The need for good reasons in redundancy

The Employment Court has confirmed recently that when a redundancy is challenged, it must enquire into the employer’s business reasoning. The past assumption has been that provided some genuine reason could be shown, the Employment Relations Authority or Employment Court were not to enquire into the reasons behind an employer’s decision to restructure, i.e. that this was simply part of an employer’s prerogative to manage its business as it saw fit. However, the decision in Totara Hills Farm v Davidson has held that this is not the case.

Totara Hills Farms v Davidson

In Totara Hills Farms, Mr Davidson was employed as one of two unit managers on a farm. The farm owner met with his staff and explained that he needed to reduce expenditure due to a combination of several years of drought, poor prices and a poor outlook. He asked for employee feedback about how to reduce costs and several days later, the employees made a number of suggestions.

A further meeting was held several weeks later and the owner announced that one of the unit manager positions would be made redundant. The following day, Mr Davidson was advised he was being made redundant, but was entitled to apply for a junior position of shepherd (a position of significantly reduced status and remuneration), which was to be created. Mr Davidson rejected this and subsequently challenged the employer’s decision.

In its decision, the Judge clarified the legal position about the Authority and Court’s role in considering the justification for a dismissal due to redundancy, including that:

• The Authority or Court is required to enquire into a business decision to declare an employee’s position redundant.
• The Authority or Court must determine whether what was done, and how it was done, were what a fair and what a reasonable employer could have done in all the circumstances at the time.
• The Authority or Court is not entitled to substitute its decision for that of the employer.
• It will not be enough for an employer to simply assert that a redundancy was a genuine business decision – the employer must present evidence to justify that decision.

In applying those principles, the Court held that the dismissal was unjustified. The farm claimed that it made Mr Davidson redundant for commercial reasons (saving $6,000 a year) and that the saving amounted to 10% of its total wages. However, it produced “scant” evidence to support this claim. The farm also failed to provide evidence about the suggestions by staff as potential ways of saving costs, nor why these were rejected.The Employment Court has confirmed recently that when a redundancy is challenged, it must enquire into the employer’s business reasoning.

The past assumption has been that provided some genuine reason could be shown, the Employment Relations Authority or Employment Court were not to enquire into the reasons behind an employer’s decision to restructure, i.e. that this was simply part of an employer’s prerogative to manage its business as it saw fit. However, the decision in Totara Hills Farm v Davidson has held that this is not the case.

Totara Hills Farms v Davidson

In Totara Hills Farms, Mr Davidson was employed as one of two unit managers on a farm. The farm owner met with his staff and explained that he needed to reduce expenditure due to a combination of several years of drought, poor prices and a poor outlook. He asked for employee feedback about how to reduce costs and several days later, the employees made a number of suggestions.

A further meeting was held several weeks later and the owner announced that one of the unit manager positions would be made redundant. The following day, Mr Davidson was advised he was being made redundant, but was entitled to apply for a junior position of shepherd (a position of significantly reduced status and remuneration), which was to be created. Mr Davidson rejected this and subsequently challenged the employer’s decision.

In its decision, the Judge clarified the legal position about the Authority and Court’s role in considering the justification for a dismissal due to redundancy, including that:

• The Authority or Court is required to enquire into a business decision to declare an employee’s position redundant.
• The Authority or Court must determine whether what was done, and how it was done, were what a fair and what a reasonable employer could have done in all the circumstances at the time.
• The Authority or Court is not entitled to substitute its decision for that of the employer.
• It will not be enough for an employer to simply assert that a redundancy was a genuine business decision – the employer must present evidence to justify that decision.

In applying those principles, the Court held that the dismissal was unjustified. The farm claimed that it made Mr Davidson redundant for commercial reasons (saving $6,000 a year) and that the saving amounted to 10% of its total wages. However, it produced “scant” evidence to support this claim. The farm also failed to provide evidence about the suggestions by staff as potential ways of saving costs, nor why these were rejected.

The Court also determined that it was not sufficient for the farm to simply offer Mr Davidson an opportunity to apply for the new lower position of junior shepherd. The position should have been offered to him, because he had adequate skills and experience for it.

The Totara Hills Farms decision makes it clear that employers are required to justify a decision to dismiss due to redundancy as one that a fair and reasonable employer could have made in all the circumstances. The Court’s prior decisions in another farming case, Simpsons Farms, had been interpreted to mean that the employer merely had to establish that the redundancy was for genuine commercial reasons and not driven by ulterior motives.

What does this mean for employer’s considering restructuring that may result in redundancies?

In considering potential redundancies, an employer’s genuine business reasons for restructuring resulting in redundancy must stack up. An employer will need to be able to provide support its decisions that it had proper foundation for its decisions including:

• The overall business reasoning for the redundancy;
• Why it decided on the particular redundancy or redundancies; and
• Why other alternatives were rejected.

Where a restructure may affect the continuation of employment, a prudent employer will provide this information to potentially affected employees during its redundancy consultation process to comply with both its faith requirements and the obligation to sufficiently investigate.

The Court’s requirement that an employer must offer a new lesser position created to an employee, not simply provide an opportunity to apply, is also significant. It is common for an employer to create other positions and allow an employee to compete for the role alongside external applicants. It can be inferred that an employer should not only offer an available substantially similar position, but must offer any available position if the employee has adequate skills and experience for it.

Employers considering a restructure that may result in redundancies, are encouraged to contact Andrea Twaddle to discuss how best to manage this process to avoid/minimise these risks. Likewise, employees advised by their employer of a restructure, are wise to contact Andrea for advice early in the process about to how best to maintain their employment relationship, or, to exit the organisation in a way that best protects their interests.