Redundancy – Getting it Right

McGuire v Rubber Flooring (NZ) Limited

The employee in this case began working for the family-owned business as sales and marketing consultant.  After the resignation of a full-time manager and during the period of the managing director’s terminal illness, the employee’s management role increased by default.  Following the managing director’s death, his son and wife took active management roles in the company.  A proposal was made to restructure which would mean the loss of the employee’s job and a number of meetings were held culminating in the employee’s position being made redundant.  The employee alleged she had been demoted from her position as manager and later dismissed on the purported grounds of redundancy which were not genuine.  She also argued that even if the restructuring was genuine, it was not carried out in good faith and was procedurally unfair. 

The Court held that the employee’s redundancy was genuine as the company was in a ‘parlous financial situation’ and it was commercially realistic to make employees redundant.  However, it held that the consultation process was misleading and deceptive and had not been undertaken in good faith as its decision to restructure was made some months before consulting the employee.  The Court said that a just employer, subject to the mutual obligations of confidence, trust and fair dealing, would implement the redundancy decisions in a fair and sensitive way.  The employee was awarded $7,500 compensation for hurt and humiliation.

Westpac Banking Corporation v Smythe

In this case, the Court was required to consider whether the employee’s former role (electronic banking consultant) was “substantially similar” to a newly created position (transactional relationship consultant).  The employee believed the levels of responsibilities, skills and competencies in the new role were not broadly comparable to her old role, which had been disestablished.  As a result she was not willing to accept the new role and sought redundancy compensation.  Her individual employment agreement provided that no redundancy compensation was payable if she declined an offer of a “substantially similar position”, which included “comparable remuneration”. 

In determining whether the two positions were “substantially similar” the Court considered salary mid-point for the new position and found that it was 23% higher than the employee’s old position.  As the two remuneration figures were not “comparable” in terms of the individual employment agreement, the Court held that they were not substantially similar.  The Court found that the employer's failure to engage the employee in discussion concerning their differing views on comparability of the new job offered to her, breached its duty of fair treatment.  The employee was awarded $6,000 compensation for hurt and humiliation. 

Substantive Justification

An employer must be able to demonstrate that an employee’s position is genuinely surplus to its requirements.  The Court of Appeal has confirmed that an employee does not have a permanent right to retain his or her job if the employer determines that the business can be run more efficiently without the employee (G N Hale & Son Limited v Wellington, etc, Caretakers, etc IUOW).  However, the employee’s position needs to be genuinely surplus to the employer’s commercial operations (i.e. not a performance-based dismissal in disguise).

Procedural Fairness

The Employment Relations Act imposes a duty on parties to an employment relationship to deal with each other in good faith.  This duty specifically applies when making employees redundant.  Procedural fairness in respect of implementing a redundancy generally involves;

• Consultation – Consultation prior to any decision to disestablish a position or to make an employee redundant will be necessary in most cases. 
• Consideration of alternatives – Once a final structure is determined and an employee’s position is to be disestablished, employers should then look at all practicable alternatives to dismissal, such as a transfer, redeployment or retraining.
• Fair Selection Process – Where there are a number of employees who could be made redundant, the selection process to choose between them must be fair.  Employees should be informed of the selection criteria and be given the opportunity to contest or discuss those criteria.  The criteria should be objectively measurably.
• Informing the Employee – Where possible, an employee who is to be made redundant should be informed of that outcome face to face.
• Notice and Redundancy Compensation – Where the employment agreement imposes a notice period and redundancy compensation, these must be applied.  Where the agreement does not contain a notice period, reasonable notice must be given based on the circumstances.
• Representation – Throughout this process, the employee/s should be advised of the right to seek professional advice or representation. 

The Courts have held that once guidelines have been set by a company as to the way in which it will conduct a restructuring, then the company should try and ensure that it sticks to its set guidelines.  A dismissal for redundancy may be unjustified if an employer does not follow its own policies, particularly when these have been followed on earlier occasions. 

Implications for Employers – Remedies

Where an employee’s redundancy is held to be unjustified there are several remedies available, including reinstatement, reimbursement of lost wages and benefits and compensation for hurt and humiliation.  Where an employer fails to prove a redundancy was made for genuine reasons and that it was carried out in a procedurally fair manner, then it runs the risk of the employee being awarded any or all of these remedies.

For more information, please contact:

Erin Davies
Partner
t: +64 9 979 2177
m: +64 29 622 2300
e: Erin Davies

Last updated: 10 August 2006

This article is intended to be brief in nature and should be used for information only. It should not be relied on as legal advice.