Jennifer Mills, Director at Jennifer Mills & Associates, shares some insight into avoiding a personal grievance in relation to restructuring and redundancies, by looking at good faith, the test of justification, and procedural justification. She will delve further into this topic at the Terminating Employment seminar on Tuesday 16 March 2021.
Although New Zealand has begun to recover from COVID-19 faster than initially expected, employers continue to prepare themselves and react to the uncertain times we live in. Many businesses, particularly smaller entities, continue to consider restructuring and redundancies to improve their financial outlook and alter their structure to better reflect the current workforce demands.
In implementing restructuring processes, employers ought to ensure they comply with their obligations and follow a fair process.
Good faith and the Test of Justification
First, an employer must remember its statutory duty of good faith, defined in section 4 of the Employment Relations Act 2000 (Act). This duty, as highlighted by the Employment Relations Authority in de Wys v Sally’s Freight (1987) Ltd [2020] NZERA 285, is “central to an employment relationship”.
The duty of good faith is wider in scope than the implied mutual obligations of trust and confidence. Broadly, the duty requires the parties be active and constructive in establishing and maintaining a productive employment relationship as well as remaining responsive and communicative. The parties must also not do anything that is or is likely to mislead or deceive each other.
Test of Justification
A Fair and Reasonable Employer
To justify a termination on the grounds of redundancy, an employer must meet the “test of justification” exhibited in s 103A of the Act.
The test is whether the employer’s actions, and how the employer acted, were what a fair and reasonable employer could have done in all the circumstances at the time the dismissal or action occurred. The burden lies on the employer to prove this.
Substantive and Procedural Justification
In the context of a dismissal by reason of redundancy, the test has two elements. First, an employer must have substantive justification for the redundancy, and secondly, the employer must effect the dismissal in a manner which is procedurally fair.
An employer who is unable to sufficiently demonstrate that they have met these requirements runs the risk of an employee successfully establishing a personal grievance against them.
Substantive justification
Traditionally, courts were reluctant to question an employer’s decision to implement a redundancy. Rather, the focus was the obligation of good faith and fairness of the procedure. This is not the case now. Presently, all circumstances surrounding the decision to dismiss must be considered, including the reasons for the decision to make an employee redundant.
Redundancy must be genuine
In particular, the redundancy must be genuine. In Grace Team Accounting Ltd v Brake [2014] NZCA 541, the Court considered that genuine, in the context of a redundancy, meant that the decision is “based on business requirements and not used as a pretext for dismissing a disliked employee”.
An employer’s decision to implement a redundancy will not be justified if it is not genuine. The Authority or court will be particularly mindful of the purpose for the redundancy, and vigilant for any inkling of an improper purpose. As mentioned above, a redundancy process must not be utilized for dismissing a poor performing employee, or one that is not a good fit within the business.
Where mixed motives exist
If it is found that there are mixed motives behind a redundancy, an employer bears the burden of showing that the redundancy was both genuine and the predominant motive or reason for dismissal. In Forest Park (New Zealand) Ltd v Adams [2000] ERNZ 310, the Employment Court held that if the predominant motive is a genuine commercial decision to make the position redundant, the dismissal will be justified if fairly undertaken. However, if the predominant motive for dismissal was not a genuine commercial decision to make the position redundant, dismissal will be unjustified.
Information must be factually accurate
The information relied upon by an employer to dismiss an employee must also be factually accurate and stand up to scrutiny. In Grace Team Accounting, the employer dismissed an employee on the grounds of redundancy, then later discovered inaccuracies in turnover calculations which actually showed a profit rather than a loss. The Court concluded that the employee’s redundancy was made on an incorrect premise and was therefore unjustified.
Objective test
An employer’s subjective belief in the genuineness of a redundancy is not sufficient. The test is an objective one, which involves an assessment of what a fair and reasonable employer could have done in all the circumstances. As the Court of Appeal noted in Grace Team Accounting, “the subjective findings about what the particular employer has done in any case still have to be measured against the Employment Court’s assessment of what a fair and reasonable employer would (or, now, could) have done in the circumstances.”
Procedural justification
Duty of Good Faith – providing relevant information
The duty of good faith, codified in section 4 of the Act, requires an employer who is considering a redundancy, to provide the employee with access to information relevant about the decision and relevant to the continuation of the employee’s employment, and provide the employee with an opportunity to comment on that information before any decision is made. Where an employer’s restructure is financially motivated, this may include providing the affected employee(s) with information demonstrating the cost savings that is hoped to be achieved through the restructure.
The courts have commonly held that the failure to provide an employee with the opportunity to consider and comment on relevant information, may mean a decision to dismiss that employee will be unjustified even if there exists a genuine business reason for doing so.
