Opinion: When is a genuine business decision not a fair and reasonable decision?

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The old saying “you can’t understand a man until you have walked a mile in his shoes” has never really applied to redundancy decisions.  The Employment Court has always been very careful to stay out of the parties’ shoes and keep its distance from the nitty gritty of redundancy decision making.  “Managerial prerogative” has instead been the catchphrase, with employers only required to run their businesses genuinely.  If they chose to make bad business decisions, that is their prerogative.  This idea has come under scrutiny lately with several Employment Court decisions indicating an increased willingness to give the parties’ shoes a closer examination.
 
Signs of a change in the Court’s approach were first alluded to by Judge Travis in Edwards v Two Degrees Mobile Ltd, when he commented that “on the face of it, [the test of justification] may be wide enough to include an analysis of the business decision itself”.
 
In Totara Hills Farm v Davidson, Chief Judge Colgan continued this line of reasoning, stating that although the Court cannot substitute its own business judgement for that of the employer, the test of justification does indeed require the Court to inquire not only into the process, but also into the business decision to declare an employee’s position redundant. 
 
In this case, the employer argued that the disestablishment of an employee’s position would reduce its remuneration bill by almost 10%.  However, the Court calculated that the savings were actually below the 10% saving claimed. The Court found that, given this, other suggestions made by employees may have achieved similar savings without sacrificing jobs. The Court concluded that although the redundancy was not a charade, the employer had not met the test of justification and the dismissal was, therefore, unjustified.
 
Brake v Grace Team Accounting Ltd also followed this line of reasoning. Judge Travis found that the employer acted abruptly and failed to closely analyse the monthly fees and budgets. Importantly, the employer’s downfall was that the figures used to justify the redundancy were inaccurate and did not, as had been asserted, show that the company’s financial position had deteriorated significantly over the previous six months.
 
Later, in Tan v Morningstar Institute of Education Ltd, a teacher was advised by her employer that the preschool was making a loss and urgently needed to cut costs.  The Court examined the books and found that the preschool had been profitable and that the projected loss for the following year was unduly pessimistic.  The Court found that the material provided to the employee was incorrect, misleading, and that no fair and reasonable employer could have proceeded with a redundancy on the basis of misleading information. Hence, the dismissal was unjustified.
 
There has been much debate over whether these decisions have changed the face of redundancy law or simply provided clarification. Putting aside technicalities, however, it seems the Employment Court is more willing than ever to scrutinise the commercial rationale behind an employer’s decision to restructure.
 
What does this mean for employers?
 
The Authority is now routinely referring to the Totara Hills line of cases and is more direct about requiring documented proof of the purported reason for the proposed restructure. For employers, it is more important than ever to build a solid business case before implementing a restructuring.  Employers must ensure they are able to demonstrate commercial reasons for any restructuring decision together with the appropriate documentation to evidence this. If financial justification is behind the proposed restructure, employers need to clearly show accurate evidence of how the proposal will produce cost savings.
 
In light of these cases, it is also increasingly likely that employees will request detailed information regarding the rationale for a redundancy.  As part of the statutory duty of good faith, employers are under an obligation to provide all information that is relevant to a decision concerning the continuation of the employee’s employment.  There are statutory privacy protections built in for natural persons and confidential information, however, the Massey case has shown that the Employment Court has set a high threshold for employers hoping to withhold information on those grounds. Accordingly, relevance will be key in determining which information needs to be provided to affected employees.  For example, although financial information illustrating the need for cost savings may be relevant, this does not necessarily lead to an obligation to disclose the company’s entire financial records.  If a requested document contains relevant and non-relevant material, the employer has the option of summarising the relevant information, as the obligation is to provide information, not documentation per se.
 
Employers should also bear in mind that the obligation of good faith is a mutual one.  If an employee is using delaying tactics such as excessive documentation requests, then an employer can remind the employee of their obligation and put a reasonable timeframe on the process, particularly if other employees are involved.
 
The Court of Appeal will decide how close it would like to get to the parties’ shoes later this year, as Grace Team Accounting has been granted leave to appeal.  In the interim, employers ought to be vigilant about ensuring the rationale behind a redundancy decision is well reasoned, supported by tangible evidence and well communicated to the employee as part of a fair process.
 
Written by Minter Ellison Rudd Watts employment law specialists Jennifer Mills and Christie Hall.

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