Employers have procedural obligations in redundancy and the duty of good faith
As New Zealand heads into a time of economic difficulty, many companies are considering how to cut costs, streamline the workforce, and create organisational efficiencies. Unfortunately, we are beginning to see an increase in the number of restructures and redundancies as companies look to adjust their operations in ways that impact on staff.
While these may be difficult decisions for employers to make, companies are of course entitled to restructure their businesses to ensure their continued or future success. However, it is imperative that employers follow a fair and reasonable process. Employers that fail to do so run the risk of employees challenging their decisions and claiming unjustified dismissal and/or breach of the statutory duty of good faith.
The statutory test
Whether any dismissal (including one for redundancy) is justified, will be determined using the test set out at section 103A(2) of the Employment Relations Act 2000 (Act):
“The test is whether the employer’s actions, and how the employer acted, were what a fair and reasonable employer could have done in all the circumstances at the time the dismissal or action occurred.”
The test considers what the employer did (i.e. terminate an employee’s employment for redundancy) and how it went about making and implementing that decision (i.e. the process followed). For a redundancy dismissal to be lawful, both of those elements – the substantive and the procedural – must be justified.
Formal and informal communications are both important during the redundancy process.
The substantive justification
The substantive justification simply requires that an employer have a genuine reason for proposing to disestablish an employee’s position and terminate their employment for redundancy. The redundancy must “stack up” in terms of the rationale and must not be a sham used as a means of exiting a poor-performing, incompatible, or unpopular employee from their employment.
The procedural justification
The procedural justification is more complex and requires that an employer consults with the affected employees about the proposal in good faith. Broadly, this means that the employer must provide the affected employees with information about the proposal to restructure, invite (and genuinely consider!) feedback from employees about the proposal, and consider redeployment opportunities within the business before making any decision to terminate an employee’s employment.
The employee’s employment agreement may give further detail about the process to be followed, but as a minimum, a redundancy process will include the following steps:
Provision of information. Employers are required to provide the affected employees with all information relevant to the redundancy proposal, including the reasons for it.
It is not enough to simply state that the reason for the redundancy is a result of the economic downturn. The rationale for the proposal must be supported by the relevant documentation. If, for example, a business is relying upon its poor financial position to justify a reduction in the number of staff, employers will be expected to provide information supporting its assertions – such as revenue reports, profit-and-loss statements and business forecasts.
The proposal should also provide the reasons why a specific role may be disestablished, and this reason must relate to the rationale for the proposal. In other words, the employee must understand why the employer is contemplating any redundancies, and specifically why their position is proposed to be disestablished rather than some other position.
An employer was ordered to pay “distress compensation” to a former employee whose redundancy negatively affected his mental health.
Consultation. An employer must:
- Advise the affected employees about their right to seek advice or representation and give them a reasonable time to do this.
- Provide sufficient time for the affected employees to consider the information supplied, comment on the proposal and suggest any alternatives to the employer’s proposal.
- Consider and respond to any comments and/or suggestions made by the affected employees before a decision is made.
Selection. If an employer is seeking to reduce the number of employees performing the same role, the employer will need to consult about the proposal to reduce the number of employees, and about the proposed criteria for determining which employees should be selected for redundancy. The employer must also consult with individual employees about the application of the criteria. This selection criteria should be consistently applied to all affected employees.
Redeployment. Where an employer has consulted with an affected employee and concluded that their position should be disestablished, the employer must then assess the opportunities for redeployment within the company and consult with the employee. Where there are vacant role(s) that the affected employees have the skills and experience to perform, they should be redeployed into those roles.
There are numerous potential pitfalls for employers carrying out a redundancy process. Following the proliferation of COVID-19-related redundancies, it has become more apparent than ever that employers must not only have a genuine reason for the redundancy but affected employees must be provided with sufficient information to support the rationale for the redundancy.
Engaging in a redundancy or restructure is a particularly nuanced and fact-specific endeavour.
Alison Maelzer is a partner and Kirby Kleingeld is a solicitor, both with the Employment Law Team at Hesketh Henry in Auckland.
