Redundancy – Employer Judgement or Court Judgment?

Four recent decisions of the Employment Court have found the employers’ reasons for redundancy wanting, and have consequentially held the dismissals to be unjustified.

Rittson-Thomas t/a Totara Hills Farm v Davidson (March 2013)

The first of these, Totara Hills Farm, caused an uproar when the Chief Judge of the Employment Court held that the employer’s business rationale did not add up. Many commentaries accused the Chief Judge of substituting his business judgement for that of the employer.

Totara Hills’ rationale for the redundancy appeared to be that it wished to cut costs – but it produced little evidence to justify this. Totara Hills claimed that the cost savings were approximately $6,000 but also claimed that this represented a 10% reduction in the wage bill. The Chief Judge found that a total wage bill in the region of $60,000 was incomprehensible and calculated that the combined wage bill of the farm was at least $100,000, of which 10% was clearly not $6,000. In short, Totara Hills’ evidence did not add up at all.

The Chief Judge was at pains to point out that it is not enough for an employer to simply assert that its redundancy decision was a genuine business decision, and that the Court or Authority is not entitled to enquire into it. While the Court, and indeed the Authority, are not entitled to substitute their judgement for that of the employer, they do have an obligation to objectively assess the decision, and determine whether the decision, and how it was reached, were what a fair and reasonable employer would (and now could) have done in all the relevant circumstances. The employer must justify its decision to declare redundancies.
Justification includes all of the reasons and rationale for the redundancy, the provision of relevant information, and consultation, before an employer reaches a decision whether to proceed with the redundancy. In Totara Hills Farm, the employer had failed to provide:

  • Sufficient evidence to support its claim that it was focussed on cutting costs (and the evidence that it did supply did not add up);
  • Any evidence that it had properly considered any other proposals raised by employees;
  • Any evidence of why it chose to reject alternative proposals provided by the employees.

As a consequence, Totara Hills failed to justify the particular redundancy.

Gilbert v Transfield Services (April 2013)

Immediately on the heels of Totara Hills Farm, the Chief Judge issued another redundancy judgment. Mr Gilbert was engaged by Transfield as an Inside Plant Technician.

Transfield conducted a restructuring process that resulted in the redundancy of Mr Gilbert. In doing so, it lumped together as “field staff” all employees involved in inside and outside plant functions. It then ran a selection process involving a particular assessment scheme, rather than utilising its annual performance information, and selected Mr Gilbert as one of the “field staff” to be made redundant.

Mr Gilbert’s employment agreement defined redundancy by reference to “the position filled by the Employee”.

The Chief Judge held that it was not open for Transfield to treat Mr Gilbert as simply one of a number of “field staff” as his position was an Inside Plant Technician. The Chief Judge described Transfield’s analysis as “flawed fundamentally from the outset”.

In addition, the Chief Judge held that it was not open to Transfield to come up with some other selection criteria and it must follow the contractual “skills and attributes” including the employees’ technical skills.

Brake v Grace Team Accounting (May 2013)

Ms Brake commenced employment with Grace Team Accounting (“GTA”) in early October 2009. On 9 and 10 April 2010, one of the Principals of GTA carried out an analysis and identified a drop in revenue, and that cash reserves were down by $100,000. He also put together an action plan that would involve a review of pricing, varying the terms of fixed term contracts, and monthly monitoring of fees and costs. He also decided to take legal and human resources advice, as he had considered as part of his analysis that he may have to make one position (and potentially another) redundant.

On 14 April 2010, a meeting was held with Ms Brake where she was told that the recession was impacting on GTA’s business, that costs had gone up, and that they were considering a restructuring proposal that, if adopted, may result in her position being surplus to their requirements. GTA did not carry out any of the action plan that had been drafted over the previous weekend.

On 21 April 2010, following further discussion, including various requests for information, Ms Brake was provided with a letter that set out that turnover was down by almost $100,000 and wages up by $19,000. On 30 April 2010, Ms Brake was advised that her position had been disestablished, and, instead of being given notice, Ms Brake was paid one month in lieu of notice. In essence, Ms Brake was terminated that day.
Within two weeks (within what would have been Ms Brake’s notice period) another employee identified that GTA’s calculation of the turnover figures was incorrect, and that turnover was in fact $120,000 more.

During the redundancy process, Ms Brake was advised that GTA had commenced consultation with two other staff members, a senior account/manager role, and a part-time intermediate role. Those employees had both elected to resign, meaning a saving of $93,600. As two employees had resigned during the consultation process, GTA never satisfactorily explained to Ms Brake, or the Court it appears, why it also made Ms Brake’s position redundant.

The Employment Court held that while GTA was acting genuinely (based on a mistake), if it had put into place its action plan that it had considered a week before it commenced the redundancy process, it would have properly and accurately calculated its current position and the redundancy would not have been required. Additionally or alternatively, had Ms Brake been provided with the relevant information and given the opportunity to comment on it, then the inaccuracy may have been discovered.
As a consequence, the Employment Court found the dismissal was not justified.

Tan v Morning Star Institute of Education Ltd (May 2013)

In the fourth (and final) case, the employer held a meeting with Ms Tan on 12 August and informed her that it was having financial difficulties and needed to look at redundancy. The employer had with it a bank statement that identified its then current cashflow difficulties, but it is not clear whether that was presented to Ms Tan or not. Ms Tan relied on the employer’s explanation of its finances and was relatively accepting of the situation, at least in that meeting, and the decision was confirmed by the close of the meeting.

It later emerged that the financial information did not show the full picture of Morning Star’s financial circumstances. While there did appear to be a cashflow difficulty at that point in time, Morning Star was able to purchase a property from which it operated a month or so later, and another director’s wife became much more involved as an employee in the business, carrying out much of the role that had been carried out by Ms Tan.

The Employment Court had no trouble finding that “the material provided by the defendant at the 12 August meeting was factually incorrect and misled the plaintiff to conclude that her redundancy dismissal was inevitable”.

The Employment Court was also concerned with the director’s wife performing most aspects of the role and that it had never been explained why the director’s management role could not have been removed or reduced to save costs. The court considered that the pessimistic view presented to Ms Tan on 12 August was contrary to the optimistic view taken a month later, when purchasing the building. Finally, as Ms Tan was not told the nature of the 12 August meeting, nor given the opportunity to bring a representative, the confusion that occurred in that meeting led Ms Tan to unfortunately conclude that her dismissal was inevitable when, in fact, it was avoidable.
The Employment Court had no trouble in finding that the dismissal for redundancy was unjustified.

In Our View

These four cases highlight that the Employment Court has a renewed focus on the substantive reasons and actions of employers leading to their redundancy decisions. An employer’s reasons and information, and consultation, must add up to the decision the employer has reached. When reaching that decision, the employer must comply with statutory requirements of good faith as well as the requirements of section 103(A). An employer must, at a minimum:

  • Explain what it is proposing that may result in redundancy and its reasons for the proposal;
  • Provide information relevant to the proposal (not just the limited information relied on by the employer, or that supports the proposal) and that information must be accurate and must not mislead;
  • Give the employee an opportunity to respond to the proposal and information, and an opportunity to be represented; and
  • Be able to show that it has considered feedback from the employee, which usually means providing responses and reasons why it has rejected other alternatives, particularly other alternatives proposed by its employees.

It is only then that an employer can reach a decision that it can proceed with its proposed redundancy. The matters referred to above are not mere process, and a lack of any one of them is likely to render any dismissal arising from that redundancy unjustified.

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