IpsofactoJ.com: International Cases [2003] Part 2 Case 9 [NZCA]


COURT OF APPEAL, NEW ZEALAND

Coram

Charta Packaging Ltd

- vs -

Howard

RICHARDSON P

TIPPING J

McGRATH J

22 FEBRUARY 2002


Judgment

McGrath J

INTRODUCTION

  1. This is an appeal from a decision of the Employment Court (WC20/01, 17 May 2001) upholding awards by the Employment Tribunal of salary in lieu of notice and of compensation for humiliation and injured feelings to 8 employees who had been made redundant. Because the critical events took place in 1999 matters at issue fall for decision under the Employment Contracts Act 1991.

    BACKGROUND FACTS

  2. The appellant produces packaging and at the relevant time was a niche producer in a market dominated by two large companies. In 1996 it was employing approximately 70 people. Its factory staff were employed under a collective employment contract which included provision for compensation for redundancy. Salaried staff, however, were employed under individual employment contracts without any such provision. During 1996 and 1997 the company was implementing a plan for growth in its production and sales involving capital expenditure. At the same time, for reasons not directly connected with the appellant, strong competition was developing between the two major companies. A company based in Australia was at this time thought to be about to enter the New Zealand market and this intensified competition in the packaging industry. The appellant’s margins came under heavy pressure. As a result by late 1998 the targets of its growth plan had not been achieved and the prices it could get for its product had instead eroded. Operating profits became operating losses.

  3. In 1998 the appellant suffered a substantial loss. It forecast it would also incur a further similar loss in the following year. In March 1999 the company decided that its situation required that it make seventeen, that is 30%, of its staff redundant. Eleven of those who were made redundant were salaried employees and 6 were factory workers. The respondents to this appeal are 6 of those salaried employees who were based at Lower Hutt together with 2 who were based at Auckland. The Lower Hutt respondents are Mrs. Stewart, Mrs. Pomana, and Messrs Atchley, Gray, Howard and Ross. The respondents employed at Auckland are Messrs Chan and Rawlinson.

  4. The respondents were made redundant in the following manner. In Wellington the appellant held preliminary meetings, on 18 and 19 March 1999, attended by those employees who were available. At the 18 March meeting employees were told of the company’s serious financial state. They were asked to take a salary cut of 10%, and informed that redundancies were likely. The appellant’s general manager gave what was referred to as a "state of the nation" address in which he said, bluntly, some staff who were on very high rates of pay were not doing much at all and that there was a need for the appellant to reassess everyone’s rates based on their current contribution. He added that some long-serving staff were not performing to the standard required.

  5. On 19 March employees were asked to sign a form agreeing to the pay cut. The prospect of there being redundancies was confirmed. Employees were also told there would be no redundancy payments to those salaried staff who were made redundant. As indicated, staff employed under the collective agreement had entitlements to compensation for redundancy. An assessment form on which, staff were told, redundancy decisions would be based was provided at that meeting.

  6. The assessment form process did not however eventuate and at the meeting at lunchtime on Thursday 25 March 1999 redundancy was implemented. Names of employees were read out and those named were asked to leave the room. Those who remained were then told they were redundant. They were also told to leave the premises and were paid until 30 April 1999; effectively they received one month’s notice.

  7. In Auckland there had been a meeting on 9 March 1999 at which employees were invited to put forward cost reduction proposals. A further meeting took place on 16 March when those present were told two sales people would be made redundant. At a meeting held on 23 March Mr. Rawlinson and Mr. Chan were told they would be those made redundant. Mr. Rawlinson was given no reasons and was told that he would not be paid compensation due to Charta’s financial problems. Mr. Chan, likewise was given no information concerning criteria against which redundancy had been determined.

  8. The eight respondents brought identical claims against the appellant for personal grievances before the Employment Tribunal, claiming they had been disadvantaged and unjustifiably dismissed. They also contended the process leading to their selection for redundancy was flawed. They each claimed to have a contractual entitlement to redundancy compensation.

