Making employees redundant - a decision not to be taken lightly

28 October 2015

With the drastic drop in Fonterra’s forecast farm gate milk price dairy farmers will be looking carefully at ways to reduce costs. Reducing the wage bill is likely to be high on the list. Deciding whether to restructure your business and make employees redundant is not a decision to be taken lightly.  This is particularly so, given recent developments in Employment Law.


For the last 20 years or so, the courts have not been prepared to scrutinise a business’ commercial reasons for making an employee’s position redundant.  As long as a redundancy decision was genuine it would not be second guessed by the courts, regardless of how sound a business decision it was. The 1991 Court of Appeal case of Hale was continually followed by the courts.  In this case it was held:

“An employer is entitled to make his business more efficient… no matter whether or not the business would otherwise go to the wall.  A worker does not have a right to continue employment if the business can be run more efficiently without him… If, for genuine commercial reasons, the employer concludes that a worker is surplus to its needs, it is not for the court or the unions or workers to substitute their business judgment for the employer’s.”

Because this approach has been accepted by the Courts for such a long time, cases have largely been focussed on the procedural aspects of the restructuring process, rather than the decision to restructure.


This has changed.  In a 2014 Court of Appeal case (Grace Team Accounting Ltd v Brake) the company projected significant cost overruns and revenue falls.  It decided to undertake a restructure, making Ms Brake redundant.  As it turned out the company was mistaken in its concern about profitability and was in fact due to make a profit.  The Employment Court concluded that a fair and reasonable employer could not have made Ms Brake redundant on the basis of the incorrect financial analysis.  This was a movement away from the approach taken by the court previously in following Hale.  The case went to the Court of Appeal where it was accepted that businesses have a “managerial prerogative” to determine how they operate without interference of the courts.  Despite this managerial prerogative, the Court held that redundancy was subject to the Employment Relations Act and the Court was able to scrutinise the employer’s decision closely.


The Brake case has demonstrated that the Court can and will look ‘under the hood’ and carefully scrutinise a decision to restructure and make an employee redundant.  As the employer in Brake discovered to its misfortune, it is necessary to ensure that the information being relied upon is accurate.

If you are considering making an employee redundant to reduce your costs, you will need to be prepared to provide accurate documentation and financial information to justify your decision and show that it is one that a fair and reasonable employer could make. You will also need to ensure that you follow the correct process and carefully consider any alternatives that will allow you to achieve your objectives without making your employee redundant.

Incorrect redundancy decisions and following incorrect processes can result in costly personal grievances.  If you are in any doubt about your decision to make an employee redundant or the process to follow, speak to an employment lawyer.


Please email me at [email protected] with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.

Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.