Employment Court: Consultation prior to redundancy requires good faith by an employer

April 2001

By the Employment Team

In the first full hearing under the Employment Relations Act 2000, the Employment Court has held that the obligation to act in good faith has altered the well-established principles relating to redundancies under the Employment Contracts Act 1991. The Court has set a new benchmark for whether an employer has acted fairly and reasonably in a redundancy setting.

Baguley v Coutts Cars Limited is the first case under the ERA challenging a determination made by the Employment Relations Authority. The Authority found that Coutts Cars had not unjustifiably dismissed Mr Baguley when they made him redundant. Mr Baguley appealed, successfully, to the Employment Court.

Facts

Coutts Cars made two of its four car groomers redundant, one of whom was Mr Baguley. On 3 October 2000, one day after the enactment of the ERA, Mr Baguley was given one month's notice of termination of employment on the grounds of redundancy. Prior to this, the company had a preliminary discussion with Mr Baguley in relation to restructuring the grooming department and met with him and his representative on one occasion.

Coutts Cars refused to disclose the selection criteria and assessments made which Mr Baguley may have been able to refute. They made Mr Baguley believe that the selection lay ahead when it had already been decided, did not give Mr Baguley an opportunity to respond to some subjective criticisms about him, and did not explain why he was selected for redundancy. Whilst Coutts Cars made a general offer of counselling, it did not make any offer of outplacement assistance. Following his dismissal, Mr Baguley became ill and depressed.

Decision

The Court found that Mr Baguley's redundancy was carried out in a procedurally unfair manner and his dismissal was unjustified. In addition, the Court held that Coutts Cars did not act in good faith generally and, in particular, it misled and deceived him by predetermining his redundancy.

The Court held that, in an appropriate case, damages could be recovered for a breach of good faith, but because this case was a personal grievance, adequate remedies were already prescribed by the ERA. The Court held that reinstatement was not practicable in this case because Mr Baguley's fitness for work was not certain and there was a chance that Coutts Cars might make him redundant again. In the Court's words, "to reinstate the applicant to a position in which the sword of Damocles would hang above his head would not help to heal the grievance."

Mr Baguley was awarded $10,000 for compensation and humiliation. The Court found that one month's notice was reasonable having regard to his length of service (two years) and his relatively low position. The Court also awarded a sum equivalent to three months' wages for the loss of benefit which Mr Baguley might reasonably have been expected to obtain if the personal grievance had not arisen. In other words, if the personal grievance had not arisen, Mr Baguley could reasonably have been expected to be left in a frame of mind that enabled him to look for other work.

Redundancy under the ERA

The Court made it clear that the ERA is a markedly different regime from the ECA and that it was not satisfactory to make decisions in reliance on cases decided under the ECA unless they stated principles of general application. While the ECA emphasised the supremacy of the employment contract, the ERA emphasises good faith in employment relationships.

The Court held that a number of propositions set out in Aoraki Corporation Limited v McGavin no longer apply, in particular, the pure contract approach. The balance had been changed by Parliament with the result that it no longer matters that the contract may be silent on an employer's obligations.

The Court also held that the duty of good faith applies when consultation is in progress and that consultation will be mandatory in most cases, although it was accepted that consultation may be unnecessary in the situation of mass redundancies. Whilst an employer retains its management prerogative to make a commercial decision to restructure, it must act fairly and reasonably and should:

• Give employees plenty of notice of a proposal to restructure;
• Give employees accurate information and enter into dialogue with employees regarding the proposal;
• Consider employees' suggestions for alternatives to redundancy (if any);
• Consider which employees should be selected for redundancy if there is a choice to be made, and advise employees of the selection criteria prior to the decision being made;
• Consider redeployment opportunities for employees;
• "Mitigate the blow" to employees by, for example, making an offer of outplacement counselling.

In summary, employers should be mindful that the procedural requirements for implementing redundancies are now stricter than they were under the ECA. If you have any questions in relation to implementing redundancies, we recommend that you seek legal advice.