The environment in which businesses operate can change quickly and dramatically.  Employees may be hired one minute when the outlook is positive, but their employment may be in jeopardy when economic sentiments change for the worse and business performance fails to meet the targets which had previously been anticipated.  For many businesses, labour costs account for a major proportion of their operating costs.  As such, many businesses will look to reduce their workforce when business conditions take a turn for the worse.  Not even newly hired employees are exempt. We turn to examine a recent Employment Court case on this issue.

STL Linehaul Limited v Waters

In this case, Mr Waters was dismissed for redundancy after less than two months’ service.  There was no consultation process, and he was advised of the redundancy by email.  Fortunately, Mr Waters obtained new employment soon after his employment with STL ended.  The Authority had found the dismissal to be unjustifiable and awarded him $17,000 as compensation for hurt and distress.  The main issue for the Court was whether the level of compensation was excessive, given Mr Waters’ brief period of service, short period of unemployment, and Mr Waters’ alleged contribution.

Background

Mr Waters commenced employment with STL as an Administration Assistant in August 2019.  He was not employed for long, as he was dismissed by STL for redundancy in October 2019.  Mr Waters obtained new employment soon after his employment with STL ended.

Before Mr Waters was employed, STL had five administrative employees in its Auckland office.  Shortly before he started, one of the employees went on parental leave.  This parental leave and a projected growth in work led STL to employ Mr Waters as a full-time employee and another person on a part-time basis.  During his employment, STL raised some issues with Mr Waters about his performance.  At the time of Mr Waters’ dismissal, the performance process was ongoing.

Redundancy

Not long after Mr Waters started work, the circumstances of the employee on parental leave changed and they returned to work early.  The evidence of STL was that the early return and a lower than expected growth of its business meant that it was overstaffed.  While there was some general discussion at team meetings of the economic trading conditions and about how STL could operate more efficiently, no formal process was put in place to address a possible restructuring.  There was little, if any, process around the redundancy.

After discussing matters internally, the STL managers determined that Mr Waters should be made redundant.  The main reasons for selecting Mr Waters for redundancy were his performance issues and short tenure with STL.  STL said it also took into account that other staff were interested in being trained in other areas, whereas Mr Waters was not.  This was not discussed with any staff, including with Mr Waters in the context of a potential redundancy.  There was no selection process, and no selection criteria were provided to potentially affected employees.

On 21 October 2019, Mr Waters was unwell, he advised STL of this, and did not attend work.  Later that day, Mr Waters was sent a letter by email advising him of the redundancy.  In the letter Mr Waters was advised that STL faced a decline in business “and due to current economic conditions, the only way forward is to look at reducing staff numbers in order to reduce payroll expenses”.  Further, STL said “we are disestablishing your role and we do not have any other roles available for you at this time”.  Mr Waters was paid two weeks in lieu of notice.

Main issue

The Employment Relations Authority found the dismissal to be unjustifiable and awarded Mr Waters $17,000 as compensation for distress and loss of dignity.  The Authority also ordered STL to pay Mr Waters $9,000 as a contribution to the cost of his legal representation.  This award included a $2,000 uplift on the ordinary daily tariff adopted by the Authority.

In closing submissions to the Court, STL conceded there were flaws in the process leading up to Mr Waters’ dismissal, and that distress compensation was payable to him.  However, STL considered that the $17,000 awarded by the Authority was excessive and ought to be reduced.

Legal principles

The Employment Court took the opportunity to restate a number of principles in redundancy situations, as follows:

  • An employer must act as a fair and reasonable employer could have done in all the circumstances at the time the dismissal or action occurred. It also must act in good faith;
  • An employer seeking to make an employee redundant must have genuine commercial reasons for doing so. When the matter is before the court, it will not substitute its view of how an employer is to run its business, but it would need to see evidence of a genuine and proper evaluation by the employer of its business situation, and of the options available to the employer, in order to establish that a dismissal for redundancy is justifiable;
  • Employers considering a possible redundancy must also follow a fair process and be constructive and communicative. The employer must let potentially affected employees know what is being proposed.  It must provide those employees with access to relevant information about the situation and give them a reasonable opportunity to provide their views before any decision is made.  Employers must genuinely consider their employees’ views before deciding what steps to take.  This means while an employer is entitled to have working plans already in mind, it must have an open mind and be ready to change its plans and even start anew.
  • A dismissal or action will not become unjustifiable solely because of defects in the process followed by the employer, if the defects were minor and did not result in the employee being treated unfairly.

Findings

STL asserted that increases in fuel costs and minimum wage obligations, plus a less than expected increase in business meant that it had more staff than it needed.  However, STL did not provide financial information to its potentially affected staff, or to the Court.

The Court noted STL decided Mr Waters was surplus to its requirements less than eight weeks after he started work, but there was insufficient evidence on which to reach that conclusion.  In addition, and as STL had accepted, there was no consultation process leading up to the redundancy.  The defects in their process were not minor; fundamental obligations were entirely omitted.

The Employment Court held STL did not act in a way that a fair and reasonable employer could have done in the circumstances at the time the restructuring and termination occurred.  The dismissal of Mr Waters was held to be unjustified.

Level of compensation

Mr Waters gave evidence of the distress which he suffered.  He fairly conceded that some distress would have resulted even if the dismissal had been justifiable.  He also acknowledged that the short period of unemployment following his dismissal meant the extent of his distress was limited in duration.  Nevertheless, the distress he experienced was exacerbated by STL’s total failure to engage with him on the staffing issues and on the reasons behind his redundancy.

The Court considered that the evidence placed this case in the category of cases involving mid-range damage (Band 2).  It noted that the Authority’s award of $17,000 is in the bottom half of Band 2 for distress compensation (as identified in Richora Group Ltd v Cheng).  The Court considered that this was a reasonably modest award for an unjustifiable dismissal, and it fairly represented the distress caused to Mr Waters by STL’s unjustifiable actions.  The Court saw no reason to depart from the Authority’s assessment.

No contribution by the employee

STL considered that the compensation awarded should have been reduced for the contribution by Mr Waters.  In particular, it submitted that but for his performance issues, he may not have been selected for redundancy.  The Court rejected this.  It noted that section 124 of the Act refers to the extent to which the employee’s actions contributed to the situation that gave rise to the personal grievance.  Here, Mr Waters did not contribute to the redundancy, nor did he contribute to STL’s procedural failures.  As such, no reduction was warranted.

Concluding comment

The Employment Court did not disturb the Authority’s determination.  STL was still ordered to pay Mr Waters $17,000 for compensation under s 123(1)(c)(i) of the Act.

This case shows that a brief period of service does not mean the level of compensation should be reduced or limited in the event of a personal grievance.  On the contrary, the potential distress, disappointment and the effects experienced by an employee may be heightened, particularly if they recently resigned from secure and satisfactory employment.

If you need any advice or assistance, we encourage you to contact us.