Posted on: Jul 26, 2013
Background: I own a motel that currently has 28 rooms. I work a few hours myself and I employ a permanent part-time manager. I also have three employees (the cleaners) who are part-time with variable hours who carry out cleaning, servicing rooms and “whatever” turns up on the day. The manager helps with those duties after dealing with administrative matters. I am converting half the rooms to apartments, so will only have a ten-room establishment. I will no longer need a part-time manager. Anticipating what is likely to happen, two of the cleaners have decided to return to study and have advised they will be terminating employment in two months’ time. After the conversion is carried out, I will be able to run the business with only two cleaners. The manager has become overbearing and I will be glad to give him notice of redundancy and work on my own again.
- Can I just give the manager written notice that he will be made redundant in two months’ time (what redundancy process must I follow)?
- Do I have to offer one of the cleaning positions to the manager?
Question 1 – The redundancy process
Before giving the manager notice of redundancy, you must enter into a proper and genuine consultation process with the manager. This means that you can’t predetermined the outcome, and you must remain open to alternatives and suggestions that come up (if any) during the consultation process. As part of that process, you must give the manager full information about your commercial reasons for proposing to disestablish the position (even if the reasons seem obvious to you).
Appropriate redundancy processes have recently been outlined by the Employment Court. They show that employers must be able to justify redundancies substantively (show that they are genuine) and procedurally (that a fair procedure was followed). An employer who fails to carry out a proper process will be liable for potentially significant remedies including compensation, penalties, lost remuneration and reinstatement (perhaps years later) of the employee to his or her former position.
From 1 April 2011, the Employment Relations Act 2000 (the Act) provides a new test to be used in determining whether the actions of an employer in dismissing an employee were justifiable. The question must be determined on an objective basis. The test, now contained in section 103A of the Act, is:
“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 section lists a number of factors that the Employment Relations Authority or the Employment Court must consider when applying the test. All relate to conduct preceding the dismissal or other action. They are (section 103A(3)):
- whether, having regard to the resources available to the employer, the employer sufficiently investigated the allegations against the employee
- whether the employer raised the concerns the employer had with the employee
- whether the employer gave the employee a reasonable opportunity to respond to the employer’s concerns, and
- whether the employer genuinely considered the employee’s explanation (if any) in relation to the allegations against him or her.
The Authority or Court can consider other factors it thinks appropriate. Section 103A(5) states that a dismissal or action must not be determined to be unjustifiable solely because of defects in the process followed by the employer if the defects were minor and did not result in the employee being treated unfairly.
Substantive justification for redundancy – requirement to show redundancy is genuine
When an employer’s decision to make an employee redundant is challenged by the employee, the employer cannot simply say it had a genuine business reason for imposing the redundancy and expect the Court to accept that statement at face value. The Employment Court in Rittson-Thomas t/a Totara Hills Farm v Davidson  NZEmpC 39 has made it clear that when considering the justifiability of a dismissal for redundancy under section 103A of the Act, although the Court cannot substitute its decision for that of the employer, the Court is required to determine whether the decision, and how it was reached, were what a fair and reasonable employer could (or would pre 1 April 2011) have done in all the circumstances. The Court said an examination of whether a redundancy was genuine did not only involve a consideration of whether the dismissal was a charade because the employer had some underlying motive for dismissing the employee, the examination should go beyond that and examine whether the employer’s decision was a genuine business decision.
In the Totara Hills case, the employer failed to prove the cost savings it had claimed would eventuate from the employee’s position being made redundant. That failure cast doubt on the genuineness of the redundancy and whether the employer had acted as a fair and reasonable employer. Accordingly, the Court held that the employee’s dismissal was unjustified.
The Court said the longstanding principles that an employer has a prerogative to restructure its business and that the Court will not substitute its decision regarding the redundancy decision for that of the employer still stood, but that did not mean that all an employer had to do was convince the Court that the redundancy was a genuine business decision in the sense that it was not a charade. It said the employer had the burden of satisfying the Court that what it did and how it did it were what a fair and reasonable employer could do in the circumstances.
