EY's Christie Hall and Nicholas Chan highlight a new hands-on approach by the courts to redundancy

By Christie Hall & Nicholas Chan*

Employers using redundancy as a quick fix to solve workplace problems risk costly lawsuits from aggrieved former employees unless they can provide a reasonable commercial rationale for their decisions.

A ruling from the Court of Appeal last week (Grace Team Accounting v Brake) confirms a new hands-on approach by the courts to redundancy, and to the level of justification and financial accuracy a business is required to provide.

In this case, the bill for a botched redundancy – even though the court accepted it was genuine and not for an ulterior motive - was more than $100,000 ($85,000 compensation plus $16,000 in costs).

The decision provides Court of Appeal support for a significant shift in the way the courts views their role in assessing employers’ decision to make staff redundant.

In the past, the courts have held that so long as a redundancy decision was genuine, they would not scrutinise a company’s commercial reasons for the move. In other words, the courts were not prepared to second-guess business decisions, even bad ones.

As Sir Robin Cooke, then president of the Court of Appeal, put it in GS Hale & Sons v Wellington Caretakers IUW in 1991: “An employer is entitled to make his business more efficient… no matter whether or not the business would otherwise go to the wall. A worker does not have a right to continue employment if the business can be run more efficiently without him…. If, for genuine commercial reasons, the employer concludes that a worker is surplus to its needs, it is not for the court or the unions or workers to substitute their business judgment for the employer’s.”

But after Brake, those “genuine commercial reasons”, and the processes behind them, are likely to come under increased scrutiny from the courts. In particular, decisions must be reasonable if employers in future are to avoid compensation payouts.

The appellant, Judith Brake – an accountant with 24 years’ experience - joined Grace Team Accounting (GTA) in October 2009 after leaving what was described as a secure role at KPMG. Six months later she was made redundant after GTA’s bosses projected significant cost overruns and revenue falls in the upcoming year. These figures were later proved to be wrong and based on a simple error of arithmetic. The business was actually due to make a profit.

After her dismissal, Brake asked the Employment Relations Authority to investigate.The Employment Relations Authority sided with GTA, finding Brake had been justifiably dismissed, and the matter was referred to the Employment Court. While the decision to make her redundant was genuine, the court said, GTA had not acted as a fair and reasonable employer would in all the circumstances. The Court of Appeal agreed.

In particular, firing Brake for financial reasons when there was no substantial deterioration in the company’s finances during her employment, and where there was more-than-adequate ongoing work, was not reasonable.
In addition, the review leading to Brake’s dismissal was based on a flawed calculation. Because GTA was a substantial practice with major clients, a reasonable employer could be expected to apply the same rigour in its internal financial analysis as it did to its client work.

Unlike the Employment Court, the Court of Appeal placed little weight on previous redundancy decisions, preferring instead to simply interpret the statutory test set out in the Employment Relations Act. This provides that a court must determine whether the actions of the employer were those of a fair and reasonable employer in all the circumstances. The Court of Appeal looked at this test in light of the purposive sections in the Employment Relations Act, which state the object of the Act is to “build productive employment relationships”. This conferred a statutory duty of good faith on both employer and employee.

On this basis, the Court of Appeal considered the statutory requirement to measure GTA’s actions against those of a “fair and reasonable employer” could not be read down to mean a “genuine employer”.

In practice, while the ongoing viability of a business need not be in danger before redundancies can be made, employers can expect the courts to scrutinise the genuineness of those decision and the process followed by the employer, and to consider whether the commercial rationale for the decisions was fair and reasonable in the circumstances.

Employers will be expected to ensure any financial analysis is correct, to properly research any strategic advantages to be gained from a proposed business restructure and to carefully consider any alternatives to redundancy.

It has always been the case that redundancies cannot be used as a guise for getting rid of “problematic” employees. But, in the past, where an employer has provided what appears to be a genuine commercial rationale for the redundancy, it has been difficult for the courts to scrutinise that rationale for reasonableness, apart from doing a general check.

This has now changed.

Where a financial basis for redundancy is relied on, employers will be expected to ensure any financial analysis is correct. They must be prepared to provide that analysis, together with any background or supporting financial information, to the affected employees for their input.

Employers relying on better synergies or a strategic advantage must be able to substantiate how and why the proposed changes will bring about the intended results.

Employers relying on increased efficiency through reduced costs will need to research fully their proposed changes, with a view to demonstrating they will result in the proposed savings, along with showing that any savings achieved will not be outweighed by reduced turnover or productivity.

In all cases, employers must carefully consider any alternatives that will allow them to achieve their objectives without resulting in redundancy.

A failure to do this is likely to be costly.

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*Christie Hall is employment law leader at EY Law and Nicholas Chan is a senior consultant at EY.