

[5] Brake v Grace Team Accounting Ltd [2013] NZEmpC 81.



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