Will courts now examine restructuring decisions, or not?

A recent employment court decision has focused attention on its approach to redundancy, without shedding much light.

In Totara Hills v Davidson, the employer, who owned a farm, decided that he needed to reduce costs due to years of drought and poor prices. He settled upon the idea of disestablishing the position of one of his two farm managers, claiming that this would reduce his total remuneration bill by 10% and was, thus, necessary.

The court was tasked with deciding whether the employer’s action was what a ‘fair’ and ‘reasonable’ employer would have done in all the circumstances. However, having made its own calculations, the court found that the employer had misrepresented the savings achieved. As a result, the genuineness and justifiability of the decision was questionable.

So what does this mean for employers? On the one hand, lawyers at MinterEllisonRuddWatts published an article stating that this decision represented a significant departure for the court. “This decision shows that the Court (and Authority) will now look more closely into an employer’s rationale behind a restructuring decision,” they wrote. As a result, employers should ensure that they gather documentary evidence to demonstrate and justify the rationale for their decision at each point in a restructure.

On the other hand, lawyers at Chapman Tripp have argued that the decision does not alter the status quo. “An employer has always needed to justify changes to staff requirements. And so we do not consider that this decision represents a shift in approach,” they wrote.

While such disagreement is a little confusing, it seems that the Ministry of Business, Innovation and Employment sympathises more with the latter approach. “In previous redundancy cases the court has not tended to focus on the legitimacy of the employer’s decision to make positions redundant but rather that they have followed a fair and reasonable process with regard to the employee (that is in line with agreed provisions in the employment agreement),” a spokesperson said.

However, the ministry did not want to comment specifically on the impact of the Totara Hills decision. “This is a recent decision and it is too early to know how this might affect the court’s approach to future cases of this nature,” the spokesperson said.