Store's failure to consult before closure proves costly despite genuine financial distress
The Employment Relations Authority (ERA) recently dealt with a dispute between a worker and her employer over the genuineness of a redundancy dismissal. The case centred on whether proper consultation occurred before the worker's position was eliminated.
The worker argued her dismissal lacked substantive justification and proper procedure. She claimed the employer failed to act in good faith, particularly after promising her a promotion shortly before making her redundant.
The employer maintained the redundancies were genuine due to financial difficulties that made continuing the business impossible. The dispute highlighted important questions about consultation requirements during business closures.
The worker was employed as a senior chef de partie at a café in October 2023. The café, owned and operated by a coffee company, closed in February 2024, with all staff made redundant.
The worker and café owner met in mid-2022 while the worker was a supplies manager elsewhere. They formed a friendship, and the worker began helping in the café's kitchen on weekends from March 2023 before being formally employed in October.
Initially, their working relationship flourished. In November 2023, the café celebrated its first anniversary. In December, the worker joined a "core team" meeting about making the café more efficient. The worker felt positive about these discussions and excited about future plans.
In early January 2024, the owner asked if the worker would like to become front of house manager when the current manager left in April. The worker responded enthusiastically. Though nothing was formalised in writing, the owner introduced potential new staff to the worker as their future manager.
During this period, the owner was discussing moving to Wellington temporarily to join her husband. The worker felt pressure to finalise her promotion details so she could become second-in-charge before the owner's departure.
In January 2024, the owner sought advice about the café's finances from a family friend who was an accountant and family trustee. Despite believing the café was "breaking even," she learned the business was in financial trouble.
The ERA decision noted: "[The owner] believed there were 'orange flags' in [the café's] financial situation, whereas [the accountant] told her to view them as 'red flags'." The accountant advised that the café had accumulated trading losses of around $125,000, with further losses expected.
This news shocked the owner, who had been having quarterly meetings with company accountants who hadn't flagged any issues. On 25 January, she sought advice from the Restaurant Association about closing the café, and two days later, at a family meeting, the decision to close was made.
Events moved quickly after the closure decision. Staff were invited to a mandatory meeting scheduled for 31 January. Before this meeting, the owner told the worker privately that the café would close with the last trading day on 25 February.
The worker was devastated by the news. She took sick leave for three days due to anxiety and depression but returned for the café's last day of trading.
When examining redundancy cases, the ERA must determine whether there was a commercial reason for the decision and ensure the redundancy wasn't used as a pretext. The Authority must also determine if the redundancy was carried out fairly, with proper notice and consultation.
The ERA found the employer had genuine reasons to close the café. The decision stated: "from a financial perspective there was no alternative other than to sell or cease business."
However, the ERA identified serious flaws in the process. The Authority determined that the closure decision was made on 27 January with no staff consultation during the decision-making period.
The ERA decision clearly outlined the procedural failings: "There was no discussion with staff about the proposal to close before the decision was made. [The owner] says she felt constrained in her ability to talk openly about potential closure because she did not want to instil fear. However, because the possibility of closure was not raised openly and transparently with employees, [the employer] failed to meet notice and consultation requirements under the Act and has not acted as a fair and reasonable employer could."
The worker had no prior warning of the café's financial difficulties. The decision emphasised: "while legitimate collapse of a business is a genuine reason for redundancy, there remains a statutory obligation to follow a fair process when making employees redundant. The decision to close the café and make all staff including [the worker] redundant was made without consultation."
These procedural defects led the ERA to conclude that the worker was unjustifiably dismissed, despite the genuine nature of the redundancy:
"The lack of process has impacted the fairness and reasonableness of the decision to dismiss [the worker] on the basis of redundancy. The procedural defects... ended [the worker's] employment relationship in a manner that did not fall within the parameters of what a notional, fair, and reasonable employer could have done in all the circumstances at the time."
The worker testified about significant emotional impacts, saying she was blindsided by the announcement and felt humiliated. The media release about the café's closure caused further hurt as it failed to mention impacts on staff.
The ERA awarded the worker $20,000 in compensation for humiliation, loss of dignity and injury to feelings. However, it rejected claims for lost wages, finding these losses weren't directly attributable to the personal grievance.
The Authority declined to impose a penalty for breach of good faith, determining that the breaches weren't "deliberate, serious or sustained." This case serves as a reminder that even when a business closure appears inevitable due to financial difficulties, employers must still follow proper consultation processes with their staff.
