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Restructure with care

Posted by denise on 22 September 2013 | 0 Comments

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Over the past few years we have seen a higher number of employers undertaking restructuring exercises resulting in redundancies.  This is natural given the changed economic conditions and  the need for business to adapt and change  how they do business.  Sometimes restructuring is used as a vehicle to exit out an employee, say for reasons of performance or similar,  where the employer for whatever reason  doesn’t want to go down the performance management route.

Recent case law has highlighted the need for employers to be much more careful when making redundancies arising from restructuring. 

In Totara Hills Farm v Davidson the farm manager, Mr. Davison, was made redundant on the basis of the employer needing to reduce the wages bill by 10% because of deteriorating  economic conditions.   Mr. Davidson, however,  thought  the real reason for his dismissal was his employer’s unhappiness with his performance and the fact that he had challenged his manager’s bullying behaviour towards him.  The Court found, however, that the redundancy was not a smokescreen.   Now normally it would have ended there.  However, in this case the Court went a step further in examining the substantive business reason relied on to make Mr. Davison redundant.

In the past there has been a perception that Employment Courts did not interfere with management’s commercial decisions to restructure and made redundancies as they see fit.   The onus of showing that a redundancy was genuine had been confined to the employer demonstrating that the redundancy was the result of a genuine commercial decision.

In this case, the Court, using section 103A of the Employment Relations Act, which sets out the test for deciding whether an employer’s actions were justifiable, scrutinised the detail of the business case for the redundancy.

The employer maintained that disestablishing the position would result in a 10% savings in the wages bill.  The Court did their own calculations and found the savings were closer to 6%.  In addition staff had suggested other ways of making savings which were not taken up by Totara Hills Farm.  There was no evidence presented  of what those savings were and how they compared to the 6% saving of disestablishing Mr. Davidson’s employment. 

The Court found that the justification for the dismissal was scant in that the employer did not provide sufficient and robust reasons for terminating Mr. Davidson’s employment.  Also the Court found that instead of inviting Mr. Davidson to apply for the new junior shepherd position it should have been given to  him  given that he was “well regarded” and the job was well within his capability.  the Court found that Davidson’s dismissal was unjustified and awarded all up costs of $9567, plus legal costs.

In another case, Wang v Hamilton Multicultural Services Trust, the employer made the employee’s position of financial administrator redundant due to the creation of a more senior position of finance manager.  The Trust suggested that as a result of increased operations they needed a more senior role with increased responsibility for training, oversight and decision making.  The new, more senior role, had a salary of almost 50% more than the disestablished junior role.  Taken together these changed job factors suggest a ‘substantially different’ role.  The Trust advertised the finance manager role publicly and told Mr. Wang he could apply.  Mr. Wang chose not to on the grounds that he did not want to appear to be agreeing with the actions of the Trust.

The Court held that Mr. Wang’s dismissal (redundancy) was unjustified because the Trust did not offer the new position to Mr. Wang and instead publicly advertised the position.   What is key in this this case is that  even though the position had significantly increased responsibilities and a large increase in salary the employer was required to offer that position to the employee.  An  factor  for the Court in making this decision was that Mr. Wang was capable of performing the more senior role following training.  The Trust also accepted that further up-skilling would not have been too burdensome for them to train Mr. Wang. 

In redundancy situations there is a requirement to firstly consider redeployment as an alternative to dismissal.  Often the employer is obliged to offer the position to the employee rather than inviting them to apply.  This is generally the requirement where the new position is of a less skilled nature and the employee is capable of performing immediately.

This case, however, suggests that an employer may be required to offer an employee a substantially different role, which is greater in terms of skill, responsibility and remuneration, where the employee is capable of performing the role following training. 

Two case law precendents  arise from these cases:

  1. The need for a strong business case around restructuring and redundancy that can withstand legal scrutiny by an Employment Court
  2. The need to consider redeploying an employee into a substantially different role where the employee is capable of performing the role with additional training, instead of relying on ‘inviting them to apply’ as part of an open recruitment process.

 What does this mean for employers undertaking restructuring?:


- Remember redundancy is about the job not the person.  Be very cautious about using restructuring and redundancy as a cloak to exit an employee for other reasons, such as performance. 

- You need to have a strong and genuine business case for the restructure, detailing the business reasons and justification for the restructure.  The facts should be able to withstand scrutiny by an Employment Court.

- If the decision to make redundancies is about cost cutting you need to demonstrate what savings have been achieved and what other cost cuttings options were considered and why they were rejected or insufficient

- Ensure you follow a robust and fair process with genuine consultation (instead of a pre-determined outcome that dismisses  employee feedback without good reason),  a reasonable consultation timeframe (allowing time for employees to seek advice) with all information relevant to the  proposal communicated to employees clearly and comprehensively

- Where employee’s feedback on the proposal is not accepted, give clear reasons why within the consultation timeframe

- Fully consider redeployment as an alternative to dismissal, instead of ‘inviting them’ to apply for the different role (as is often the practice).  Where redeployment is not an option ensure that your reasons are sound, are legally justifiable,  and  fully explain  to the employee why

- Where redeployment into a different role is not feasible  employers would need to demonstrate why  the affected  employee does not have the required skill for a new and different job, even with further training and upskilling

- Always seek legal advice before embarking on a restructuring and redundancy process

sources:  NZ Business. 



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