Jennifer Mills, Director at Jennifer Mills & Associates, explores key issues in restructuring and redundancies, particularly in the wake of COVID-19, with an in-depth look into recent cases de Wys v Sally’s Freight (1987) Ltd [2020] NZERA 285 and Nel v CA31 Limited [2020] NZERA 412.
Due to the continued uncertainty created by COVID-19 both here and abroad, many businesses have, and continue to implement the undesirable, but necessary alternatives of restructuring, redeployment and redundancies. These processes involve stringent requirements which ought to be complied with, every step of the way.
In this article, we outline an employer’s obligations when implementing the restructuring and/or redundancy process. We also examine one of the first Employment Relations Authority decisions relating to redundancies implemented during COVID-19, and another recent decision issued by the Authority which similarly involved procedural failings.
Substantive and Procedural Justification
Important obligations befall an employer which is implementing the restructuring/redundancy process. First, the employer must have substantive justification for the redundancy. Secondly, it must be procedurally justifiable, complying with the notice and consultation requirements set out in section 4 of the Employment Relations Act (“Act”).
Importantly, to justify the termination on the grounds of redundancy, an employer must meet the “justification test” set out 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. This is the overarching question the Authority, and the Court will consider when scrutinising the actions of an employer alleged to have unjustifiably dismissed an employee. As such, it must always be borne in mind.
Substantive Justification
An employer ought to demonstrate that the redundancy is genuine; there must be no ulterior motive influencing the decision, for example, a difficult employee.
The Court of Appeal in Grace Team Accounting v Brake noted that genuine means “the decision is based on business requirements and not used as a pretext for dismissing a disliked employee”, and that if the decision is shown not to be genuine, it is difficult to see how it could be found to be what a fair and reasonable employer would or could do.
As such, the Authority and Court will be particularly mindful of the purpose for the redundancy, and vigilant for any inkling of an improper purpose. To show there are genuine business reasons, an employer ought to consider providing specific financial information showing an economic downturn, and cost savings that will be achieved if the proposal is to be implemented.
Procedural Justification
An employer must also remember the overarching statutory duty of good faith, defined in section 4 of the Act, which applies when it is making an employee redundant.
This duty requires an employer who proposes to make a decision that will, or is likely to, have an adverse effect on the continuation of employment of 1 or more of its employees to provide to the employee(s) affected:
- access to information, relevant to the continuation of the employees’ employment, about the decision; and
- an opportunity to comment on the information to their employer before the decision is made.
For example, at the outset, an employer should consider setting out the proposal neutrally, in a memorandum to be given to relevant staff. We emphasise “neutrally”, because a common pitfall facing an employer, which can lead to a successful personal grievance, is the appearance of a predetermined outcome. An employer ought to remember that the outcome must not be pre-determined, but rather, must be determined in accordance with procedure (and selection criteria if applicable) set out in the proposal. At the outset, it should be remembered that a proposal is just that – a proposal. An employer ought to avoid phrases such as “we have decided”, which lead to the appearance of a decision having already been made, before effective consultation.
Further, an employer should also genuinely consider if there are suitable alternative roles for the employee(s) they propose to make redundant. If the employer is considering disestablishment, and reducing the number of roles, it is important that the employer develop a selection criterion in respect of which the relevant employees’ will be assessed against. The relevant employee(s) should also be given the opportunity to comment on the proposed selection criteria, before they are to be applied.
An employee should also be reminded of their right to obtain professional advice in respect of the proposal, and the opportunity to have a representative/support person present at meetings to discuss the proposal.
Case Law
Innumerable personal grievances have been raised in the past year against employers for unjustified dismissal due to redundancy. This is unsurprising given the unprecedented circumstances due to COVID-19, and its detrimental impact on the economy. Many employers have been forced to face situations they may never have imagined, and despite how well-intentioned an employer may be, innocent mistakes during the redundancy process will not relieve them of the important obligations outlined above.
We now turn to examine de Wys and Anor v Solly’s Freight (1987) Limited [2020] NZERA 285, one of the first cases heard by the Employment Relations Authority relating to COVID-19 redundancies. We also examine Nel v CA31 Limited [2020] NZERA 412 – while not a COVID-19 related case, this is also instructive on several fronts.
de Wys v Sally’s Freight (1987) Ltd [2020] NZERA 285
Background
In de Wys v Sally’s Freight (1987) Ltd [2020] NZERA 285, the Authority heard an application from two employees of the trucking and general contracting business, Solly’s Freight (1987) Limited (“SFL”). Both employees’ employment was terminated on the grounds of redundancy, which SFL claimed was justified, arising directly from the impact on its freighting business resulting from the COVID-19 Level 4 lockdown. We focus on Mr de Wys’s claim.
Mr de Wys’s claim
SFL applied for the Government Covid-19 Wage Subsidy for its employees (including Mr de Wys) on Wednesday, 25 March 2020.
