How to navigate the redundancy minefield

"It's not you, it's the economy"

It is much less confrontational to dismiss an employee this way than embarking upon a long list of performance concerns or misdemeanours which have wound you up to the point of no return. That's why redundancy terminations are the preferred route of many employers. However, the door may have been closed by a recent case in the Employment Court which has put an interesting twist on the existing law.

What the law says

The law has always recognised that it is an employer's prerogative to organise its business as it sees fit in order to make it more efficient or profitable. That's why the ability to restructure your business or make redundancies has always been considered a legitimate way to terminate the employment of an employee. The law simply requires that you have a genuine reason for the proposed changes and that you go through a fair process with your affected employees before you make the final decision. Rarely, however, would the Authority or Court second guess a decision to restructure or make redundancies unless it was evident that there were ulterior or mixed motives behind that decision. The reason for that has always been that only you are best placed to know what is best for your business.

This made the task of the employee who was trying to establish that the redundancy was not genuine pretty difficult because the employee had to be able to point to some ulterior or mixed motive. The employer on the other hand simply had to point to some genuine commercial justification for the restructure or redundancy and the Court or Authority was likely to accept that as justifying the dismissal on substantive grounds. The employee is then left with only procedural concerns to justify raising a personal grievance which in turn may not exist or only give rise to reduced compensation. 

However, in a recent case*, the Court has indicated a greater willingness to investigate in more detail the rationale for the restructure or redundancy provided by the employer to see whether it really makes sense. Therefore, there appears to be a greater burden on the employer to provide sound business reasoning behind its decision. If it doesn't, the Court or Authority is more likely to find that the redundancy/restructure is not genuine and therefore unjustified, whether or not the employee can point to any mixed or ulterior motives.

What does this mean in practice?

Employers have always been aware of a duty to justify a redundancy on genuine commercial grounds, so nothing changes there. The change is the extent to which the employer may be required to justify its proposal both for the employee during the consultation process and possibly later before the Authority or Court.
During the consultation process an employer has an obligation of good faith towards its affected employees which includes providing all information relevant to the proposal to the affected employees. This obligation has been interpreted widely and the circumstances where an employer can withhold information regarding a proposal will be rare. This means it is common practice amongst lawyers and advocates representing employees to ask curly questions about the proposal of the employer before they advise their client to provide feedback. These questions are generally designed to test whether the restructure/redundancy is genuine. It follows that in light of this recent decision that great care should be taken replying to these questions as well as formulating the initial consultation document. Any mistakes in the consultation document or the responses to questions posed by the employee could prove fatal to the redundancy and render it unjustified if it makes the proposal illogical. 

To give a practical example, say that you propose the redundancy of a role in order to reduce your overheads by 50%. However, upon closer analysis it appears that making this role redundant will clearly not achieve the stated aim then the proposed redundancy is likely not to be genuine and therefore unjustified. Whilst this is a relatively simple example you can see how it could lay the door open for a more complicated analysis of an employer's justification for the decision. 

Should you be worried?

For the employer proposing a genuine restructure or redundancy, this latest decision should cause no difficulty because providing you take care to set out your consultation document in a logical and well reasoned manner, and then answer any questions that arise honestly, it will be obvious that your proposal is genuine. The only downside is that employees will be more encouraged to test the validity of your proposal, either during the consultation phase or later before the Authority or Court which may lead to further expense down the track. However, a well reasoned consultation document provided to the employee at the outset should avoid this.
However, for the employer who is using redundancy as a means to get rid of an employee for reasons other than genuine commercial reasons (e.g. performance concerns), this case could make life very difficult because you will need to construct genuine commercial reasons when none are likely to exist. An astute employment lawyer is likely to see through your construct which in turn could render the dismissal unjustified. In monetary terms, this means that you would be more likely to have to pay damages for loss of earnings (i.e. the time the employee spends out of work looking for another job subject to the employee's obligation to actively search for work).

How to avoid a damages claim

The prudent employer whether embarking upon a redundancy for genuine reasons or not, should therefore always seek assistance when formulating its consultation document and take advice when answering any questions posed by an employee. It would be easy for a business owner to assume that something about their proposal was obvious because of their knowledge of their own business, and then fail to explain their logic in the documentation provided to the employee. However, by explaining the rationale to your lawyer first, any gaps in your logic are likely to be filled, thereby protecting you from a personal grievance.

*Thomas t/a Totara Hills Farms v Davison [2013] NZEmp 39
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