Employers need to take care when proposing to make employees redundant. The recent Court of Appeal decision in Grace Team Accounting v Brake has confirmed a growing body of cases with the courts putting restructuring and redundancy decisions under increased scrutiny.
Until recently the courts were concerned only with whether the redundancy was genuine - that is the redundancy was for genuine business/commercial reasons, and not masking another reason for dismissing the employee and in ensuring a fair process was followed. The decision in Brake joins a number of Employment Court rulings which look beyond the genuineness of the decision, and scrutinise both the process and the result. When redundancy matters go before the Court or the Employment Relations Authority, it is now clear that the court will look very closely at the employer’s actions.
Grace Team Accounting v Brake
Mrs Brake was permanently employed as a senior accountant at Grace Team Accounting (GTA). Six months into her employment, GTA’s directors became concerned about the company’s financial position and decided to restructure. The company, with legal advice, sought to make three positions redundant. Their decision was based on the financial issues that the company was facing, specifically that turnover was around $200,000 less than projected and the company had projected an annual loss of $60,000. As a cost cutting exercise, Mrs Brake was made redundant. Unfortunately for GTA in this instance, the financial information relied upon was wrong and the company had actually made a profit of $60,000.
The Court of Appeal confirmed the Employment Court’s earlier decision that although the redundancy was made for genuine business reasons, it was not justified. The court looked into the commercial justification for the dismissal, particularly the financial mistake. Putting the decision making process under more scrutiny than has been seen in previous redundancy cases, it considered the process flawed (particularly when made by an accounting firm!), and the redundancy unnecessary. A fair and reasonable employer, the objective standard by which redundancy decisions are measured, would not make a decision to dismiss an employee based on incorrect financial information.
When undertaking a restructuring process, employers are obliged to consider redeployment opportunities within the business for affected employees. Several recent cases have indicated that this obligation is becoming something of an entitlement for employees. Where a restructuring process involves making positions redundant, but also creating new positions, employers must carefully consider appointing the employees to those positions.
The three cases of Rittson-Thomas t/a Totara Hills Farm v Davidson, Jinkinson v Oceania Gold (NZ) Ltd and Wang v Hamilton Multicultural Services Trust each demonstrated the obligation on employers to redeploy where possible, even where the terms and conditions of employment are different, the position is more junior, or where up skilling or additional training would be required. While the courts have emphasised that any decision will be heavily fact-dependent, it is clear that where a new position is similar in duties, remuneration and skill level to the redundant position, redeployment should be offered.
Importantly, employers’ redeployment obligations will not be discharged by inviting a departing employee to apply for a new position. There is now an expectation that an existing employee will be given preference over external candidates. If redeployment is possible, the position should be offered without an advertisement or application process.