    TRIBUNAL PROCEEDINGS

  9. The proceedings before the Tribunal were heard over 5 days in August 2000. The respondents first argued they were contractually entitled to payments for redundancy on the same terms as those set out in the appellant’s collective agreement with its factory employees. These provided for 6 weeks pay for the first complete year of service plus two weeks pay for each complete year thereafter. Secondly, the respondents contended they had been unjustifiably dismissed in that their dismissal was not in fact the result of a genuine commercial need. In particular they said the basis of their selection for dismissal had not been genuine. Thirdly, and in any event, they had not been given reasonable notice of their impending redundancies and were also entitled to be compensated for the humiliation, loss of dignity and injury to feelings they had suffered in what had been a defective process.

  10. Each of the respondents gave evidence at the hearing. An aspect of it which assumed importance was that for many years a family culture was very much part of the working atmosphere of the appellant. The appellant was a family company that had been started in 1978 by Mr. Winlove who had extensive previous experience in the packaging industry. He and a member of his family had been the sole shareholders since 1982. Until the mid 1990s it was part of Mr. Winlove’s employment policy for the appellant to pay staff above market rates and to encourage an atmosphere of friendship between Mr. Winlove himself and the appellant’s employees and among those employees.

  11. This "family culture" began a transformation in 1996 when the appellant appointed a general manager, Mr. Burgess, as part of a plan of transition for the future, devised by Mr. Winlove, who wished the appellant to continue as a separate company after his retirement. As indicated, by March 1997, when the financial difficulties were being addressed, Mr. Burgess had expressed to staff his view that some long-serving employees were overpaid and not contributing to the productivity of the company.

  12. The respondents also gave to the Tribunal their own account of the redundancy process implemented by the company and the effects of that process and the redundancy on them. None of this evidence was challenged during cross-examination. It included descriptions of the respondents’ feelings in terms of being shell-shocked, betrayed, humiliated and devastated. The effects of their distress and shock included impact on their sleeping patterns, depression and stress. In a number of instances there had been consequences for the personal health of the respondents. Some suffered substantial financial impacts including having to sell the family home.

  13. The Tribunal, in its decision of 18 September 2000, found that the appellant’s implementation of redundancies was genuinely undertaken for compelling financial reasons. Its financial situation at the time was perilous. Nevertheless for reasons we now outline the respondents had been unfairly disadvantaged and unjustifiably dismissed. Accordingly their grievances had been proved and they were entitled to remedies.

  14. The respondents were held not to have a contractual entitlement to compensation for redundancy as such. They did however each have rights, under an implied contractual term, to notice in the event of their redundancy. This arose from their length of their individual service with the appellant, the senior positions they held, and the expectations that arose from explicit and implicit undertakings over the years as to how they would be treated in such circumstances. These were underpinned by the appellant’s family culture part of which was an undertaking they would be appropriately looked after. Each respondent was entitled to compensation in the form of salary in lieu of the notice they were individually entitled to receive as an implied term of their employment.

  15. Furthermore, while the redundancy itself was genuine, the process of implementing it had been flawed. In the Tribunal’s words it was "short, brutal and deceptive". In selecting employees to be made redundant the appellant’s focus was on particular individuals who were regarded as overpaid or not contributing to the company. The process of consultation initially embarked on was found to be a sham, as the appellant had already decided who was to go. The respondents’ representative was not permitted to be involved in the decisions. The appellant had accordingly reneged on its undertakings to follow a process in which the respondents had been invited to participate and acted in bad faith. The respondents were entitled to compensation for this.

