Company decisions to restructure, with resulting redundancies, are coming under increased focus from the Employment Court.

Recent decisions are changing the long held perception that Courts will not interfere with management's commercial decisions to restructure and make redundancies as they see fit, even if those decisions are poor ones.

In the past, case law about restructuring and redundancy has focused on the consultation process followed by the employer.

That has changed with the spotlight now also firmly on the justification for the employer's commercial decision to restructure.

In these three recent cases, the Court has made it quite clear that employers must be aware that their commercial decisions, and the way in which these are reached, will be subject to greater scrutiny by the Courts in future.

In Rittson-Thomas T/A Totara Hills Farm v Davidson, Mr Davidson's employer sought to justify his redundancy on the basis of a need to cut costs. Following consultation, Mr Davidson's position was disestablished and a lower level position created. This resulted in a saving of approximately $6000 a year.

Mr Davidson was invited to apply for the newly created position, but was not automatically offered the role. The Court was satisfied that the employer was not driven by any ulterior motives in making Mr Davidson redundant. But, it found his redundancy was unjustified. The Court said the employer did not adequately explain why the money saved in this case justified Mr Davidson's position being disestablished and was also critical of the lack of information from the employer about what other cost cutting measures were considered and why they were rejected. The Court also considered that Mr Davidson should have been offered the new role, not just invited to apply for it.

Although only decided last month, Rittson-Thomas has already been followed in subsequent Employment Court decisions, including in Brake v Grace Team Accounting Ltd.

In this case, an accountant was made redundant only six months after starting a job, when her employer realised that the practice was struggling financially and that it needed to cut costs.

The Employment Court closely analysed the employer's reasons for making Ms Blake redundant and found the employer wanting. The Court said that the financial information the employer was relying on to justify the need for Ms Blake's redundancy was wrong. The Court was satisfied that this was a "genuine, but mistaken dismissal." Irrespective, the dismissal was held to be unjustified and Ms Blake was awarded a full year's lost wages in addition to $20,000 compensation for humiliation, loss of dignity and injury to feelings.

It was a similar scenario in Tan v Morning Star Institute of Education Ltd t/a Morningstar Preschool. In this instance, Ms Tan was called to a meeting with the preschool's owners who explained that the preschool was making a loss and urgently needed to cut costs. Ms Tan accepted the need for her position to be made redundant based on the information given to her at that meeting. Again, the Court found the financial information relied on by the employer to justify the redundancy to be "inaccurate and misleading." Ms Tan's redundancy was, therefore, unjustified.

What's changed?

Redundancy, as with any other type of dismissal, can be challenged by an employee through the personal grievance process. This requires an employer to justify that the redundancy, and how it was implemented, was what a fair and reasonable employer could have done in all the circumstances.

This has traditionally involved an analysis by the courts of two matters:

  • Was the redundancy genuine?
  • If so, did the employer go through a full and fair consultation process with the employee before making a final decision about the redundancy?

The onus of showing that a redundancy was genuine has largely been confined to demonstrating that the redundancy was the result of a genuine commercial decision. Unless the employee could show that the redundancy was a sham, motivated by a desire to exit an employee for reasons other than redundancy (for example, poor performance), the Courts tended not to interfere. It was considered a management prerogative to structure the business as an employer saw fit.

This meant that case law previously focused on the process followed by an employer when implementing a redundancy – and, in particular, whether the employer fairly consulted with affected staff before making a final decision about restructuring and redundancy.

However, these recent cases signal that employers must show that the decision to make an employee redundant was not only genuine, but was fair and reasonable. There will be a greater emphasis on employers to justify the rationale for a restructure and to provide employees from the outset with copies of documents which support this. If a decision to make redundancies is because of cost cutting, an employer must show what savings have been achieved and explain what other cost cutting options were considered and why they were rejected or were insufficient.

These decisions demonstrate that the onus is very much on the employer, not only to justify commercial decisions connected to their structure and staffing, but also to continue implementing those decisions in a procedurally fair way. It is more important than ever for employers to take their time when considering redundancies and to seek professional advice and guidance early.

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