Redundancies have never been an “easy” option for employers. The level of scrutiny that employers face to justify a redundancy decision has been increasing and the Court of Appeal has now confirmed that scrutiny of the commercial rationale of the decision is appropriate.
In the past, it was considered settled that the Court would not enquire into an employer’s commercial business decisions but that the redundancy had to be “genuine”.
In 2013, the Employment Court in Totara Hills Farm v Davidson indicated that the appropriate analysis under the Employment Relations Act required “substantive justification” in relation to a redundancy dismissal. This went beyond simply considering whether a decision was fair and reasonable in itself but included considering whether purported cost savings would actually be achieved by the proposed redundancy.
In that case, the Court found that the employer’s justification was flawed and the redundancy was not upheld even though the employer had genuinely believed the redundancy was necessary.
The Totara Hills Farm case was followed by Brake v Grace Team Accounting Limited. In that case the Employment Court found that the employer had relied on an erroneous financial analysis and again, the decision for redundancy could not be upheld. The Court also found unfairness in the failure to provide the financial information relied on to the employee which prevented the employee from establishing the error.
The Court of Appeal has now upheld the Employment Court’s reasoning. Whether a dismissal is justified must be determined on an objective basis as to 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 that the dismissal occurred.
The Court has found that this test applies to both the substantive justification underlying the dismissal as well as to the procedure which is followed.
With a redundancy the employer will need to do be able to establish that:
- The position is genuinely surplus to its requirements based on clear and accurate information which demonstrates that the goals of the redundancy (particularly where these are based on financial information) will be achieved by the restructure.
- There is no ulterior motivation for the change.
- A fair consultation process has been followed regarding the proposal before any decisions are made.
- Alternatives have been properly considered.
- The selection process and the process of informing an employee of the outcome have been fairly conducted.
- Notice and compensation has been given in accordance with the Employment Agreement.
Most of these requirements have been in place for some time. However, if a decision is challenged, employers must now expect the Court to assess the employer’s commercial rational and evidence and to extent that was accessible and able to be understood by the affected employees.
If the Court finds that a decision has been made in reliance on incorrect information, or information which has not been carefully evaluated, then the employer will be found not to be acting in a fair and reasonable manner. Fair and reasonable employers take care to act on information which is factually correct and robust.