The Totara Hills case shows that you should provide detailed facts and figures to justify making the manager redundant. It also shows that when deciding if a redundancy is genuine the Courts will look to see if the real reason for the dismissal is something other than redundancy. In this situation you should focus entirely on the lack of need for the position. No mention should be made of the manager’s overbearing conduct.
Procedural justification for redundancy – following a fair process
In Gilbert v Transfield Services (New Zealand) Ltd  NZEmpC 71, the Employment Court focused on the redundancy procedure followed by the employer. The Court found there were severe failings and that the employee would not have been dismissed if the employer had conducted the process properly. As a result, the Court reinstated Mr Gilbert and awarded him his entire lost remuneration of more than three years with interest from the time of the dismissal until his reinstatement. In that case in August 2009, Transfield Services (New Zealand) Ltd (Transfield) lost telecommunications service contracts. Transfield announced a proposed restructure and redundancies to cut costs and increase productivity. After consultation, the employer decided to move ahead with redundancies and to implement a three-step programme:
(i) identification of those employees who were to form part of the selection pool for redundancy
(ii) psychometric testing of the selected employees, and
(iii) interview and evaluation of the selected employees.
Seventeen technicians including the employee were placed in the redundancy selection pool and in October 2009 the employee was informed his position was redundant and he was dismissed. The employee raised a personal grievance for unjustified dismissal. He did not challenge the genuineness or reason behind the proposed redundancies but he argued that the employer breached the provisions in the collective agreement (CA) relating to redundancy, failed to provide him with adequate information and had relied on improper and flawed information in dismissing him. The Court found that Transfield had breached the redundancy provision in the collective agreement, which provided that redundancy was a situation where the “position filled by the Employee” becomes superfluous.
The Court held:
- Transfield had incorrectly classified the employee’s position as a general field technician position rather than the more specialised technical position the employee actually held
- Transfield had incorrectly decided that technical skills would not be used to distinguish candidates for redundancy (because it decided it had sufficient technical skills in the workforce already) although the CA provided employees would be selected for redundancy based on their “skills and attributes”.
The Court held that Mr Gilbert’s redundancy was flawed from the outset because Transfield misunderstood its contractual obligations. The Court also found that Transfield had failed to take into account relevant criteria (technical skills, past positive performance reviews, experience) and had taken into account irrelevant criteria (psychometric testing, adopting stereotypical assumptions about long-serving employees such as the employee) in dismissing the employee. It found that the employee had not been provided with information relating to his redundancy or with sufficient opportunity to comment on that information before decisions were made.
Transfield failed to provide accurate and adequate information about:
- how the redundancy pools were selected and the identities and designations of others in the selection pool
- scoring information about the employee
- test results of the psychometric testing relating to the employee and other employees
- interview notes and spreadsheets comparing the candidates
- the factors which would be taken into account by the employer in its decision-making, and
- the reasons why the employee was finally selected for redundancy.
The Court also commented on the failure to disclose information about, and Transfield’s own lack of understanding of, the psychometric testing results it relied on. This was said to be inconsistent with the Act’s requirements of “information sharing, disclosure, and objective rationality”.
The Court concluded that if the correct process had been followed, and the employee had been assessed fairly and objectively, he would not have been dismissed.
Although you, as a much smaller employer than the one in the Transfield case, would not be expected to carry out such a detailed redundancy process the case makes it absolutely clear that all employers must:
- comply with any contractual processes regarding redundancy, and
- give the employee full information and a proper opportunity to give feedback on the initial proposal and then on each decision made by the employer in relation to the employee.
Employers engaged in a redundancy process should:
- Make sure the redundancy proposal is based on sound business reasons and the employer fully understands the business case for its proposal. Those reasons should be clearly articulated to employees and must be based on an accurate understanding of the facts
- Ensure that the process and decision-making is compliant with the procedures and criteria set out in any employment agreement
- Ensure all information relevant to the reasons for the decisions the employer makes throughout the process and its outcome is disclosed to affected employees
- Consider carefully employee feedback and articulate reasons why that feedback is not accepted, and
- Ensure redundancy selection criteria are rational and clearly explained.
