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Keep the faith - restructure guidance in a changing world

The COVID-19 pandemic has had significant financial and operational consequences for employers and this looks set to continue . Unfortunately, as a result, we also expect to see a continued increase in restructure proposals and redundancies. This article serves as a timely reminder as to what employers must demonstrate before undergoing a restructure or redundancy process.

We caution, even in the present climate, that a restructure  should not be the first thing that is considered by a business and that the obligations set out in: the contract between the parties; the Employment Relations Act 2000 (ERA); and the Holidays Act 2003 remain in place.

Employers now, more than ever, face a much higher level of scrutiny in respect of any business decision to restructure and make an employee redundant.  Particularly if a company has accessed the Wage Subsidy or other government-funded payments and subsidies.

The Courts and the Employment Relations Authority retain the ability to inquire into the reasonableness of the business information relied on by an employer in reaching its decision to dismiss an employee for redundancy. In the Court of Appeal decision Grace Team Accounting Limited v Brake[1]incorrect financial projections had been relied upon by GTA when it decided to terminate Ms Brake’s role. The Employment Court had earlier found that if the calculations relied upon by GTA been correct, there would have been no immediate need to declare Ms Brake’s role redundant. The Court of Appeal upheld this decision and Ms Brake was awarded $65,000 for lost earnings and $20,000 for humiliation, loss of dignity and injury to feelings.

The implication for employers is that even redundancy dismissals which have been based on genuine reasons are liable to be examined and may be found to be unjustifiable if it is subsequently discovered that the information relied on to inform the restructure decision was not factually accurate, or if the basis for the proposal does not stand up to scrutiny.

Ikundabose v McWatt Group Ltd [2019] NZEmpC 193

Given the increased onus on an employer to justify a redundancy, it is no surprise that employees may appeal such decisions if they feel that the information relied upon to dismiss them was inaccurate or fraudulent. This was the situation in the recent decision of Ikundabose v McWatt Group Ltd. In this case an in-house mechanic who had been made redundant raised a personal grievance against his employer (MG), claiming that he was unjustifiably dismissed and that there were no genuine grounds for making him redundant.

Mr Ikundabose contended that the decision to terminate him was not genuine, but rather was a result of dissatisfaction with his performance, disagreements with his supervisor and disputes relating to his entitlement to parental and sick leave. MG argued that the business had changed significantly during the time that Mr Ikundabose had been employed. It pointed to evidence that the work available for an in-house mechanic had reduced considerably due to MG’s new policy to buy new vehicles, reducing the need for ongoing service and repair work.

The Employment Court noted that it is well established that it must not substitute its business judgment for that of the employer. Despite this, the Court is still required to determine, on an objective basis, what a fair and reasonable employer could have done in all the circumstances at the time the dismissal occurred. Again, the Court stressed that the reasons for making the decision must be genuine, being based on business requirements. The redundancy procedure cannot be used as a pretext for dismissing a disliked employee.

It was found that MG had adopted a fair process when deciding to make Mr Ikundabose redundant. There were genuine reasons for terminating his employment and it was clear that the work available for him had reduced substantially and would continue to diminish. Further, Mr Ikundabose’s contention that there had been a conspiracy to “get rid of him” was rejected on the basis of the evidence before the Court, which had been corroborated by other employees at MG.

While the threshold for making an employee redundant has certainly increased, if an employer keeps accurate records and evidence of the procedure and reasons for letting someone go, then this will go a long way to protecting that employer from a claim of unjustified dismissal. It is recommended that advice is sought regarding not only the process required for a restructure, but also whether the rationale for that decision is adequately supported.

Disclosure of Confidential Information

Employers should also be aware of what information they are required to disclose (and what they can withhold) during the redundancy process, pursuant to the duty of good faith in the Employment Relations Act 2000 (ERA).

Section 4(1A)(c) requires an employer, who is proposing to make a decision that will  (or is likely to) have an adverse effect on the continuation of employees’ employment, to provide potentially affected employees with access to relevant information and an opportunity to comment on that information.

Information that is “relevant” will change depending on what the employer alleges are the reasons for the proposed restructure. For example, if a business is relying on a financial downturn, then information to support the alleged position will need to be shared.

Section 4(1B), however, does not require an employer to provide access to confidential information. Confidential information is defined as:

  • information about an identifiable person other than the affected employee;
  • information subject to a statutory requirement to maintain confidentiality;
  • information deemed necessary to be kept confidential for any other good reason.

Section 4(1B)(c) provides the specific example, of maintaining confidentiality to avoid “unreasonable prejudice to the employer’s commercial position”, as a good reason for withholding disclosure of information. The Employment Court has noted that it is significant that the statute explicitly refers to the protection of information of this kind. Given the provisions outlined, employers should always consider whether they are justified in withholding certain information during a restructure proposal.

Summary

Restructures are no longer straight forward exercises and we strongly recommend that employers seek legal advice prior to commencing one. We remain ready to listen and guide employers through this process so that the obligations of good faith as captured in s 4 remain complied with.

[1] [2014] NZCA 541

This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.

For further information

Jay Rajendram - Harkness Henry Solicitor

Jay Rajendram

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