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Of recent times, there has been development in the law surrounding redundancies and an employer's decision to restructure their business.  With many employers looking to restructure, it is timely to summarise these developments.

The legal framework

Under the Employment Relations Act 2000, an employer needs to be justified in dismissing an employee and it is no different with redundancies arising out of a restructure. For a long time have, employers have justified redundancies by claiming that they made a genuine business decision to restructure their business, and any personal grievance claims for unjustified dismissal have been defended on that basis.

The Employment Court limited the extent to which it involved itself with an employer's decision to restructure, which meant that there was not any real inquiry into the legitimacy of the restructuring decision. This left employees with little power in a situation where an unjustified dismissal (perhaps for ulterior motives) was covered up by a redundancy.

But it was not all one sided. The "justification test" under the Act applied. This is whether an employer's actions, and how they acted, were what a fair and reasonable employer could have done in all the circumstances at the time of the dismissal.

The Employment Court 1 has further developed the justification test in terms of restructuring decisions, meaning that employers should carefully cover off all issues.

The previous legal position

From 1991, the Employment Court had taken the view that they should not be concerned with assessing the genuineness of a business decision behind a restructuring. The Courts did not want to get involved with how an employer ran his or her business. If an employer restructured their business and employees were made redundant, the Courts would, more or less, stand back and accept the decision to restructure without assessing its merits.

So long as an employer was acting in good faith and followed a fair procedure for making employees redundant, the Courts did not interfere with the Employer's business decision.

The new position

Recent decisions have seen the departure from the previous legal position. The Employment Court, in Totara Hills, ruled that an employer who wants to make employees redundant because a restructure is good for business will now be required to prove the genuineness of that business decision to the Courts' satisfaction.

Employers will no longer be able to respond to a claim for unjustified dismissal by claiming that the decision to restructure was genuine. When assessing whether a dismissal is justified, the Court is now entitled to pull back the curtain and enquire into the merits of a business decision; asking whether the decision to restructure and make employees redundant is what a fair and reasonably employer could have done in all the circumstances.

There have been half a dozen cases since Totara Hills was decided in March 2013 that have adopted this new approach; showing that employers may be at risk when making employees redundant without justification.

This development has given employees further grounds upon which to challenge a dismissal while creating a further, and possibly rather expensive, hurdle for employers to jump over. There are likely to be an increased number of these sorts of cases going before the Employment Relations Authority and Court in the interim period before employers begin to react to the change.

What are the practical implications for employers?

As well as following the proper procedure of good faith and consultation when considering a redundancy, employers will now need to ensure that they rationalise and carefully justify the business decisions behind a redundancy. The ERA or Court cannot substitute its own decision for that of the employer at the time, but it will mean that employers will need to put together more information for employees in a redundancy process.

Employers considering a restructure will now need to be even more careful than before. In particular, employers will need to:
  1. Carefully go through the reasons for the restructure, with such reasons being objectively justifiable;
  2. Be able to explain these reasons in clear practical terms to both employees affected by the proposal and Courts/ Authorities;
  3. Invite and consider alternatives to a proposed restructure e.g. redeployment options:
  4. Be able to justify a decision to not adopt alternatives to restructure;
  5. Obtain accurate financial evidence if relying on financial reasons for a restructure; and
  6. Be prepared to produce documentary evidence to justify a restructure.
In Totara Hills, the Court picked up on the fact that the savings that the employers said it needed to achieve were not actually achieved by its redundancy decisions.

Points for employers to note

Employers will avoid getting themselves into trouble where they follow a proper process and consider whether the decision they are contemplating is one which a fair and reasonable employer could reach in all the relevant circumstances.

There is a new focus on justifying the business decision sitting behind the restructuring and redundancy process.

If you are considering a restructure or change in your business that may affect your employees, then it is worth getting in touch with a member of Wynn Williams Employment Team. It is important that employers know their obligations to employees prior to and during a change to their business. We can help you to avoid the pitfalls of restructuring by advising you on the "dos and don'ts" when making business decisions that will affect your employees.

1Totara Hills Farm v Davidson
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