Justification for the Substantive Grounds of Redundancy in New Zealand

Section 103A of the Employment Relations Act requires that, when conducting a redundancy, an employer must satisfy both substantive justification and procedural fairness; otherwise, the dismissal may be deemed unjustified.

We will address, in turn, the justification for the substantive grounds of redundancy and the relevant powers of the adjudicator, as well as the parties’ respective burdens of proof.

First, in assessing whether an employer’s grounds for redundancy are substantively justified, the central inquiry is whether the employer’s decision to make the position redundant is one that a fair and reasonable employer could have made in all the circumstances at the time. The following relevant factors must be fully considered:

1. Employer-related factors are the core consideration. This concerns whether, at the time of the redundancy decision, the employer genuinely had genuine business reasons. Case law shows that such reasons include:

(1) overall operating losses or a serious decline in profitability, or operating losses or a serious decline in profitability in the area involving the employee being made redundant; (2) the existence of significant adverse market changes in the future;(3) necessary and objective changes to the employer’s internal operational processes, making the redundancy reasonable.

For example, in Stormont (2016), the Authority held that the employer had sufficient grounds because workflow changes meant the department could be effectively managed by assigning the tasks to an architect and an interiors assistant, making the employee’s internal design role unnecessary. This is a typical example of redundancy arising from internal operational change.

Another example concerns redundancies used as a pretext to replace an employee with a lower-paid one. In Davidson, the employer made the employee redundant but then created a lower-level replacement role. The Court held the employer had not adequately explained why the annual saving of NZD 6,000 justified disestablishing Mr Davidson’s role and criticised the employer for failing to provide information about other cost-saving measures considered. In this case, the employee’s position was not genuinely superfluous.

2. Employee-related factors are secondary but still relevant under the inherent requirements of s 103A, as employers owe a duty of good faith to employees. Thus, employers must consider employees’ special circumstances. For example, rare or specialised skills that limit alternative job opportunities, or an employee's illness, would render the redundancy a higher unreasonableness. 

This also explains why, in the 2014 Brake decision, the Court of Appeal rejected the rule from Hale (1991), which had allowed employers to rely solely on efficiency gains and cost-saving to justify redundancy. The Court of Appeal in Brake explicitly held that the Hale rule was inconsistent with s 103A of the Employment Relations Act.

3. Improper motives for selecting an employee for redundancy are an important indicator of lack of substantive justification.

In Simpsons Farms, the Authority stated that as long as the employer’s decision is genuine and not driven by ulterior motives, redundancy decisions fall within managerial prerogative and require no intervention by the courts or the Authority. The Court of Appeal in Brake similarly noted that “genuine” refers to a decision based on business needs, not a pretext to remove an unfavoured employee.

The unjustified targeting of a particular employee is also relevant. In Brake, after examining the circumstances of other employees in the same department, the Court held: “GTA did not adequately explain how Ms Brake came to be included in the redundancy proposal…”.

Second, although the adjudicators cannot simply replace the employer’s subjective business assessment with their own view, s 103A of the Employment Relations Act empowers them to undertake an objective review.

In Wootton v Roadrubber Tyres Ltd, the Authority stated: “Whilst the Authority following the Court of Appeal decision of Brake cannot substitute its objective view of the employer's subjective assessment of its business situation, this does not prevent the Authority from considering, in applying s 103A of the Act, the commercial accuracy and efficacy of the business decision to restructure.”

This reflects the strengthened power of the courts and the Authority post-Brake (2014) to judicially review and intervene in the substantive justification for redundancies.

Finally, in proceedings concerning substantive justification, the employer bears the burden of proving the existence of genuine business reasons and the primary motive for the redundancy.

For example, for redundancies said to be based on profitability, employers must produce financial information demonstrating profit or loss to justify the redundancy. In Wootton, the Authority stated: “Despite being legally advised, Roadrubber failed to disclose any economic information that it based the decision upon… A failure to disclose such is a specific breach of s 4(1A)(i) of the Act and a penalty is sought.”