Applying “would” v “could”
Both cases noted above applied the pre-1 April 2011 test of what a fair and reasonable employer would do under section 103A rather than the post-1 April 2011 of what such an employer could do. However, it is unlikely that a different result would have been reached under the new test. In Totara Hills, the employer failed to present sufficient information to justify the dismissal under either test. In Gilbert, no fair and reasonable employer would or could breach the requirements of the Act and the collective agreement during the redundancy process.
Question 2 – Do I have to offer one of the cleaning positions to the manager?
To avoid the possibility of the employee raising a personal grievance, it would be wise to offer a cleaning position to the manager.
Section 4 of the Act imposes a duty on the parties to an employment relationship to deal with each other in good faith. Section 4(1A) states that the duty of good faith is wider in scope than the implied mutual obligations of trust and confidence and requires the parties to an employment relationship to be
“active and constructive in establishing and maintaining a productive employment relationship in which the parties are, among other things, responsive and communicative.”
The enactment of section 4(1A), requiring employers to be active and constructive in maintaining productive employment relationships, means employers do have a responsibility to offer alternative positions where possible. Two 2010 Employment Court decisions confirmed that section 4(1A) requires an employer, where possible, to offer an employee an alternative position. In the first, Jinkinson v Oceana Gold (NZ) Ltd (2011) 9 NZELC 93,655, the Court said the enactment of section 103A meant that the Authority or Court had to objectively review all the actions of an employer up to and including the decision to dismiss. In the case before it, the employer had decided not to appoint its employee to one of the new positions it had created. It said the selection process followed by an employer and its outcome formed part of the employer’s conduct to be reviewed in deciding whether the dismissal was justified. The Court could examine not only whether the employee had been considered for redeployment, but the actual decision made. It concluded that a dismissal that resulted from a procedure, which did not comply with the good faith obligations of section 4(1A)(c), would not be justifiable. The Court found that the redundancy was not a genuine one and the decision not to appoint the employee to one of the positions was unjustifiable.
Jinkinson was confirmed some months later in Wang v Hamilton Multicultural Services Trust (2011) 9 NZELC 93,670. The employee was so irate about the restructuring of his and other positions that he refused to apply when a new position was advertised. He said it was in fact the same as the position he held. The Court held that the redundancy was genuine, but that the employer had failed in its obligations to consider redeployment under the redundancy process. The Court said the employer was obliged to consider alternatives to making the employee redundant. It was apparent that the new position, while carrying greater responsibilities, was within the capabilities of the employee with some upskilling. By publicly advertising the position, rather than offering the post to the employee, the employer had failed to act as a fair and reasonable employer would have done. In the circumstances of the case, the judge did not regard the employee’s failure to apply for the new post as breach of his obligation to mitigate or as contributory behaviour occurring as it had after the employer’s decision to terminate his employment.
The Employment Relations Authority dealt with the issue of whether an employee who was made redundant should have been redeployed to a more senior position in Robertson v Arcad Ltd  NZERA Auckland 418. The employer argued that it had an obligation to redeploy the employee into a substantially similar position if one was available, but said the available position was substantially different and more senior to the employee’s disestablished position and it did not have an obligation to offer the employee a different position from the one he was engaged to perform. The Authority referred to sections 4(1A) and 103A of the Act and said it had reservations about whether section 4(1A) could be limited in the way the employer submitted. It said at :
“It is conceivable that observing the obligation to be active, constructive, responsive and communicative could lead to the redeployment of an employee to a position which is not substantially similar to the position to be disestablished yet within the employee’s skills and experience. That is not to say there is an obligation to offer an employee a different position from the one the employee was engaged to perform, only that the parties have an obligation to engage in a meaningful way about reasonable alternatives to dismissal. Redeployment to another position for which the employee had insufficient if any relevant skills, redeployment which required significant amount of retraining, or redeployment which had the effect of displacing an incumbent, for example, are unlikely to amount to a reasonable alternative.”
An employer is not obliged to offer re-employment to an employee who has been made redundant and who is not suitable for a new position. The employer is only required to honestly and fairly consider redeployment of the employee.
This article, and any information contained on our website is necessarily brief and general in nature, and should not be substituted for professional advice. You should always seek professional advice before taking any action in relation to the matters addressed.