As an employer, you may face situations where downsizing becomes necessary. Market changes, reorganizations, technological developments, or economic challenges can lead to the need for reducing your staff.
While it’s crucial to follow proper procedures ― such as keeping proper documentation, defining the selection pool and criteria, conducting consultation meetings, and complying with formalities at each step — the requirement for justifiable grounds is a key condition for a valid downsizing process.
Without justifiable grounds, a dismissal will be invalid, no matter how properly the process has otherwise been managed. In this blog, we’ll explain what the requirement for justifiable grounds entails and how you ensure your downsizing decisions meet legal and ethical standards.
What is meant by “Justifiable Grounds”?
Section 15-7 of the Working Environment Act requires that a dismissal must be “objectively justified” based on the circumstances of the business, the employer, or the employee. In the case of downsizing, it concerns your business or employer’s situation.
The requirement for justification applies to two separate aspects of downsizing:
- Justifiable reasoning for downsizing
- Fair selection of employees
In this blog, we will focus on what constitutes justifiable reasoning for downsizing.
For a downsizing to be objectively justified, the need must be real, current, and well-founded. Typical situations that may provide justifiable grounds include:
- Economic difficulties: The company is operating at a loss or needs to cut costs to ensure continued operation.
- Reorganization: Changes in organizational structure to adapt to new requirements, technologies, or market conditions.
- Efficiency improvements: Aiming to make the business more competitive by reducing the workforce.
- Changed market conditions: Loss of customers, contracts, or market share making it necessary to reduce staff.
The assessment for downsizing must be specific
It is not sufficient to refer to general concerns. The employer must point to a specific and documented situation that makes downsizing necessary. The downsizing must appear as a reasonable and necessary adjustment.
Ensure justified and measured downsizing
There must be a balance between the needs of the business and the consequences for the employees. If the downsizing appears unnecessary or disproportionately burdensome, the dismissal may be considered unjustified.
Downsizing cannot be used as a hidden motive
Downsizing must not be used as a pretext to dismiss individual employees for other reasons, such as personal conflicts. In such cases, the dismissal may be declared invalid.
Documentation is crucial when downsizing
The company should be able to present concrete figures, reports, or other documents that support the need for downsizing. Especially important is documentation showing that company leadership has assessed the need for downsizing—such as board minutes or board resolutions.
If the downsizing is due to economic factors, this should be supported by financial reports, budget forecasts, or liquidity overviews. Board documents that show leadership has decided on cost-reduction measures strengthen the employer’s case.
Tips for employers: how to assess justifiable grounds for downsizing
- Document the business need: Ensure there is written support explaining why the company must reduce staffing, such as board minutes, budget forecasts, or financial figures.
- Be specific: Avoid general statements about “efficiency” or “restructuring” without being able to explain the specific drivers behind the need.
- Evaluate necessity carefully: Could the company’s challenges be solved in ways other than downsizing? If so, this must be considered and justified.
- Ensure alignment between need and action: There must be a clear link between the identified need and the decision to downsize. Downsizing must appear to be a reasonable and necessary measure.
- Avoid hidden motives: Ensure that the justification is genuine and that no personal or irrelevant reasons are behind the decision.
- Prepare to document the process: In case of a dispute, the employer must be able to provide evidence of both the need for downsizing and how the assessment was conducted.
Key take aways if you are you facing a downsizing process
The requirement for justifiable grounds is the foundation of any lawful downsizing. It is not enough for a company to want to cut costs or streamline operations; the need must be real, documented, and carefully assessed.
By ensuring solid documentation and a thorough assessment of the necessity of the action, the employer will be in a much stronger position if objections arise. Remember, it is the employer who bears the burden of proof that the conditions for dismissal are met.
Do you have questions about how to assess justifiable grounds or need help with a downsizing process? Feel free to contact us for a non-obligation conversation.