Redundancy – are you following the 6 x golden-rules?

Finally, the Employment Relations Authority provides some well-needed clarity on what it believes constitutes a “fair and reasonable” redundancy process.

In Jarrett v Bio-Cell (NZ) Limited, the Authority sets out strict legal principles to be adopted by employer’s when embarking on a redundancy process. So, for those of you looking to reduce overheads, please read on to make sure that you follow the legally recognized golden-rules that now form the basis of a fair and reasonable process.

Jarett had been employed since 2004 as a Water Treatment Serviceperson with Bio-Cell until his redundancy ten years later. His role comprised a mix of duties such as servicing and maintenance of air-conditioning units, obtaining and testing water samples, and the sales of water treatment products.

Since 2012, Bio-Cell suffered a significant loss in revenue brought about by a steady decline in sales. Consequently, it opted to undergo a restructuring of the business as a means of limiting overheads and unnecessary expenditure. Due to poor sales, Jarrett’s role had altered dramatically – many of his previous duties had long since disappeared. There were limited opportunities to promote Bio-Cell products and consequently, there was even less need for his services.

After seeking professional advice, Bio-Cell resolved to minimize its outgoings which included streamlining the workforce by making redundancies. To do so, it embarked on a consultation process with each affected employee — brief discussions were to be held with everyone to explain the financial situation and advise that their roles were “at-risk”. Jarrett fell into this category.

Unfortunately for Jarrett he was about to head-off on annual leave when the consultation process began. Not wishing to seem unfair, Bio-Cell convened a two-minute meeting with him before he left the office in which he was presented with a letter outlining the process. The letter correctly pointed out that his feedback would be welcomed and that he would be consulted before any final decision was made regarding his role. The letter, however, did not give any explanation as to why a redundancy process had been instigated, nor did it disclose any information as to the criteria used to assess the affected employees to determine who (if any), would be selected for redundancy. Jarrett was not permitted to ask questions in this meeting, but was informed that a further meeting would be convened on his return from leave.

In a two-minute meeting convened on his first day back at work, Jarrett was informed of Bio-Cell’s interim decision to “disestablish his position”. Subject to final approval from Head Office, he would be made redundant with no entitlement to redundancy compensation. Bio-Cell acknowledged a payment equal to one weeks’ notice of termination (as per their contractual obligation), and what it believed, was a further “generous” payment of two week’s salary (as a “gesture of goodwill”).

Jarrett did not go quietly. He filed a complaint with the Authority for unjustified dismissal seeking reimbursement for lost wages, compensation for humiliation and loss of dignity, together with legal costs.

Not surprisingly, the Authority agreed and awarded him financial compensation.

Having compared Bio-Cell’s conduct with the six golden-rules, it became clear to the Authority that their actions were unfair and procedurally defective. In its judgement, the Authority set out the legal principles that employers should follow before terminating any employment on the grounds of redundancy.

The golden-rules to follow are:

  1. Provide the affected employee with all relevant information (details of the financial situation; an explanation of the proposed restructure; disclosure of assessment criteria to be applied; and redeployment opportunities);
  2. Allow the affected employee time to comment give feedback on the information;
  3. Allow the affected employee to seek advice;
  4. Provide a genuine business reason to terminate (there must be no ulterior motive);
  5. Consider alternatives to dismissal such as redeployment; and
  6. Abide by the duty of good faith.

The Authority accepted that Bio-Cell was in financial trouble and had genuine business reasons for making Jarrett redundant. However, Bio-Cell simply could not demonstrate that it complied with all golden-rules necessary to demonstrate a fair or reasonable process. It concluded that the consultation process was almost over by the time Jarrett returned from leave and that Bio-Cell had already selected him for redundancy. It was described as “rushed, mismanaged and unfair” – effectively a fait accompli by the time Jarrett returned from leave.

The Authority specifically noted that he received little or no information about the financial situation causing the proposed redundancies; had been given little information on the actual process; had not been given any opportunity to comment on the effect the proposed redundancy would have on his role; was not offered the chance to seek advice or bring a support person; nor was the possibility of redeployment ever discussed.

By failing to adhere to the legal principles, Bio-Cell had categorically and fundamentally failed to comply with its statutory and contractual obligations to act in good faith.

Let this case be a warning to those of you considering whether to make an employee redundant. Are you able to comply with all the golden-rules and provide evidence in support? If the answer is a resounding “yes” then fear not, your risk of a personal grievance is undoubtedly minimized. If the answer is “no” or even a “maybe”, then please do not hesitate to talk to us before you do anything further.