Courts may scrutinise employers’ rationale for redundancies

Thursday 13 November 2014

Authors: Tim Clarke and Grace Stacey-Jacobs

​The Court of Appeal (CA) has upheld the Employment Court’s (EC) decision in Brake v Grace Team Accounting, which found that the employee’s redundancy dismissal was “unnecessary” and “genuine, but mistaken.” The CA’s decision confirms the approach taken by the EC in a number of significant cases last year, in which the EC closely scrutinised the rationale of the redundancies and the supporting financial documents to see whether each dismissal made “business sense.”

The general concern of employers with the EC’s decision in this case was that the EC appeared to be encroaching on an employer’s management prerogative to make business decisions, and that it was substituting its own judgement for that of the employer.

The CA has now confirmed that, even if an employer’s decision to make an employee redundant is found to be genuine, the EC is still entitled to consider whether the decision, viewed on an objective basis, was one that a fair and reasonable employer would (and now could) have taken in all the circumstances at the time of the dismissal. This may involve a close assessment of the information and documentation which was relied on by the employer to justify the decision.

The Employment Relations Authority and EC will be expecting to see clear, compelling evidence from employers that show that the financial objectives of a restructuring will be achieved by the proposed changes. Employers will be required to produce sufficiently precise, accurate and reliable financial information to demonstrate this.

Facts of the case: Brake v Grace Team Accounting

Ms Brake was employed as a senior accountant at Grace Team Accounting (GTA). At the time she was offered the position, Ms Brake was assured that her employment would be long term. Six months after Ms Brake began work, she was made redundant. GTA provided information to Ms Brake showing that its turnover was $200,000 short of what was expected, and while two employees (who had initially been included in the redundancy proposal) had resigned, the firm was still about $100,000 short of projected turnover.

Unbeknown to GTA at the time of the dismissal, the figures provided to Ms Brake were incorrect. Instead of a suspected annual loss of $60,000, the company had made a profit of that same amount. In evidence, GTA explained that the turnover was still not acceptable to it, and that the decision to disestablish Ms Brake’s position was still justified on this basis.

Employment Court’s findings

The EC held that this was “genuine, but mistaken” redundancy dismissal. GTA had failed to discharge the burden of showing that the dismissal was justified. The EC held that, if the information GTA relied on had been correct, there would have been no immediate need for Ms Brake’s redundancy. There was a lack of information as to why Ms Brake had been included in the redundancy proposal, especially considering the two other employees had resigned. This, the EC said, “would have provided GTA with sufficient savings to have rendered the plaintiff’s immediate redundancy unnecessary.” There were a number of “other practical proposals which would have revealed to GTA its true financial position, improved its profitability and may have avoided Ms Brake’s redundancy.”

The EC awarded Ms Brake $20,000 for hurt and humiliation, and 12 months’ salary of $65,000.

Court of Appeal’s decision

GTA appealed the decision, arguing that the EC had erred in changing the law on justification for dismissals for redundancy, which was well recognised by the courts since the important and oft-cited decision of Hale. GTA also argued that the EC had assumed jurisdiction to second-guess business decisions for a company which was acting in good faith.

The CA has dismissed GTA’s appeal, finding that the EC applied the correct test under s 103A of the Employment Relations Act 2000 (ERA) for justification on the grounds of redundancy. It also upheld the remedies awarded to Ms Brake.

The CA rejected the argument that, as the EC had found Ms Brake’s dismissal to be “genuine” (and not a pretext for dismissing a disliked employee), it was not open to EC to find that the substantive decision to make Ms Brake redundant was not what a fair and reasonable employer would (or now could) do. The CA held that, in light of the purpose of the ERA and the duty of good faith, “a fair and reasonable employer” cannot properly be read down to mean a “genuine employer”.

Rather, given the explicit requirements for disclosure of information and consultation that now apply in redundancy situations, the EC will have before it the information provided by the employer to the employee justifying the redundancy. The clear words of s 103A require the EC to determine on an objective basis whether the employer’s actions and how it acted were what a reasonable employer would (and now could) have done. This test, the CA said, has “little in common” with pronouncements made in the landmark decisions of Hale and Aoraki.

GTA had acted precipitously, did not exercise proper care in its evaluation of its business situation, and had made its decision about Ms Brake’s redundancy on a false premise. GTA “never turned its mind to what its proper business needs were but rather proceeded to evaluate its position based on incorrect information.” The CA held that a fair and reasonable employer would not do this.

Importantly, the CA held that the EC was entitled to take into account the fact that GTA had made an error in its financial calculations, even though GTA was not aware of this mistake at the time of the dismissal. “The careless miscalculation of the financial information, the reliance on that wrong information, the provision of that wrong information to Ms Brake and the decision to make Ms Brake redundant on the basis of that wrong information were “all matters that affected GTA’s conduct at the time of the dismissal.”

Key issues with GTA’s redundancy process

A number of important factual findings heavily influenced the EC and CA’s decision in the Brake v Grace Team Accounting case. Despite having no ulterior motive in dismissing Ms Brake, GTA had failed to discharge the burden of showing that its actions, and the manner in which it acted, was what a fair and reasonable employer would have done in all the circumstances. The following factual findings were relevant to the courts’ decisions:

  • The financial information provided to Ms Brake contained a carelessly miscalculated arithmetic error.

  • There was no convincing evidence that GTA’s financial situation had substantially deteriorated. Other evidence showed that there was more than adequate on-going work.

  • GTA ran a substantial accounting practice, yet did not apply an accurate financial analysis to its decision to employ Ms Brake, or its decision to make her redundant.

  • GTA did not give adequate information to Ms Brake at a time which would have enabled her to see the financial error and, which would have allowed her to come up with more concrete proposals that could have avoided her redundancy.

  • GTA did not adequately explain how or why Ms Brake was included in the redundancy proposal.

  • It GTA had analysed its practice on correct information, it would not have encouraged Ms Brake to leave secure employment with her former employer on assurances of a permanent position at GTA.

  • The directors of GTA had acted precipitously.

  • The reasonable belief that her redundancy was linked to a medical condition caused Ms Brake considerable distress.

 


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • Rob Towner

    Partner Auckland
  • Tim Clarke

    Partner Auckland
  • Rachael Brown

    Partner Wellington
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