On 31 March 2020, SFL sent a letter, signed by the managing director (Mr Solly) to all of its employees, including Mr de Wys. The letter noted that times were uncertain and unprecedented, and it was appropriate to “let you know where we are at.” SFL advised its employees that freight was static because of the lockdown, and that this was directly impacting on the company’s operation. The letter also stated that SFL had applied for the wage subsidy, but had not yet had a response, describing the subsidy as critical to the company and “…If the subsidy is received well and good, if not changes to our operations will become absolutely necessary.” It also assured each employee that they would be kept “informed as time goes by.” The Authority noted that the letter did not exclude restructuring, but nor did it mention that the Company was considering it.
On Thursday 2 April, a manager named Mr Adrian (whose responsibilities included HR) telephoned a Mr Welsh (the Christchurch branch manager for SFL) and told him that SFL was going to send redundancy letters to those on the “Christchurch list”. This was a list that had been prepared in late March by Mr Welsh at the request of Mr Adrian (in turn requested by Mr Solly). The list was said to be prepared based on factors such as work ethics, absenteeism, equipment damage, attitude to the job (including flexibility) and family situation. However, the Authority noted that this was likely inaccurate, and that the criteria came from Mr Adrian supplying criteria from the senior managers’ discussion.
The Authority also noted Mr Adrian’s evidence, which was that SFL had not heard the outcome of its wage subsidy application by the time Mr Welsh had spoken to all the staff who would receive the redundancy letter. However, the Authority noted that Mr Adrian received a telephone call from MSD on the morning on 2 April. The Authority accepted that Mr Adrian told the official that some employees were to be excluded from the subsidy application, and concluded that on the morning of 2 April SFL knew or ought to have realised that it would soon receive the government wage subsidy.
Following the letter of 31 March, the only communication SFL had with Mr de Wys was on 2 April 2020, when he was telephoned to say he had been selected for redundancy. The Authority found that this was when Mr de Wys first knew of his dismissal. The telephone call was thereafter followed by a formal notice of the same.
Determination
Overall, the Authority determined that SFL unjustifiably dismissed Mr de Wys, and that he was entitled to remedies.
Failure to comply with statutory consultation requirements
First, the Authority found that SFL did not comply with the statutory consultation requirements required by section 4 of the Act. The failure to comply with these, it found, made the decision to dismiss Mr de Wys unjustifiable. In particular, it noted the following failings by SFL:
- Solly’s failed to keep Mr de Wys informed as to the status of the Wage Subsidy application and proposed restructure despite explicitly noting it would do so. The only contact SFL made with Mr de Wys following the letter on 31 March to tell him he was one of the employees selected as redundant;
- The decision to make Mr de Wys redundant was not preceded by any prior consultation. After Mr de Wys received the phone call informing him he was one of the employees selected as redundant, he received written notice. Mr de Wys was essentially given no opportunity to comment;
- SFL emphasised the importance of the wage subsidy, and declared it was eligible – staff knew of this fact. The Authority found that no information about the circumstances which caused Solly’s to come to the view that it “cannot just go on waiting” for the subsidy payment (as outlined in Mr de Wys’s dismissal letter) but needed to move to redundancies was disclosed to the Mr de Wys. Again, he had no opportunity to comment;
- The Authority found that when the letter was sent to and received by Mr de Wys, SFL knew that it would be receiving the subsidy.
The Authority also condemned SFL’s decision to remove Mr de Wys from their wage subsidy application upon having contact with MSD that it would receive payment. Further, the Authority noted that despite the declaration Solly’s made that it would use its best endeavours to retain the named employees, there was no evidence that Solly’s took any endeavours to retain Mr de Wys.
Considered objectively, the Authority found that no fair and reasonable employer could have decided that Mr de Wys had genuinely become surplus to the company’s requirements, when it had previously reassured Mr de Wys about his employment for at least the short term, if the subsidy was received. As above, the Authority considered that Solly’s knew or ought to have known that the subsidy would soon be paid.
The Authority also noted that despite Solly’s being a relatively large private sector employer with access to human resource expertise, legal and other advice, it did nothing to discharge its statutory obligations to raise concerns, allow a reasonable opportunity to respond and genuinely consider any response before a dismissal. An employer should ensure that it effectively uses the resources it has at its disposal to implement such processes, or at minimum, should obtain legal advice if uncertain about how to go about the redundancy process.
Standard employment obligations continue to apply notwithstanding pressing circumstances
The Authority also dealt with a suggestion that subjective factors are brought to account in assessing whether an employer’s actions are fair and reasonable. Specifically, SFL argued that the standard expected of a fair and reasonable employer was significantly altered by the context of the global pandemic and economic turmoil. The Authority was dismissive of this, noting that the circumstances were as such that SFL managed to make a wage subsidy application, advise Mr de Wys about that, consult with a legal advisor to draft a dismissal letter, and exclude Mr de Wys from the application. However, it found that it did not, but could have alerted Mr de Wys to its consideration of a workforce reduction, its intention to adopt and apply selection criteria and that there would be exclusions from the wage subsidy. The failure to do so, the Authority considered, was not forced on it by external factors beyond its control. In essence, the Authority affirmed that standard employment obligations continue to apply, notwithstanding times of extremity and crisis.