  16. Varying awards were made for salary in lieu of notice, and for compensation under s40 of the Employment Contracts Act 1991. Mrs. Stewart, who had nearly 20 years of service with the company and whose evidence had been that she was "shell-shocked, devastated and humiliated", was held to be entitled to six months salary in lieu of notice and awarded $15,000 compensation for humiliation and injured feelings. Mrs. Pomana who had been employed for 13 years was also held entitled to 6 months salary in lieu of notice. She had told the Tribunal that she felt betrayed and also distressed at not being farewelled by other staff and that she believed she had been the subject of an unfair assessment resulting in her selection for redundancy. She was awarded $13,000 compensation. Mr. Ross who had been employed for 9 years also was held to be entitled to 6 months salary in lieu of notice. He had said he felt "betrayed and gutted" by the manner he had been made redundant. His sleep had been affected and he had suffered a severe financial impact. He was also awarded $15,000 compensation. Mr. Howard who had been employed for 8 years likewise was entitled to 6 months salary in lieu of notice. He told the Tribunal he had encountered severe financial complications and that his health deteriorated with shingles as a result of the "horrible" experience. He was awarded $13,000 compensation. Messrs Gray, Atchley, Rawlinson and Chan, each spoke similarly in terms of being shocked and devastated. The impacts on them included their sleeping patterns and, in one case, depression and stress. Each of them received compensation of $11,000. Mr. Atchley had worked for the appellant for 14 years and was awarded 6 months salary in lieu of notice. The others who had worked for periods of up to 4 years received 3 months salary, the lesser period of notice reflecting their lesser length of service and reduced implied contractual entitlement to notice.

    EMPLOYMENT COURT DECISION

  17. The appellant appealed to the Employment Court. Its appeal was confined to challenging the appropriateness of the remedies allowed by the Tribunal, that is, first, to the findings of a contractual obligation to give notice for the periods stipulated in each case and, secondly, to the compensation awarded to the respondents for humiliation, loss of dignity and injury to feelings. Judge Shaw, in her judgment delivered on 17 May 2001, differed from the Tribunal over its finding there was an implied term requiring notice of termination of the respondents’ employment in the event of redundancy. Rather there was a common law requirement of reasonable notice. The Judge referred to this Court’s decision in Telecom South Ltd v Post Office Union [1992] 1 NZLR 295, as supporting a conclusion that Mrs. Stewart’s employment situation, involving 19 years of service, a senior accounting position and a special relationship with the employer, gave rise to a legal requirement to give 6 months notice. That seemed to have been treated as a benchmark. The Judge observed that the Tribunal seemed to have found an implied term requiring 6 months notice for those employees whose service was over 7 years, and 3 months notice where their length of service was below 7 years. Although the Tribunal had been in error in approaching the issue by reference to an implied term as to length of notice, the Judge decided that there had been a rational and justifiable basis for the exercise of the Tribunal’s discretion. It was accordingly inappropriate to interfere with the requirements as to notice in each case.

  18. Turning to compensation for distress and humiliation the Judge referred to s40(1)(c)(i) of the Employment Contracts Act 1991 and summarised the considerations influencing the Tribunal as being, first, the short, brutal and deceptive nature of the appellant’s process, secondly that the process for selection of who was to be made redundant was an "empty gesture" and thirdly the Tribunal’s view that the process was tainted and biased. The Judge took the view that as the Tribunal had not referred to the loss of the job in making its findings there was no indication that this factor had played any part in the levels of compensation it had set. The range of awards was between $11,000 and $15,000, which the Judge accepted could be seen as relatively high. There had been proportionately few awards above $10,000 since 1991, but inflation over the intervening period should be taken into account.

  19. The Tribunal had referred to the seniority of respondents when determining quantum for the awards for distress and humiliation, a factor Her Honour considered to be irrelevant. Nevertheless the Tribunal had dealt with the position of each respondent individually and had awarded compensation after weighing the evidence in relation to that respondent of his or her distress and humiliation. In light of that the Judge did not see that there had been any error of law or fact which would warrant interference on appeal with the awards made and they were upheld.

    SUBMISSIONS ON APPEAL

  20. Counsel for the appellant, Mr. Turkington, submitted that the findings of entitlement to between 3 and 6 months salary in lieu of notice had been made by the Tribunal, and confirmed by the Employment Court, in both cases on a wrong principle. The respondents were effectively compensated for the loss of their jobs in circumstances where there was no term providing for such compensation in their employment contracts. Given that the Employment Court had acknowledged the error in the Tribunal’s approach, and that the requirement in law was to give reasonable notice, it was not open to the Employment Court to conclude that there remained a rational and justifiable basis for the Tribunal’s decision on the periods of notice to which each respondent was entitled. He submitted that the Employment Court had failed to have regard to the Court of Appeal’s decision in Aoraki Corporation v McGavin [1998] 3 NZLR 276.

