Court Clarifies Redundancy Consultation Process

Christine Meechan | January 2002

The Court of Appeal has clarified how employers should make staff redundant in a way that complies with their obligations under the Employment Relations Act.

Timely consultation with affected employees, who should be provided with adequate information about the redundancy proposals and selection criteria, is described by the Court as "desirable, if not essential, in most cases". However, consultation is not "an absolute requirement" in situations where it may be impractical, such as mass redundancies or immediate business closures.

The Court of Appeal's recent decision in Baguley v Coutts Cars Limited came out just before Christmas 2001. The case concerned a car-groomer on an individual employment agreement who had no express entitlement to redundancy compensation. When the company contracted out some work and laid off two of its four car-groomers, Mr Baguley claimed unjustified dismissal. He lost his case in the Employment Relations Authority. He took his case to the Employment Court. That Court found Mr Baguley was dismissed unjustly. It stated that the new Act's good faith provisions required higher standards of conduct from employers and suggested the approach taken by Court of Appeal in Aoraki Corporation Ltd v McGavin (under the Employment Contracts Act 1991) no longer applied. It awarded Mr Baguley $10,000 compensation for hurt and humiliation, and a further three months wages ($5,570) because the stress of the redundancy impeded his ability to look for other work. The company appealed and succeeded in having the first award reduced to $5,000 and the second award of $5,570 quashed altogether.

The Court of Appeal criticised the Employment Court for making negative findings against Coutts Cars that were not based on the evidence. It noted that the company, having made a commercial decision to reduce the number of car-groomers, followed a two-stage process of selecting who to interview as likely candidates for redundancy and then assessing them in light of the interview. Having selected Mr Baguley, the company considered re-deploying him elsewhere in the company or group, and when no suitable position was found, offered him assistance in finding another job, which was not taken up.

However the Court criticised the employer for not providing enough information to the employee and not consulting him properly about the redundancy proposal. The key failure was a refusal to disclose the selection criteria which were used.

Selection criteria

Mr Baguley and his lawyer attended a meeting with the company before he was declared redundant. At this meeting, the company refused to let Mr Baguley know the criteria for selecting which car-groomers would be laid off.

The Court of Appeal stated that selection criteria should be provided when requested. This was clearly required under the Employment Relations Act's emphasis on access to information in resolving employment relationship problems. Information on the assessment of other employees should be kept confidential.

The Court of Appeal did note that a dismissal for redundancy was not necessarily flawed by non-disclosure of selection criteria. A challenge to redundancy was "unlikely to be fruitful" where the criteria were properly formulated and applied to the standard of a reasonable employer acting fairly and in good faith. However, in most cases the employer will be well advised to be open about the selection criteria that are to be used.

Consultation

The ERA s4 requires that employers and employees deal with one another in good faith. This includes situations where an employer's plans may affect employees, such as contracting out or transferring part of the business, and when making employees redundant. The Court of Appeal described these new statutory obligations as not significantly different from the obligations of mutual trust, confidence and fair dealing that the courts have placed on parties to employment contracts over recent years. While the "good faith" requirement would affect areas such as bargaining for collective agreements, it was already required in the court-developed law on redundancy.

Justice Gault, in giving the majority decision, stated that existing case law, such as Aoraki, continued to provide guidance on the applicable principles. The existing requirement for good faith in dealing with redundancy, together with the new Act's emphasis on providing information, made:

"consultation desirable, if not essential, in most cases. But as said in Aoraki, to impose an absolute requirement would lead to impracticabilities in some situations.

In the present case the issue was not so much the fact of consultation as its adequacy and timing."

The obligation to act fairly and sensitively to the employee called for more than "going through the motions" in "such a way as to bruise the employee rather than reasonably minimising the impact on him or her".

Remedies

The Court of Appeal found that the Employment Court was wrong to award Mr Baguley three months lost wages in addition to the month's notice he was paid by the company. This was awarded under ERA s123(c)(ii) which refers to benefits lost that might reasonably have been expected to be obtained if the grievance had not arisen. The Employment Court had accepted that reinstatement was not appropriate as Mr Baguley was likely to have been selected for redundancy anyway if a fair process had been followed by the company. This meant he could not have expected the wages if the grievance had not occurred.

The Court of Appeal left open the prospect of a separate remedy where an employee loses a realistic chance to keep his or her job by being denied an opportunity to address the criteria for selection for dismissal.

In awarding $10,000 for hurt and humiliation, the Employment Court had not distinguished between the hurt from the manner of handling the dismissal and the hurt suffered in any event from loss of employment. The award was reduced to $5000 by the Court of Appeal.

Key Points

Where an employment agreement does not have specific terms about redundancy, a fair redundancy process will usually involve:

• making decisions on the basis of fair selection criteria;
• providing affected staff with information about the proposed redundancy and disclosing selection criteria;
• interviewing affected staff and listening to their views on the proposal and any comments on how they fit the selection criteria;
• providing reasonable notice of redundancy;
• providing counselling, career and financial advice and retraining, where appropriate.