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Significant changes in how courts decide on redundancy situations

15 December 2014


The ground has shifted significantly due to recent decisions of the courts dealing with redundancy situations. The very recent Court of Appeal decision in Grace Team Accounting Limited v Brake confirmed a number of changes which employers specifically need to be aware of, particularly the legal test regarding justification for dismissal in a redundancy situation.

Judith Brake left a position of secure employment as an accountant, where she had been working for more than eight years, to work for Grace Team Accounting Ltd. After seeing an advertisement for the position, Mrs Brake made an inquiry as to the salary and then pursued the job no further until Grace Team Accounting came to her asking her to consider it. 

Six months after commencing employment, justified by a downturn in business and an increase in costs, Mrs Brake was made redundant. Mrs Brake was not provided with any of the financial information which apparently supported the redundancy. If she had, it is likely she would have noticed that the information was flawed in that the company had made a profit of $60,000 rather than a loss of $60,000. In addition, the employer made Brake redundant only hours after she informed them she had leukaemia, although it was decided on the facts this did not contribute to the dismissal. 

Mrs Brake made a claim of unjustified dismissal in the Employment Relations Authority and then appealed the decision in the Employment Court. The Employment Court found that because there was no evidence of substantial client loss or staff overcapacity and the calculations on which the redundancy was based were erroneous, the dismissal was not what a fair and reasonable employer would have done in all the circumstances at the time. The Court of Appeal decision affirms that Mrs Brake’s dismissal was not justified despite the fact that it was genuine and not the result of an ulterior motive. 

The Employment Court ordered Grace Team Accounting to pay Mrs Brake unusually high damages to the sum of $85,000. The Court of Appeal agreed with the award, but the primary point to be drawn from their judgment is that of the test for justification of dismissal. 

Previously, justifying a dismissal in a redundancy scenario was simple. As long as the employer could show a genuine basis for redundancy, the Employment Relations Authority and the courts would not examine the employer’s commercial rationale. 

The key change that the decision of Grace Team Accounting has confirmed is that judges can look behind the veil and examine the merits of the employer’s claimed reasons for the redundancy. The court requires clear and compelling evidence that the goals of the restructure will be achieved by the redundancy. 

The Employment Relations Act set out the test for dismissals in redundancy situations as:
…whether the employer's actions, and how the employer acted, were what a fair and reasonable employer would have done in all the circumstances at the time the dismissal or action occurred.

The Court of Appeal decided this places a positive obligation on the court to assess the reasonableness of the employer’s decision. This responsibility is not fulfilled by merely relying on the fact that the employer considers that its business rationale is reasonable.

Grace Team Accounting failed to take sufficient care in consideration of the business’s situation and the decision to make Mrs Brake redundant was based on a flawed foundation of analysis. The Court of Appeal considered that although the decision was genuine, the standard of a fair and reasonable employer required Grace Team Accounting to ensure its information was accurate.

The Court of Appeal has now made it clear that the statutory test now allows a more substantive inquiry into the merits of business decisions. This means that employers may have to explain their business rationale and persuade the court that its business case is what a fair and reasonable employer would proceed with.

Cullen - The Employment Law Firm was one of the first eleven law firms in New Zealand approved to provide employment law services to Government and the public sector.

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