Restructuring must be done correctly

The Dominion Post - 21 July 2010

In the 1990 case of the caretakers union and GN Hale & Sons, a company in the Hutt Valley decided to contract out its cleaning work and make Mr Shrubshall redundant.

The Employment Court decided that in order to justify a redundancy the company virtually had to show that it would otherwise go to the wall.

The Court of Appeal said that was not the law in New Zealand. A company was entitled to restructure to run its business more efficiently. It was for the company to decide what would make it more efficient, not the courts. As long as the restructuring was genuine, it should stand. A fair process of course must be followed.

More recently the Court of Appeal made another significant decision in the area of restructuring and redundancy, in a case involving McGavin and Aoraki Corporation. The Employment Court had given awards to Mr McGavin for a restructuring not carried out correctly. Aoraki was ordered to pay a significant amount for humiliation and lost wages.

The Court of Appeal essentially said that most humiliation awards for unfair dismissal are for the dismissal itself being unjustified. Where a dismissal is justified because there is a genuine redundancy but the process followed is not correct, a much more modest award should be given. Humiliation caused by a faulty process would be much less than the humiliation caused by a wrongful dismissal. Finally the Court of Appeal said that where the job is genuinely gone you should not get future lost income.

Accordingly, aggrieved workers in most redundancy cases receive a modest award if all that is wrong is the process that was followed.

But there are exceptions. In a recent case involving advertising agency Ogilvy, the employer was ordered to pay out just under $350,000 to a wronged employee.

Margaret Whitten, deputy managing director at Ogilvy, was advised by the managing director in an impromptu meeting that a new deputy managing director had been hired. The director asked her to relinquish her title and take up a directorship role. Otherwise, he said, her existing role would be limited. Hers would be reduced to a regional rather than a national role.

Ms Whitten agreed to consider the request. Three days later the appointment of the new deputy director was announced to staff and published in national newspapers. Ms Whitten raised her concerns with the company. It withdrew its offer to her to take on the directorship role.

The Employment Relations Authority found the company had acted unreasonably and vindictively. The proposal to Ms Whitten was a restructuring. At the time of the announcement that her replacement had been appointed Ms Whitten reasonably understood she was engaged in a consultation process. By withdrawing its directorship offer, the company unreasonably and unilaterally terminated that process. Ms Whitten was backed into a corner. She was left with no job and a considerable amount of stress.

What stands out in Ms Whitten's case is the amount of money awarded to her by the authority. She was paid redundancy compensation of about $130,000, a humiliation payment of $15,000 and lost wages of about $194,000 along with interest. She was awarded a further $6000 odd for loss of contractual benefits. The company's attitude throughout the process contributed to the high amount. Ms Whitten suffered considerable hurt and humiliation because of the company's actions.

Senior employees are almost always on a higher salary and accordingly are likely to receive a higher overall award than low-level employees. In Ms Whitten's case her departure was highly public in nature.

A number of redundant employees have read the Ogilvy decision and are asking how they might increase their termination payment in the same way. Fortunately for employers and perhaps unfortunately for those seeking to recover more money, cases such as Ms Whitten's are rare.

Most employers follow a fair process and genuinely need to downsize their business. Almost always these days that is because of the effect of the economic downturn.

Employers should prepare properly before they embark on restructuring. The two golden rules are: Seek good advice before you commence restructuring; and follow it.