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Redundancy Wake Up: Court of Appeal Upholds Employment Court Decision

Written by Jim Roberts and Michael O'Brien on November 21st, 2014.

Redundancies have been a hot-button issue over the past 18 months, with no fewer than four Employment Court decisions dealing with them.  The Court of Appeal has now weighed in, and made findings that are important to employers and employees alike.
 
As we discussed in a previous update (Redundancy - Employer Judgement or Court Judgment?) in mid 2013 the Employment Court found that a number of redundancies were, in fact, unjustified dismissals.
 
In reaching these decisions, the Employment Court focused on the substantive reasons and the employers’ actions in the lead up to the redundancy.  To some, this represented a departure from established principles – previously, the Employment Court had not questioned an employer’s decision provided it was for genuine business reasons.
 
These cases have traversed the Government’s amendment to the Employment Relations Act on 1 April 2011 that changed the test for justification from “what a fair and reasonable employer would have done” to the far wider set of options “what a fair and reasonable employer could have done”.  This amendment followed criticism from employer groups that the “would” test allowed the Employment Court to step into the shoes of the employer, and replace an employer’s business judgment with its own.
 
One of the four cases, Grace Team Accounting Ltd v Brake, where the employer’s actions pre-dated the amendment, was heard by the Court of Appeal, which has just released its decision.  The Court of Appeal comprehensively upheld the Employment Court’s findings.
 
Background
 
Ms Brake was lured from KPMG to take up employment with Grace Team Accounting (GTA).  Within six months GTA proposed her redundancy.  The basis for the redundancy was a downturn in business. 
 
GTA intended to put in place an action plan that was to involve a comprehensive review of the financial state of its business.  Mr Grace, who was one of the directors, subsequently carried out some calculations and thought that the business was in trouble (in fact, that it was making a loss of some $60,000).
 
After requests for information by Ms Brake, GTA provided Mr Grace’s summary showing its plight.  As it turned out, that information was neither detailed nor accurate and the losses it showed were actually a profit in the same amount.  That information was not deliberately misleading; the Employment Court found that Mr Grace, who had prepared it, genuinely believed the business was in trouble.
 
In addition, during the process, two other employees resigned, which would appear to have resulted in sufficient salary savings to cover the shortfall GTA thought existed.  GTA never explained why those savings were not sufficient and why it needed to continue to make Ms Brake’s position redundant.
 
The Employment Court held that GTA was acting genuinely (based on a mistake).  However, had it put into place its action plan (which it had considered) before it commenced the redundancy process, then it would have properly and accurately calculated its true position and the redundancy would not have been required.  In addition, if Ms Brake been provided with the relevant information about the state of the business (sufficiently detailed source information) and given the opportunity to comment on it, then the inaccuracy in Mr Grace’s calculations may have been discovered.  The Employment Court also considered that the redundancy could have been avoided if GTA had paused and properly considered the difference the two employees resigning would have made.
 
The Employment Court concluded: that “the material provided by the defendant… was factually incorrect and misled the plaintiff to conclude that her redundancy dismissal was inevitable”; and that a fair and reasonable employer would not have acted the way that GTA did.  Ms Brake was awarded over $85,000 in remedies.  GTA appealed the decision to the Court of Appeal. 
 
The Court of Appeal
 
The Court of Appeal found that the Employment Court had applied the correct test under section 103A for justification of dismissal on grounds of redundancy. 
 
As Ms Brake was made redundant before the change in terminology from ‘would’ to ‘could’ (referred to above), the Court of Appeal had to specifically consider the issue under the earlier test.  However, the principles the Court expressed are equally applicable to redundancies under the current ‘could’ test in section 103A.
 
To the Court of Appeal, the “clear words of section 103A now require the Employment Court to determine on an objective basis whether the employer’s actions and how it acted were what a reasonable employer would have done”.  In short, the test for justification applies to all dismissals, including redundancy, and it is not enough for an employer to simply say that the decision to dismiss was reasonable – as the Court of Appeal noted, the Employment Court cannot discharge its responsibility under section 103A by simply accepting the employer’s word. 
 
Given the explicit requirements for disclosure of information and consultation in redundancy situations, the Employment Court will have in front of it the information provided to the employee to justify the redundancy.  This information will allow the Employment Court to assess whether, on an objective basis, the decision to dismiss due to redundancy was one that a fair and reasonable employer could have made. 
 
The Court of Appeal noted that:
 
“If the decision to make an employee redundant is shown not to be genuine (where genuine means the decision is based on business requirements and not used as a pretext for dismissing a disliked employee), it is hard to see how it could be found to be what a fair and reasonable employer would or could do. The converse does not necessarily apply. But, if an employer can show the redundancy is genuine and that the notice and consultation requirements of s 4 of the Act have been duly complied with, that could be expected to go a long way towards satisfying the s103A test."
 
In other words, the Court (or the Authority) will still need to consider the genuineness of the employer’s business decision, and the focus will need to be on the objective standard of a fair and reasonable employer.  As the Court of Appeal put it:  “…the subjective findings about what the particular employer has done in any case still have to be measured against the Employment Court’s assessment of what a fair and reasonable employer would (or, now, could) have done in the circumstances.” 
 
What does this mean for you?
 
Employers making a well-considered, well-researched, genuine decision to restructure, and following a fair process of providing information and consulting with potentially affected employees, will have nothing to fear from the Court of Appeal’s decision.  
 
On the other hand, employers making non-genuine, rash, or rushed decisions to make employees redundant can expect to have their decision very closely scrutinised.  The Authority or Court will not substitute its business decision for that of the employer, but it will use the objective test to make sure that a “fair and reasonable employer” could have reached that decision, and could have behaved in that manner.  This means that the reasons for the decision and the information that is relevant to that decision must add up objectively. 
 
If you are in any doubt about your obligations or are proposing a restructure, please give us a call.    
 
Topics: Employment Law
 
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