In Innovative Landscapes Ltd (2015) v Popkin [2020] NZEmpC 40, the Court noted that although there were genuine reasons for the employee’s termination, several procedural failings, including the failure to provide sufficient information, led to a conclusion that the company’s actions gave rise to an unjustified dismissal.
In particular, the company’s director did not consult adequately, “if at all”, with the employee regarding the possibility of redundancy before the decision was made, did not consider whether there were any alternatives to dismissal, failed to provide the employee information to enable her to understand and engage meaningfully in a consultation process, and accordingly concluded that the director failed to obtain the employee’s views and consider them with an open mind before making a decision as to whether her position ought to be made redundant.
Consult employment agreement and relevant company policies
The first port of call should be an employee’s employment agreement, which will often contain provisions relating to a redundancy and restructuring process. While the basic requirements and the statutory duty of good faith must to be complied with, an employment agreement and any company policy may impose additional requirements or set out a process for consultation. It is important to ensure that an employer complies with any prescribed processes mentioned in its employment agreements, policies or otherwise.
In Innovative Landscapes Ltd (2015) v Popkin, the Court noted that while there were genuine reasons for the respondent’s termination, the procedure was “fatally flawed”. One of the company’s failings was failing to comply with a clause in the employment agreement, which set out a consultation process in the event of redundancy. The company also failed to provide “written notice” of the termination of employment in breach of the employee’s employment agreement.
No predetermination, ensure consultation with staff
Any redundancy proposal should be set out neutrally in writing and be given to relevant staff. It should be termed as a proposal and should reinforce that no decision has been made yet. A common pitfall for employers is the appearance of a predetermined outcome. Employers ought to ensure that an outcome is not suggested until it has considered the employee’s feedback on the proposal and the relevant information.
Phrases such as “we have decided” must be avoided. These lead to the appearance of a decision having already been made, before effective consultation, which breaches the fundamental obligation of good faith.
Further, an employer should also genuinely consider if there are suitable alternative roles for the employee(s) they propose to make redundant.
Downsizing
If the employer is considering reducing the number of employees employed in the same role, it will need to go through a downsizing process. In effecting a downsizing process, an employer ought to develop selection criteria which will determine how the employees will be assessed and who will be selected for the reduced roles following the restructure. The employees ought to be consulted on the criteria before they are finalised.
Once the criteria are finalised, an employer ought to provide employees with their draft results for comment. From there, the employees can comment on whether they believe they have been accurately assessed against the criteria.
It is important to note that due to the requirement to provide employees with information relevant to the continuation of their employment, employees are entitled to receive other employees draft assessment results and ought to be able to provide comment on the same before any decision is finalised.
Redeployment
Employees who are made redundant ought to be considered for redeployment. This should be addressed through the consultation process. If redeployment opportunities are identified, employees may be entitled to be offered the role, or may be invited to apply for the role depending on the skills of the employee, the suitability of the role, and the number of employees being considered for the role. A redundant employee’s entitlement to be redeployed into a certain role can be a tricky area, and employers may wish to seek legal advice.
If, for example, an employee is entitled to be offered a role on redeployment, but is only invited to apply for that role, and the employee is subsequently unsuccessful for redeployment and has their employment terminated by reason of redundancy, the dismissal is likely to be unjustified. As such, employers may wish to proceed with caution and consider legal advice when considering redeployment.
Right to obtain independent advice
An employee should also be reminded of their right to obtain independent, professional advice in respect of the proposal, and the opportunity to have a representative/support person present at meetings to discuss the proposal.
Specific statutory requirements – restructuring
There are also other specific statutory requirements to be wary of. The Act provides additional protection to specified categories of employees on the basis that they are employed in sectors in which restructuring occurs frequently, whose terms and conditions of employment tend to be undermined by the restructuring of an employer’s business and have little bargaining power. By way of general comment, this applies to employees employed in cleaning services, food catering services, caretaking, orderly services, or laundry services in particular sectors or industries. The complete list of employees employed in specified categories is at Schedule 1A to the Act.
Employers employing these categories of employees ought to be aware of their obligations and ensure they comply with the same when effecting any redundancies.
Concluding remarks
Overall, there are important requirements – found in a number of different sources – that an employer must comply with when effecting a redundancy and/or restructure. Importantly, the Court and Authority will consider all circumstances to determine whether, objectively, an employer’s actions were what a fair and reasonable employer could have done in all the circumstances.
Jennifer Mills is highly regarded as one of New Zealand’s leading employment and health and safety lawyers, with a wealth of experience in employment litigation, industrial relations, health and safety, complex restructures, large scale Holidays Act issues, executive remuneration and regulation, executive exits and immigration law. She regularly advises on novel and complex legal issues and is passionate about providing her clients with effective tailored solutions. She has been listed as a ‘leading individual’ in the Asia Pacific Legal 500 and is rated one of the leading employm ent lawyers in the world, by Chambers Global. Connect with Jennifer via email or LinkedIn 
