Alan Cressey
The courts have long held that an employer is entitled to run its business as economically and efficiently as it can and if that means making employees redundant, then it is entitled to do so.
In a claim for unjustified dismissal, the courts will check that the dismissal decision was made for genuine business reasons and is not simply a case of an employee overstaying his or her welcome.
The courts will also check that the employer has followed a fair process involving proper input from the employee, and that it has complied with all of its contractual obligations owed to the employee such as giving proper notice of termination.
A recent case involving Car Giant Ltd provides an example for how not to do things.
Car Giant employed Michael Stocker as an IT manager.
At a meeting on May 2, 2012, the company's CEO, Greg Philpott, advised Mr Stocker that he was dismissed immediately and, as he was a contractor, he would receive no further payments. He asked Mr Stocker to clear out his workspace, hand over his cell phone, and hand in his company car.
Mr Stocker had no prior notice of what the meeting was about.
Mr Stocker complained about being dismissed and said he was owed holiday pay.
Mr Philpott disagreed but said he would look into it. He then, rather cheekily, asked Mr Stocker to return the next day to train a replacement.
On the way home, Mr Stocker telephoned Mr Philpott and asked for written reasons for dismissal. Mr Philpott initially refused, but later provided a letter.
The letter was headed "cessation of engagement" and referred to the company's "precarious financial position" and its need to make "rapid and radical changes in order to survive" as the reason for Mr Stocker's termination.
It also referred to there being "some confusion as to the status of [his] engagement as it appear[ed] to sit somewhere between a contractor and a permanent part-timer".
The letter went on to offer him "ongoing independent engagement as a weekend sales consultant".
Mr Stocker sued the company for unjustified dismissal.
The company initially claimed that he was a contractor and not an employee, but the Employment Relations Authority (ERA) rejected this claim. The company was required to justify Mr Stocker's dismissal and the process it had followed.
In attempting to justify Mr Stocker's dismissal, Mr Philpott told the authority that the company had been poorly managed. He said he had implemented a plan designed to increase revenue/sales and decrease costs but, by early April 2012, the company was insolvent and unable to meet its debts. He began making employees redundant.
He said that his discussion with Mr Stocker was different from the discussion he had had with other employees because he believed that Mr Stocker was a contractor and not an employee. He still believed that Mr Stocker had been treated fairly and reasonably.
The Employment Relations Authority disagreed. "It is clear ... that CGL did not apply a fair procedure in dismissing Mr Stocker. Mr Philpott embarked on a process with a complete disregard for the requirements of natural justice and good faith.
"He gave Mr Stocker no advance notification that CGL was considering making his position redundant. Accordingly, Mr Stocker had no opportunity to attempt to persuade his employer of the merits of retaining him, or of putting forward any alternatives to redundancy," the authority said.
The ERA also noted an earlier Employment Court decision which held that, when justifying a dismissal for redundancy, it will not be enough for an employer to simply say that it was a genuine business decision.
Although Mr Philpott claimed that the company's precarious financial position justified Mr Stocker's dismissal, he provided no financial data to verify this claim. His request for Mr Stocker to train his replacement also suggested that the position was not genuinely redundant.
The ERA ordered the company to pay Mr Stocker three months' lost wages (almost $20,000) and $8000 in compensation for humiliation and distress plus costs.
Alan Cressey is an employment lawyer based in Napier. Questions may be sent to him at alan@cresseylaw.co.nz