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When the Employment Court has looked at the books and decided that the business decision to lay off staff is not viable.

Did I just say ‘….when the Employment Court has looked at the books..’?  Yes.  In recent cases, beginning with Edwards v Two Degrees Mobile Ltd, the Court has decided that section 103A of the Employment Relations Act 2000 (which refers to dismissals that a fair and reasonable employer could make) is wide enough to include an analysis of the employer’s business decision to make an employee redundant.  Edwards v Two Degrees Mobile Ltd was followed by Totara Hills Farms v Davidson in which the Chief Judge continued the line of reasoning started in Edwards, stating that, although the Court cannot substitute its own business judgement for that of the employer, the test of justification (of a dismissal) does indeed require the Court to inquire into the business decision that led to redundancies.  Mr Davidson had claimed that his redundancy was a result of his employer being unhappy with his performance and was therefore not genuine, but the Court did not accept this.  It believed the redundancy was not a charade but, on the financial evidence presented, it found instead that the employer’s figures when calculating his savings by making Mr Davidson were incorrect. This finding “threw into doubt the genuineness and, therefore, the justification of making Mr Davidson’s position redundant”.  Mr Davidson was found to have been unjustifiably dismissed.  By this finding, it is my view that the Court did just what it said it wouldn’t, and substituted its own judgement over that of the employer’s.

This finding was repeated in Brake v Grace Team Accounting Ltd.  The Court ruled that the figures used to justify the redundancy were inaccurate and, again, found the dismissal unjustified.  This decision is being appealed (as at Aug 2014).

These decisions sent shock waves through the business community.  Prior to them, the Employment Relations Authority and Court were only concerned with the genuineness of the redundancy, and that it was not just a manoeuvre to get rid of an employee.  Now, the decisions indicate that they will consider whether the business case for the redundancy is objectively justifiable having regard to the financial outcome the employer wishes to achieve.    This means that if the employer has made a genuine error in its calculations and made a redundancy based on those, the Authority/Court could find the dismissal unjustified even though the employer thought it was a genuine redundancy.  It can be argued that this is no different to finding that an employer did not follow the correct disciplinary process prior to sacking an erring employee and that, therefore, the dismissal is unjustified.  However, the two forms of dismissal are different in that, in the case of redundancies, the business owner may be relying on the advice of an accountant rather than his own judgment.  In addition, there may be an element of crystal ball gazing in the financial analysis because there could be an attempt, for example, to predict future trends in the industry that will impact on the business. For these two reasons, I feel that the Authority/Court should not go as far as it has in scrutinizing the books of a business.  If it considers that the decision to make redundancies is genuine, even though the financial analysis may be flawed for whatever reason, then it should find the dismissal justified. 

The Grace appeal will be awaited with interest.  My desire would be to see the Court of Appeal draw a line at pre Edwards v Two Degrees Mobile Ltd and return to the position outlined in Simpsons Farms v Aberhart.  In that case, the Court held that section 103A did not alter its long held principle that, so long as an employer acts genuinely, there is no need for it to proceed any further in its investigation.

In the meantime, employers must take great care to ensure there is a sound business case for any redundancies, and that they can supply the documentation to prove that, as an employee is entitled to view the information in that documentation.  The employee/s must also be given the opportunity to comment and make alternative suggestions which must be listened to with an open mind.  Alternative employment within the business needs to considered for the affected employee/s.  A reasonable timeframe should also be provided for this process.  If these steps are followed, the chances of a redundancy being found unjustified will be greatly reduced.  Please see my blog on DIsclosure of Information to Employees to read about what information has to be given in the redundancy process.


Grace Team Accounting Ltd has this month lost its appeal.  This means that future redundancy cases that are claimed to be unjustified dismissal will face greater scrutiny of the financial information that led to a decision to make redundancies.  This is unfortunate, in my view.  As I said above, as long as the employer genuinely believed that a redundancy was necessary, there should be no grounds for a claim of unjustified dismissal.  I would add that, of course, it would be expected that the financial information relied on should be as accurate as it can be in view of the fact that some of it will be based on conjectures made about future events, but it is the fact that there always will be that element of conjecture that makes it none of the Authority's or Court's business to scrutinise, beyond determining that there was genuine belief and the financial information is accurate as far as it goes.

Posted: Fri 03 Feb 2017


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