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Change in the wind for redundancies

Ani Bennett, June 2013

In March 2013, the Employment Court issued a game changing decision - Totara Hills Farm v Davidson. The Court signalled that it intends to look more closely at redundancies to determine whether there were "sufficient business reasons” for any restructure.

Previously the prevailing wisdom has been that it is not for the Court to substitute its decision for that of the employer in relation to business decisions.

But change has been in the wind since the Edwards v Two Degrees Mobile case in late 2012.  In that case the Court stated that section 103A of the Employment Relations Act may be wide enough to include an analysis of the employer's business decision to make an employee redundant. 

The Case

In Totara Hills Farm v Davidson, the farm manager, Mr Davidson was made redundant as his employer claimed that it needed to reduce its wage bill by 10% due to worsening economic conditions. Mr Davidson believed that the real reason for his dismissal was his employer's unhappiness with his performance and Mr Davidson's challenges to his manager's demeaning and bullying conduct towards him.  The Court found, however, that these were not the causes of his dismissal and that the redundancy was not a charade.  In the past the Court would have left it there. Usually it would not have looked any further into the substance of the employer's decision, and any deficiencies found would relate to process only, such as a failure to consult properly.

However, in reliance on section 103A of the Employment Relations Act 2000, which sets out the test for deciding if an employer’s actions are justifiable, the Court went further than it had done previously, and closely examined the substantive business reason relied on to make Mr Davidson redundant.

The employer maintained that disestablishing Mr Davidson's position and creating a junior shepherd's position in its place would reduce its wage bill by almost 10%.  The Court did its own calculations and found the saving was closer to 6%.  Staff had suggested other ways of making savings, which were not accepted by Totara Hills Farm because they were only "minimal", but there was apparently no evidence of what those savings were and how they compared to the 6% saved by disestablishing Mr Davidson's position.  Overall, the Court found that the evidence of justification for Mr Davidson's dismissal was scant.

In the Court's view, this threw "into doubt the genuineness and, therefore, the justification of making Mr Davidson's position redundant".  The key point is that the employer did not provide sufficient and robust reasons for terminating Mr Davidson's employment.

The Court also found that rather than inviting Mr Davidson to apply for the new junior shepherd position, it should have been offered to him, given that he was "well regarded" and it was well within his capability. 

In finding that Mr Davidson's dismissal was unjustified, the Court awarded him $3,000 for lost remuneration, $4,000 compensation for injury to feelings, $1,090.76 for his Kiwisaver losses and $1,566.87 for unlawful deductions from his holiday pay. He was also awarded legal costs.

Our Comment

This case sends the signal that the Authority and Court are likely to enquire more carefully about the merits of business decisions in restructuring situations and assess whether genuine redeployment options have been explored.

We therefore recommend that employers take the following approaches when restructuring:

  • Ensure that the outcomes you wish to achieve are based on sound business reasons, that those reasons are communicated in clear and comprehensive terms in the proposal document and other communications, and that all justifications for the restructure can be supported by facts.
  • Ensure that all information relevant to the reasoning and the outcomes desired is provided to employees.
  • If employee feedback on the proposal is not accepted, the employer should explain to employees why it’s not accepted during the consultation process.
  • Redeployment should be fully considered as part of the process from the beginning and throughout the process. If you don’t intend to offer existing or new roles employees being made redundant, then ensure you have sound reasons for this and you explain those reasons to the employees concerned
  • If a redundancy decision is challenged, clear and comprehensive evidence should be presented to the Authority or the Court to help justify the employer's decision – even if it was not presented in the consultation process.

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