  21. Mr. Turkington also emphasised that it had been found by the Tribunal and accepted by the Employment Court, that the redundancy was genuinely the result of the appellant’s financial situation. Compensation for humiliation and injury to feelings should have related to the findings of what had been found to be a defective process. Mr. Turkington reiterated that in reality compensation was awarded for the redundancy itself which was wrong in principle and contrary to Aoraki Corporation v McGavin.

  22. Mr. Dewar, in his submissions in this Court, was confronted with the difficulty of defending decisions reached on a basis that differed from the pleadings, and the manner in which he had presented the case for the respondents. He argued that the findings of the Tribunal as to an implied term requiring notice were made on a basis that was consistent with the requirement for reasonable notice at common law. He pointed out that the Tribunal had discussed and, he submitted, applied the principles in the Aoraki Corporation decision. In that case this Court, he said, had not indicated that the common law stipulated a period of one month’s notice as reasonable for redundancy. It had rather said, on the basis of an analysis of negotiated contracts to which it had been referred, that the survey did not indicate a general practice requiring much in excess of one month’s notice of redundancy. Mr. Dewar pointed out that the analysis did not indicate the other components of the employment contracts surveyed. In the present case his argument was that the collective agreement’s provision as to notice for redundancy was a better guide to what was reasonable notice. Aoraki Corporation in the circumstances of that case had upheld a provision for 3 months notice as reasonable, and it was Mr. Dewar’s argument that the provisions as to 3 months and 6 months notice in individual cases should be upheld by the Court in this appeal.

  23. On the awards for humiliation and injured feelings Mr. Dewar focussed on the findings of the Tribunal concerning the defective nature of the appellant’s process in implementing redundancy. There had been targeting of senior employees, all of whom were made to appear to carry the blame for the appellant’s problems, which were of course completely outside their control. They were required to leave the appellant’s premises on the same day. He emphasised in his oral submissions the findings of deception in indications that there had been a process for selection of those who were to be redundant. Overall he argued that the awards reflected the principles laid down in the Aoraki Corporation case and the statutory provision in s40(1)(c)(i) of the Employment Contracts Act.

    DECISION

  24. The dispute in the Employment Tribunal over whether the respondents were dismissed for redundancy was determined by that Tribunal in favour of the appellant. The respondents failed to persuade the Tribunal that the manner in which they were selected for redundancy indicated there was no truly genuine commercial need. The Tribunal rather found the evidence of the perilous financial situation of the appellant was overwhelming. That evidence satisfied the Tribunal steps were required by the appellant to effect savings if it was to survive. The Tribunal accordingly found that the appellant’s decision to effect redundancy was arrived at for genuine and compelling financial reasons.

  25. In Aoraki Corporation the principal judgment of this Court said:

    Where it is decided as a matter of commercial judgment that there are too many employees in the particular area or overall, it is for the employer as a matter of business judgment to decide on the strategy to be adopted in the restructuring exercise and what position or positions should be dispensed with in the implementation of that strategy and whether an employee whose job has disappeared should be offered another position elsewhere in the business.

  26. It is clear that the appellant reached the conclusion it had too many employees overall. The respondents were working in areas of administration and sales although one was an engineer. In terms of Aoraki Corporation the appellant was entitled to decide that redundancies should come from the positions they occupied. This flows directly from the finding of fact that there was a genuine redundancy situation requiring reduction in the company’s costs. Eventually it decided that, of the positions concerned, eleven should be made redundant of which the respondents held eight.

