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3 July 2015
by SRB Law

Court of Appeal Confirms Any Redundancy Decision Must Have "Clear Evidence" That Goals Of Redundancy Will Be Met

The Court of Appeal has recently confirmed that an employer's reasons for a redundancy process, even if genuine, may be open to question.

For any redundancy situation to be justified, an employer must ensure that two key requirements are met.  First, the redundancy must be substantively justified - did the employer have good and genuine reasons for the redundancy?  Second, it must be justified procedurally - was a fair process followed?  Did the employer consult with the employee about the possible redundancy in a meaningful way, and consider any submissions or suggestions that the employee may fairly and reasonably have made?

Until fairly recently, the Employment Court took the view that it should not try to step into the shoes of the employer in assessing the substantive justification for a redundancy.  That would have allowed the Court to replace an employer’s business judgment with its own. Instead, the Court simply considered whether a decision was a genuine business decision, and not merely a charade by which an employer used redundancy to get rid of an employee.  This has resulted in most of the recent redundancy decisions being focussed on the process followed by an employer rather than the substantive reasons. 

Two recent Employment Court decisions have changed that.  In Rittson-Thomas t/a Totara Hills Farm v Davidson and in Brake v Grace Team Accounting Limited the Court stated that in considering whether a redundancy was justifiable from a substantive point of view, a court must consider whether the decision was fair and reasonable.  This necessarily involves an assessment of whether the suggested goals behind the redundancy have been met.  The Court stated that it was not enough to merely show that the employer’s reasons were genuine as opposed to being based on ulterior motives. 

The Court of Appeal has now confirmed that test, in Grace Team Accounting Limited v Brake.  In dismissing the employer’s appeal, the Court of Appeal stated that the test for whether a redundancy decision was justified requires an assessment of the employer’s rationale for the decision, including an assessment as to whether the employer’s stated goals would be met by the decision.  In assessing the rationale and the employer’s decision to make the employee redundant, the Court of Appeal found that the employer’s motives were genuine but mistaken.  A fair and reasonable employer would not have made that decision and as such the dismissal was unjustified. 

While the facts of Brake are pretty clear cut (the employer’s decision was based on clearly erroneous financial information, and two other employees had already resigned which lead to the desired costs savings) the Court of Appeal’s confirmation of the test of justification in a redundancy context has significant implications for employers.  Employers have sometimes been tripped up by procedural issues in relation to redundancy decisions but have managed to mitigate their damages by showing that despite the procedural errors, their decision was ultimately justified as having been made for genuine business reasons.  This will no longer be sufficient - instead employers must also ensure that any decisions they make can be justified if assessed by the Employment Relations Authority or the Court, particularly with respect to whether or not the employer’s stated goals have been met by the employer’s decision.  In effect, employers now face the possibility of the Employment Relations Authority or the Court second guessing their decisions even if made for genuine commercial reasons. 

Employers need to be even more careful in considering matters before embarking on a redundancy process.  Saunders Robinson Brown is able to advise on and assist with this process. We strongly recommend that employers take legal advice before undertaking a redundancy process, so as to ensure that the decision ultimately made is one that stands up to court scrutiny as being one that a fair and reasonable employer could have made in all the circumstances.