Defects in the employer’s process resulted in the employee being treated unfairly
Further, the Authority commented that it must not determine that a dismissal is unjustifiable solely because of defects in the employer’s process if those defects were minor and did not result in the employer being treated unfairly. The question is whether the alleged defects resulted in unfair treatment – it will not merely be any procedural defect that founds a successful personal grievance claim. Nonetheless, an employer ought to err on the side of caution and adopt a process that is inclusive of the relevant employee(s), genuinely considering all feedback they have to offer, before any detrimental decision is made.
In the circumstances of the case, understandably, the Authority found that the defects were not minor, and they did result in Mr de Wys being treated unfairly.
The Authority highlighted that importance of good faith, which “is central to an employment relationship”, and commented that SFL’s actions and how it acted denied Mr de Wys any prospect of even maintaining the employment relationship.
Remedies
The applicants in that case were together awarded approximately $58,000 in compensation and lost wages, overall.
Nel v CA31 Limited [2020] NZERA 412
Background
The applicant in this case, Ms Nel, was employed by CA31 Limited (“CA31”) from July 2018. She was not provided with a copy of her written agreement.
Throughout the time of Ms Nel’s employment, CA31 experienced increasing difficulties. On Friday, 16 August 2019, the director of CA31 sent a group text message to all staff, informing them that “we have been evicted as of today” and that the “café has closed permanently”. The message also went on to say that “ the company is no longer financial, no further wages or payouts will be available.” The Authority noted that this was when Ms Nel had understood her employment to have ended. Further, despite requesting her employment agreement, this was never provided.
Determination
The Authority found that Ms Nel was unjustifiably dismissed by way of redundancy, and entitled to remedies.
While accepting that there were genuine reasons for the business closure, the Authority found that there was a “complete lack of process” and unfairness occasioned to Ms Nel.
Procedural Failings
In particular, the Authority found that the evidence before it established that there was existing pressure on CA31 to pay rent arrears. CA31 had apparently received at least two weeks’ notice of repossession, before the announcement on 16 August. The Authority condemned this, finding that a “fair and reasonable employer would have given Ms Nel at least contractual notice of the closure of the business and outlined the reasons why the business was closing and her job was to end.” CA31’s failure to do so prevented Ms Nel from considering the reasons about her impending job loss, the potential impact, to ask questions, and seek independent advice, the Authority considered.
The Authority also noted that a fair and reasonable employer would have given Ms Nel access to her employment agreement, termination pay, and access to a calculation of the latter.
Remedies
The Authority accepted that the notice of dismissal came as a shock to Ms Nel, and addressed the great hardship occasioned to Ms Nel, who “as a young person in her first proper job, was particularly dependant on her employer to do the right thing.” It was also noted that Ms Nel, who had not been her “usual self” returned to South Africa at the insistence of her father, to receive her mother’s support.
As such, it awarded Ms Nel $12,000.00 for humiliation, loss of dignity and injury to feelings.
In addition, the Authority awarded Ms Nel notice of one weeks’ gross pay, which it considered reasonable in the absence of a written employment agreement. Holiday pay of 8% gross earnings was also awarded on top of this.
Concluding remarks
Both these cases serve as an important reminder of the crucial substantive and procedural requirements that an employer ought to comply with when implementing a redundancy/restructure. Notably, all employment law obligations continue to apply, even in national emergencies such as COVID-19. An employer who is considering implementing the redundancy/restructuring process may be well placed to do so, but must ensure that the relevant employee(s) are given an adequate opportunity to participate in the decision process. An employer which neglects to do so will likely put themselves at risk of a successful personal grievance. As we have seen, there are common pitfalls during the procedural process, which can easily be avoided.
We recommend that an employer seeks professional advice when considering implementing such processes, although this will not be an answer to a claim for unjustified dismissal as we saw in de Wys and Anor. Notwithstanding the advice given, an employer ought to ensure (and should be reminded) that they themselves must practically implement the appropriate procedure to consult with the relevant employee(s), to ultimately ensure the crucial good faith obligations are complied with.
As above, innocent mistakes will not relieve an employer from their obligation to provide both substantive and procedural justification for the redundancy. As such, we recommend that an employer always seeks legal advice in respect of redundancies/restructuring, especially if the process is new for them.
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 employment lawyers in the world, by Chambers Global. Connect with Jennifer via email or LinkedIn 
Andrew McCombie joined Jennifer Mills & Associates in November 2018, after graduating with an LLB and BSc from the University of Otago. Andrew has been involved with a range of employment and regulatory issues and is currently involved in two large regulatory cases brought under the Health and Safety at Work Act. Connect with Andrew via email or LinkedIn