  27. In that situation the appellant as employer would nevertheless be liable for unjustifiable dismissal or action under the Employment Contracts Act, the statute applicable at the time, if it failed to observe certain standards in its dealings with the employees who were to be made redundant. The issue was whether the appellant’s conduct was not just in all the circumstances. This Court developed this point in Aoraki Corporation in this way:

    A just employer, subject to the mutual obligations of confidence, trust and fair dealing, will implement the redundancy decisions in a fair and sensitive way. The procedural fairness standard will determine the period of notice or payment in lieu which recognises that commercial circumstances may dictate that redundancies take immediate effect. It is a matter of how long would a just employer provide for in treating the employee fairly. Where the contract is silent as to the redundancy notice period and payment in lieu, the contractual period for terminating on notice and in the absence of any contractual provisions the common law requirement of reasonable notice in the circumstances, may help in striking a reasonable balance between employee and employer, but modified to recognise that the employment is being terminated in a redundancy situation and the inevitable impact on the employees of the manner in which it is done and the time involved. As well, fair treatment may call for counselling, career and financial advice and retraining and related financial support. No doubt other considerations will be relevant in particular cases.

  28. The Tribunal found the appellant had failed to comply with the procedural standards required to implement the redundancy fairly and sensitively. In the criticism which was encapsulated in the Tribunal’s characterisation of the process as "short brutal and deceptive" the Tribunal effectively decided that a genuine and substantively justified, decision to implement redundancies had been put into effect in an unjust way. Because the necessary procedural standards had not been reached in relation to treatment of the respondents, there had been unjustifiable dismissal or action affecting them, to which they were entitled to remedies under the statutory provisions.

  29. As already outlined the Tribunal’s view that the respondents were entitled to a fixed period of notice of their redundancy under an implied contractual term was rejected in the Employment Court. The Judge accepted however that they were entitled to reasonable notice. Neither of these conclusions by the Court was challenged before us and in our view both were correct. The factors that the Tribunal had considered were a proper basis for finding there was an implied term had included its view that the respondents had an expectation of a particularly high standard of fairness deriving from the Charta family culture, and close associations which had developed from it. The length of service of some individual respondents was also relied on by the Tribunal. None of these factors, however, meet the tests of obviousness or necessity for an implied term requiring an employer to give a period of notice beyond reasonable notice in the event of an employee being made redundant. Having reached the conclusion there was no such term the Employment Court was required to consider afresh what was reasonable notice in all the circumstances having regard to the governing principles outlined in the Aoraki Corporation decision. The Judge, however, instead relied on an earlier decision of this Court in Telecom South v Post Office Union, which she saw as indicating that awards of up to 12 months notice for senior managers might be sanctioned by the Court of Appeal as within the scope of reasonable notice.

  30. The Telecom South decision was not, however, concerned with what was reasonable notice for redundancy. This Court emphasised in Aoraki Corporation that termination of employment for redundancy is a special situation. It requires consideration of different principles than those applicable to alleged unjustifiable dismissal cases involving termination of employment for cause, or on notice, in situations where the position itself has not disappeared. The principles applied in Telecom South to determine reasonable notice generally in an employment contract at common law, in our view, offered no guidance in this redundancy case. In relying on the decision as sanctioning periods of up to twelve months notice the Employment Court accordingly applied the wrong principle.

  31. 31. In determining what is reasonable notice at common law, in the present circumstances, the starting point is that there is no evidence to indicate that common practice in employment agreements in relation to required notice of redundancy is other than that identified in Aoraki Corporation, where the Court said that practice provided no support for a reasonable notice period much in excess of one month. Mr. Dewar is of course correct in pointing out that the Court did not say reasonable notice at common law might not exceed one month. It all depends on the relevant circumstances. We do not accept, as apparently did the Employment Court, that the provisions in the collective agreement with factory employees, or the "Charta family" environment, were relevant to deciding on a common law period of notice in the context of termination for redundancy. A factor we do accept as of relevance to Mrs. Stewart’s position is the discussion she had previously had with Mr. Burgess in which he had explored with her winding down over 6 months in anticipation of her retirement. This gave her some expectation she would have a job for 6 months. None of the others in our view had any such expectation. Mrs. Stewart had also been employed for appreciably longer than any of the other appellants which is a factor we consider is entitled to some weight.

