Courts toughen redundancy checks

By Steve Hart

Job specs and business cases now come under scrutiny, and an expert says employers must do their homework

Courts are checking that employers are following the redundancy rules. Photo / Thinkstock
Courts are checking that employers are following the redundancy rules. Photo / Thinkstock

Employment courts are looking at company redundancy decisions to check that newly created jobs are not the same as the ones being axed and that there is a solid business case for cutting staff numbers.

"If you look at some of the bigger redundancy proposals we often see employers terminating a number of roles, and inviting the incumbents to apply for new roles," said Christchurch employment lawyer John Shingleton. "But sometimes, you look at the new role and wonder how different it is to the old one.

"That is one of the things the employment courts are now looking at - to see if a redundancy is genuine - and they do that by comparing job descriptions, to see how similar the old and new jobs are."

A principle of employment law is that a redundancy should relate to a position, not a person, the basic premise being that jobs - not people - can become redundant.

But deciding how different two jobs are comes down to degrees, said Shingleton, a partner at Malley & Co.

"It usually comes down to the 25 per cent rule, meaning that if the new job is more than 75 per cent the same as the redundant job, then one might smell a rat.

"You have some clever HR and employment lawyers drafting a new position description and saying 'look how different it is'. But what the employment courts are prepared to do is go behind the documents and ask what the new role will require in day-to-day practicality, to establish how different it is to what those people were doing before."

One case that has been subjected to this analysis is the dispute between Totara Hills Farm (Michael Rittson-Thomas) and Hamish Davidson, an employee it wanted to make redundant so the firm could cut costs.

The Wellington employment court ruled in March that Davidson had been unjustifiably dismissed.

Shingleton said the employment court decision had helped define the circumstances for a redundancy, and that wanting to save money was not a good enough reason on its own for a company to reduce staff numbers.

"For a while, employers, employment lawyers and HR advisers assumed that if there was a good business reason for making a redundancy, the courts ought not to interfere in the decision making," he said. "The Employment Relations Authority was there just to ensure employers complied with the law.

"In the Totara Hills Farm dispute the judge looked at the business case presented by the company and saw the firm would save only $6000 a year by making one person redundant. It told the employer it couldn't terminate a fulltime role to save such a small amount of money.

"This is an important case because now, lawyers are advising clients who want to make people redundant to ensure they have evidence that will back up their decision.

"A business owner with a letter from their accountant saying they need to cut costs will have to include a profit and loss statement, or some financial predictions based on evidence.

"It is based on the concept that an employee is entitled - under section 4 of the Employment Relations Act - to all the information relevant to the decision to make them redundant.

"The Totara Hills Farm decision sent a signal that the Employment Relations Authority is no longer just focusing on process, it wants to look at the justification for a redundancy."

Shingleton said the judgment meant any restructuring proposal had to be fair, reasonable and justified.

Staff re-applying for a job with their current employer during a restructuring were entitled to see a clear outline of what the new role involved. But most employers would have a preferred candidate and might draft the new job description to fit them and their skills.

"Employers need to be careful when they craft the job description, but what goes on behind the scenes is that an employer will have a preferred candidate and couch the job description accordingly," Shingleton said.

"So it is always good to carefully look at the selection criteria for the new job and see if it gives an advantage to some people over others. But unless you know everyone's skill set it can be difficult to pinpoint."

Shingleton said some employers would consider existing staff for new jobs before going to the open market.

"If this happens then employees need to see that the same criteria are used when the firm recruits externally - otherwise it is not really fair."

Steve Hart is a freelance journalist.


How it must be done

Step 1: The employer contacts each employee in writing to say the company is proposing a re-organisation and wishes to consult the employee.

Step 2: The company sets out in detail what the proposal is, including whether any redundancies are proposed. It gives sufficient information to assist the employee to understand the reason for the proposal and tells them that they are entitled to a support person or lawyer during the process. An example would be closing a factory and centralising staff in one location. This leads to a discussion between the company and its staff on the proposal, and staff can see if it stacks up. It is only once a proper discussion has taken place that the company can proceed to the next step.

Step 3: The company confirms the action it will take, and details any proposed redundancies.

Step 4: The company further consults staff who may lose their jobs as a result of the re-organisation.

Step 5: The employer details the criteria used in its decisions on who might be "let go". One criterion could be "last one in, first one out", others could be based on past performance, or skill set.

Step 6: The employer has to consider - in good faith - if a different job within the firm is available for staff facing redundancy. In small firms there may be no other jobs, but in large firms there may be a position elsewhere within the company.

John Shingleton, employment law partner at Christchurch law firm Malley & Co, says that if a redundancy process is too short then the Employment Relations Authority may determine staff were not fully consulted.

But there is no guide as to what is an acceptable consultation period. There is no right in New Zealand law for redundancy payments, unless stipulated in an employment agreement.

- Source / John Shingleton, Malley & Co.

- NZ Herald

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