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Redundancies – will we see a change in control?

, 20 November 2012

Reviewing the employer's business decision

In redundancy cases, the Authority and Court have for the last twenty years taken the view that the employer's business decision cannot be questioned, so long as it is genuine.  They can scrutinise the process to ensure that it is fair, and to ensure that the employer is acting genuinely, but it is for the employer to decide how its business will be structured.  It is therefore irrelevant whether the employer's decision to disestablish a particular role is good, bad or indifferent. 

In a recent decision involving Two Degrees Mobile, the Court signalled that it was time to reconsider these principles, based on the wording of the legislation and the way that the law has developed.  His Honour Judge Travis had this to say about the wording of section 103A of the Employment Relations Act (ERA), which requires the Court to consider all the circumstances of the case in determining whether the actions of the employer were those of a fair and reasonable employer:

"On the face of it, those words may be wide enough to include an analysis of the business decision itself.  This, however, is a controversial issue which will require submissions in due course."

So, the law has not changed as yet, but this is an issue that is likely to be tested in the near future. 

The current position

While the Authority and Court will currently not look behind the employer's business decision, they will consider whether it was made fairly (i.e. whether there was adequate information, consultation and engagement about the employer's proposal, whether the employer considered alternatives such as redeployment, and whether the affected employees were treated respectfully), and whether the redundancy was genuine. 

"Genuine" means more than not having ulterior motives, such as getting rid of a poor performer by disestablishing his or her position, rather than by addressing the poor performance. 

Genuineness also requires the employer to be able to articulate an adequate commercial explanation for the change.  While the Authority and Court will not look behind the employer's reasons to determine whether they make good business sense, they will look at the reasons given by the employer to see if they are robust and make sense on their face. 

Finally, the Authority and Court will examine whether the employer has considered alternatives to redundancy, primarily redeployment.  A decision not to offer an available role to an employee whose employment will otherwise be terminated for redundancy will be scrutinised closely, especially where the vacant role contains aspects of the employee's "old" role, or is otherwise within the employee's capabilities - even if some up-skilling is required.  This is not to say that employers must appoint an employee in this situation to the available position, or put them through a selection process that the employee will not succeed in.  Rather, it requires employers to think carefully about a decision to go to the market, to be able to provide robust reasons for doing so, and to engage with the affected employee about those. 

Our prediction

In our view, the current approach to redundancies - at least based on the current wording of the ERA - is the correct one and ought not to change.  A change of the sort signalled by the Employment Court would have far-reaching applications for employers, and significantly impact on their right to structure their businesses in the way they consider best meets the needs of their business.  Had Parliament intended to make such a significant change, to a practice that has been in place now for over twenty years, it would have said so explicitly. 

For these reasons, we doubt that the Court will change the current approach.  We are confident though that the issue will be tested; it is a question of which case. 

We recommend that employers think carefully about their business reasons before they go into a redundancy process, and that they engage in a genuine and thorough way with their employees about those.  Apart from minimising your chances of being the next test case, this can only be good for the process, your ultimate decision-making and your employees.