  32. In deciding whether the circumstances justify notice beyond prevailing practices it is also necessary to consider if they reasonably warrant a longer period to address the situation, perhaps to retrain, to seek re-employment or to become self-employed. All these factors however must be weighed against the financial circumstances of the company. This is an important point of distinction with reasonable notice in other employment contexts. Reasonable consistency with other awards is also required. Applying this approach we are of the view that the periods allowed for reasonable notice by the Employment Court (reflecting those allowed on a different basis by the Tribunal) were inordinately high because of the Court’s failure to apply the correct principles. Other than in Mrs. Stewart’s case, we see no basis for a period of reasonable notice for any appellant beyond 2 months. In the special situation of Mrs. Stewart we would stipulate 3 months. In each case the appellant is entitled to credit for the payment made in lieu of notice at the time of termination.

  33. Awards of compensation for humiliation, distress and injured feelings for substantively justified redundancies are confined to the unjustifiable element of the dismissal, which in this case for the reasons we have indicated, was the process by which it was implemented. We reiterate that the employer was entitled to choose who was made redundant. However in the course of its consideration of the position and in carrying out the dismissal the appellant was bound by an obligation of good faith and fair treatment: NZ Fasteners Stainless Ltd v Thwaites [2000] 2 NZLR 565, para 22. The Tribunal was highly critical of the appellant’s process, first, in that the professed consultation over how to effect savings was not considered genuine. At the outset of the process Mr. Burgess had also said some long-serving members of the staff were overpaid and not contributing to the company’s productivity. Inevitably those holding the positions which later were made redundant became tarred with this implicit attribution of responsibility. There were failings also on the day in the manner in which the process was implemented. The appellant had arranged for counselling to be available but the way the redundancies were implemented gave no encouragement to the respondents to avail themselves of such services. These factors caused humiliation to and injured feelings of the respondents well beyond what was inevitable because of the hurt in no longer having a job.

  34. On the other hand the Tribunal’s approach, did not distinguish between the impact of not having a job and that of the manner in which terminations of employment were implemented. We disagree with the Employment Court on this point. It is plain in our view that the awards accordingly included an element of compensation for not having the job. Judge Shaw also considered the awards to be relatively high, but some upward movement on historic levels was justified by inflation over the years. The awards however are out of line with prevailing practice in cases where the redundancy is genuine. This was however a case in which both the Tribunal and Judge on appeal were entitled to find that serious flaws in the appellant’s process unnecessarily humiliated the respondents and exacerbated the distress they felt at being made redundant. Awards above the usual for that reason were appropriate. After excising the element of job loss we consider awards under s40(1)(c)(i) of $7000 to each respondent would have been appropriate and we substitute that figure for the sums of $11,000 to $15,000 awarded by the Tribunal and upheld by the Judge.

    OUTCOME OF APPEAL

  35. The appeal is allowed. In place of the respective awards of salary in lieu of notice for 3 months and 6 months we substitute 2 months salary for each respondent other than Mrs. Stewart in whose case we substitute 3 months salary. In each case the appellant is entitled to credit for the payment made in lieu of notice at the time of termination. In place of the awards of compensation for humiliation, distress and injured feelings we substitute $7,000 for the awards made which were of between $11,000 and $15,000. The appellant is entitled to an award of costs in that it has achieved a measure of success in the appeal albeit that the reductions in the awards are considerably less than those which it sought. In the circumstances we order that the respondents pay costs of $3000 to the appellant and that the order made in the respondents’ favour in the Employment Court stand.


Cases

Telecom South Ltd v Post Office Union [1992] 1 NZLR 295; Aoraki Corporation v McGavin [1998] 3 NZLR 276; NZ Fasteners Stainless Ltd v Thwaites [2000] 2 NZLR 565

Representations

Izard Weston, Wellington, for appellant

Thomas Dewar Sziranyi Druce, Lower Hutt, for respondent.


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