By | September 3, 2013

Totara Hills case lifts the bar

Are you wanting to cut staff costs and considering letting someone go? The recent Totara Hills case has raised the bar for an employer’s need to prove redundancy for financial reasons is a justified business decision. We offer you some advice based on recent employment law decisions.

In the past, the Employment Relations Authority and Employment Court have been reluctant to take more than a superficial look behind an employer’s stated business decision in relation to redundancy.

Until this year, the accepted rationale as applied in the Simpson Farms case (see footnote 1) was that a genuine business decision about redundancy should be upheld in the absence of ulterior motives and also that business decisions are for the employer to make, not the court. Essentially the court would not overturn a business decision unless it was just a ruse to sack an employee without going through the proper process.

Justifiable and reasonable business decision – the Totara Hills’ test

Earlier this year in the Totara Hills case(see footnote 2) , the Employment Court determined that the court can, and should, look deeper into the reasoning behind business decisions, as an employer’s decision must always be one that is justifiable and reasonable in the circumstances at the time the decision is made. The court has now demonstrated a willingness to test the assertions of employers to see whether their decision really can be justified by reference to the accounts of the business.

Be careful what goals you set

In Totara Hills, the employer (Mr Rittson-Thomas) met with staff and set a goal to reduce the wage cost by 10% for the business to survive. When Mr Rittson-Thomas later chose to make a senior position redundant and to create a junior position, with a net saving of only 6% of the wage cost; this decision was found to be unjustified. The court considered that Mr Rittson-Thomas couldn’t show that the business had explored other avenues to cut costs, nor could Mr Rittson-Thomas show any objective reason why 10% was chosen as the goal, given that the business had survived a lengthy downturn prior to the redundancy.

To make matters worse, Mr Rittson-Thomas didn’t offer the newly created junior position to the employee (Mr Davidson) who was made redundant. Even though this might result in a demotion and reduction in pay, as an employer you must offer to redeploy an employee to any alternative position vacant in your business in which that employee could perform.

Putting the Brakes on – can you prove what you claim?

The claimed cost savings must be real and your figures must be accurate. In a more recent case in May this year(see footnote 3) the Brake case has affirmed the Totara Hills’ test and clarified that it’s not reasonable for an employer to rely on erroneous figures or business data, even if they were not aware of the error at the time. In the Brake case, Grace Team Accounting tried to justify a redundancy on the basis of a large drop in turnover. When the Employment Court investigated further, however, it found that the figures were miscalculated by more than $120,000. Relying on the incorrect figures was determined to be unreasonable and the dismissal was unjustified.

What does this mean for you?

If you’re re-evaluating your staffing levels and considering possible redundancies, take the time to collate (or have your accountant gather) financial data to back up your plans. It’s vital to check and double check the evidence that you intend to rely on when taking the step of making a position redundant. Ask yourself – is it robust enough to stand up in court? If in any doubt, talk to us. You may want to seek assistance in managing the process or in assessing the evidence that you want to rely on. Get advice before you take action.

Footnote 1 =  Simpson Farms Ltd. v Aberhart [2006] ERNZ 825
Footnote 2 =  Totara Hills Farm v Davidson [2013] NZEmpC 39
Footnote 3 =  Brake v Grace Team Accounting Limited [2013] NZEmpC 81

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