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Employment Law Update: Accountants pinged for errors in financial information

  • 15 December 2014

There have been significant developments in case law around restructuring and redundancies.

Until recently, justifying a dismissal due to redundancy was relatively simple – an employee could be dismissed if the employer genuinely believed the business could be run more efficiently without them. If the employer could show a genuine basis for redundancy, the Employment Relations Authority (Authority) and the higher courts would not put the employer’s commercial reasons under the microscope.

Traditionally, the courts have asked two questions:

1. Was the redundancy genuine?

2. If so, did the employer go through a full and fair consultation process with the employee before making a final decision about the redundancy?

A redundancy must be procedurally and substantively justified. This requires the ‘what’ (the redundancy) and the ‘how’ (the process) to be what a fair and reasonable employer could have done in all the circumstances. Now the courts are assessing the merits of an employer’s business decision closely to determine whether it is sufficient to justify a redundancy.

In the recent decision of Grace Team Accounting Limited v Brake1, the Court of Appeal (CA) confirmed the legal test regarding justification for dismissal in a redundancy situation. It is no longer acceptable for an employer to simply assert that it made a genuine business decision; the decision can now be closely scrutinised.

The facts:

In October 2009, Ms Brake left her accountant’s job at KPMG to take up a position of senior accountant with Grace Team Accounting on the understanding it was a long-term position.  However, after six months she was told by senior members of the business that they had “miscalculated figures” and that turnover was down by $100,000, which required redundancies.

Although Grace Team Accounting had decided initially to make only two roles redundant, a consultant (inaccurately) advised that redundancies should be implemented on a “last on, first off” basis. As Ms Brake was the last employee hired, her role was included as potentially affected. The company then disestablished Ms Brake’s role, and the roles of two other employees.

It was hard for Grace Team Accounting to justify the redundancy of the third position in circumstances where their initial view was that only two redundancies were necessary to achieve business objectives. Further, and more crucially, Grace Team Accounting had miscalculated its turnover. Ms Brake’s position was disestablished on the basis that turnover had decreased by $100,000, but in fact turnover had actually increased. While the mistake in calculation was genuine, it undercut Grace Team Accounting’s justification for dismissal.

Was the action justified?

When Ms Brake was dismissed, the test for justification of dismissal in section 103A of the Employment Relations Act 2000 (Act) was:

“…the question of whether a dismissal or action was justified must be determined, on an objective basis, by considering whether the employer’s actions, and how the employer acted, were what a fair and reasonable employer would have done in all the circumstances at the time the dismissal or action occurred.”

The Employment Court (EC) found that Ms Brake’s dismissal was not justified.

Grace Team Accounting appealed on the basis that the EC had accepted that Ms Brake’s dismissal was genuine (in that it did not have an ulterior motive) and it contended that it was not therefore able to enquire into whether it was a good business decision.

Outcome in the Court of Appeal

The CA upheld the EC’s decision, holding that the section 103A test required consideration of whether the employer’s actions met the standard of a fair and reasonable employer. The CA said that it was not enough to say that if an employer considered its conduct to be reasonable, then it must be. The CA had to perform its own assessment of reasonableness.  The CA said that while the employer’s decision was genuine, it did not automatically mean that the decision was one a fair and reasonable employer would have made.  The company had not exercised proper care in evaluating its business situation, and this directly resulted in its decision being made based on incorrect information.

The CA said a fair and reasonable employer would have ensured it had accurate information and concluded that Ms Brake’s dismissal was not justified.

So, what ’s changed?

Brake signals that employers need to show that the decision to make an employee redundant was not only genuine, but fair and reasonable too. We believe that this will lead to a heavier emphasis on justifying the rationale for restructuring and the need to provide affected employees with documents that support this rationale from the outset.  If cost-cutting is a factor in the decision to make redundancies, employers must demonstrate what savings will be achieved. They should also consider whether other cost cutting options are possible instead and be able to explain why these were rejected or considered inadequate.

Take home point

It is now absolutely crucial that an accurate financial and functional analysis is undertaken before commencing a restructure if the rationale is the need to make savings or achieve efficiencies. This evidence should be given to affected employees. The employer will then, of course, need to follow a proper procedure before making a final decision.

Reproduced with permission from DLA Piper.