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Craig Flynn, a filling machine operator was dismissed last March after Fonterra discovered two videos uploaded to YouTube.
It showed Mr Flynn and six employees re-enacting the dance.
He appealed against the company's decision to the Employment Relations Authority (ERA), and in June it ordered his temporary interim reinstatement pending a substantive hearing.
Fonterra had submitted Mr Flynn put himself and others at risk of harm by organising the videos, "dancing with a shovel between his legs, hosing water where another employee was dancing and splashing a pallet endangering himself and others".
Fonterra argued that the men's conduct breached the company's code of conduct and health and safety policies, and constituted serious misconduct.
The ERA disagreed.
"Concerns were raised about increased risks of slipping due to cream or milk product on the floor, misuse of the hose creating risk employees may be splashed with chemicals from the footbath, contamination of packaging and not wearing earmuffs risking hearing loss."
But the authority said there was no evidence on the video of milk or cream product on the floor, splashing of chemicals and contamination of packaging. No other evidence was produced to justify these concerns.
Authority member Tania Tetitaha also found the plant manager who dismissed Mr Flynn, Craig Rooks, did not consider disciplinary alternatives.
She declined to award Mr Flynn any compensation because his actions contributed to the situation.