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Employment Court rules on its ability to inquire into the business case behind a redundancy

From MinterEllisonRuddWatts

In the Employment Court’s recent decision in Totara Hills Farm v Davidson, Chief Judge Colgan has confirmed that the Court can assess the business decision behind a redundancy to determine whether the decision, and how it was reached, were what a fair and reasonable employer could have done in all the relevant circumstances.

This confirmation means that employers can no longer assert that a decision to restructure was justified simply because it was a genuine decision, as opposed to a sham to hide a dismissal for other reasons. Rather, the Authority or Court is now entitled to also enquire into the merits of the decision.

How was this applied in the Totara Hills case?
The employer argued that the disestablishment of an employee’s position would have the effect of a reduction in the employer’s remuneration bill of almost 10 per cent. However, the Court stated that in order for there to be a 10 per cent saving, the remuneration bill must have been in the region of $60,000 per annum. The Court calculated the actual bill as being more than $100,000 per annum, even at a conservative estimate. Therefore, the achievable remuneration savings would not have been the 10 per cent saving which the employer had claimed to its staff.

The Court stated that if the employer’s advice to its staff of a need to save 10 per cent from the remuneration bill was correct, then the arrangements in place would not have achieved that saving. Hence, the genuineness of the redundancy and substantive justification for it was thrown into doubt. The Court noted that none of this was explained by the employer, as the Court would have expected.

The employer had given evidence that the suggestions made by staff during the consultation process had not been accepted because only “minimal savings” could have been made. However, the Court held that the employer should have given evidence as to what these “minimal savings” may have been and how they would have compared to the savings of about $6,000 per annum made by the disestablishment of the employee’s position. The employer also should have given evidence of its analysis and rejection of those suggestions.

Taking the above considerations into account, the Court concluded that the employer had not met the test of justification and that the dismissal was unjustified.

What does this mean for employers?
This decision shows that the Court (and Authority) will now look more closely into an employer’s rationale behind a restructuring decision.

Therefore, in formulating a restructure proposal and deciding whether to implement a restructure, employers will need to:

  • give careful thought as to the rationale for the proposal to restructure and how to describe that to affected employees;
  • be prepared to explain further the rationale in simple, practical terms and carefully consider any alternatives suggested;
  • have clear and justifiable reasons for not adopting any alternatives suggested by employees, other managers or Board members; and
  • consider whether the decision they are proposing to make is one which a reasonable employer could reach in the circumstances.
  • Employers will also need to be prepared to produce documentary evidence setting out the rationale behind a redundancy proposal and their consideration of any alternative submissions provided by employees, including evidence as to why they rejected them in favour of the final decision.

The key message for employers is that they ought to collate evidence to justify their decision at all points in the process. Such evidence ought to support the employer’s rationale. For instance, where cost savings are asserted, such savings must be able to be proved. Where an employee proposes an alternative means of achieving such savings, the employer must be able to clearly show why the final decision was preferable to that proposal.

Unfortunately, this decision is likely to open restructuring decisions to more frequent challenge by employees. If you are considering a restructuring, our team can assist you to work through the process in a way that minimises the risk of challenge.


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Disclaimer: This information has been written for and submitted to HRINZ for publication and has been published in good faith for the general information of HRINZ Members of the Institute. HRINZ accepts no legal responsibility for the contents of the Knowledge Base and appropriate professional advice and assistance should be sought in particular cases.

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