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Brief Counsel

Redundancy - Court clarifies justification test

22 April 2013

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Judges are not entitled to substitute their decision for yours in terms of how your business should be run or restructured, but – if you make someone redundant – you will need to demonstrate that the redundancy was justifiable and reasonable.

This is the effect of the Employment Court’s ruling in Totara Hills Farm v Davidson.1  

Context

There had been suggestion last year (in relation to a dispute between 2Degrees and founder Tex Edwards) that the changes to section 103A of the Employment Relations Act may require the Court to review the decisions taken by the business and form its own view of what should have been done.  However, the question was never tested in that case because the dispute was settled out of court.

But the Court has found its opportunity in Totara to clarify that, while it is not for the Court to substitute its decision for that of the employer, the Court must determine whether what was done, and how it was done, were what a fair and reasonable employer could have done in all the circumstances at the time. 

This necessarily requires an examination of the reasons and justification behind the restructure.  And if those reasons are found wanting then the Court may determine the employer has acted unjustifiably, irrespective of whether the employee has managed to establish that the employer was motivated by ulterior factors.

The case itself provides a useful illustration of what this means for employers.

Totara Hills Farm

Mr Davidson was employed as a manager at Totara Hills Farm.  In 2010 the owner of the farm, Mr Rittson-Thomas, talked to staff about ways of reducing cost.  The discussion arose as a result of several years of drought and poor prices. 

After a number of meetings with staff, Mr Rittson-Thomas decided to make one of the two managers redundant as a means to save cost.  That manager was Mr Davidson, whom Mr Rittson-Thomas proposed to replace with a junior shepherd. 

Mr Davidson claimed that his redundancy was unjustified because the real reasons behind it were performance concerns and his poor relationship with Mr Rittson-Thomas. 

Both the Authority and the Court (albeit by a narrow margin) concluded that Mr Rittson-Thomas was not motivated by those other factors and that the redundancy was not a “charade”.  However, the Court went on to state that it needed to examine the reasons behind the redundancy itself before it could conclude that the redundancy was justified.   

Mr Rittson-Thomas needed to satisfy the Court that Mr Davidson’s dismissal was what a fair and reasonable employer would (or now, could) have done in all the circumstances.  In this particular case the employer’s evidence to justify the redundancy was “scant”. 

The employer asserted that the decision was made for cost saving reasons, however the Court found that there was no evidence to support the alleged savings of 10%.  On that basis, it determined that the decision was not one that a fair and reasonable employer would have made, and accordingly, it was unjustified.

Chapman Tripp comment

An employer has always needed to justify changes to staff requirements.  And so we do not consider that this decision represents a shift in approach.

However, there has perhaps been a tendency to focus on the employee’s ability to demonstrate an ulterior motive on the part of the employer as a means of demonstrating the genuineness (or otherwise) of the decision.  This case is a helpful reminder that the employer bears the burden of independently establishing a proper foundation for the decision it has made.

Our thanks to Gemma Peachey for writing this Brief Counsel.  For further information, please contact the lawyers featured.

Footnote

Totara Hills Farm v Davidson [2013] NZ Emp C 39

 

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