90 day trial period is a legal minefield

On 26 August 2010 the Chief Judge of the Employment Court in Smith v Stokes Valley Pharmacy (2009) Limited exposed the complexity of the law on 90 trial periods and established that it is a veritable legal minefield for employers. It seems that should employers not have complied strictly with the law, they will be exposed to claims of unfair dismissal and in all but a few cases will lose.

The Chief Judge said that for the scheme to be available, the employer must be able to show:

• The trial period must be in the written employment agreement;
• The period must be specified and not exceed 90 days;
• The start of the trial period is to be at the beginning of the employee’s employment;
• The provision must state or is to the effect that it states that:

• The employee must not have been previously employed by the employer;
• Notice of termination must be given and state that it is notice of termination of the employment agreement;
• The period of notice must be in accordance with the notice period in the employment agreement.

The effect of the decision is that employers must have ticked every box in order to get immunity from unfair dismissal personal grievance claims.

An employer must have ticked every box to get  immunity from unfair dismissal claims

Why did the Chief give such a strict interpretation to the Act? In a careful analysis of the law, he emphasised that laws that remove previously available access to courts and justice should be strictly interpreted.

The Chief Judge also went on to remind employers that important good faith obligations apply. For example, at the time they give notice of termination, they cannot refuse to give an employee an explanation for the dismissal and, must not either directly or indirectly mislead or deceive the employee .

But didn’t the government specifically say employers could not be required to give reasons for dismissal? The Chief Judge replied that the Government only removed the obligation to provide reasons in writing after a dismissal had occurred and a request had been made under s120 of the Act. It had not removed the good faith obligation to be responsive, communicative and honest when giving notice of termination and the employee asks “Why?”

What then did the owners of Stokes Valley Pharmacy do wrong?

First, the owners bought the business and in the week before taking it over gave Ms Smith the proposed employment agreement, as the law requires. She had some questions so she spoke to one of the owners. As a result they agreed to her retaining her current hourly rate and that performance targets and goals would be sorted out later.

Interestingly she had not noticed the trial period until a few days later when it was pointed out to her by her step mother. She started on the Monday without the employment agreement having been signed or finalised, which was the employers first big mistake.

She sat down on the Tuesday with one of the owners. She expressed concern about the trial period but was reassured she was not being singled out. The agreement was amended and signed.

So what had gone wrong?. Her employment on Monday was on terms and conditions that were unwritten. Even though she had been given a proposed employment agreement in the previous week, this agreement with its expressed trial period had not been concluded until Tuesday. This agreement expressly stated that it replaced previous arrangements and understandings between them and it would come into force on the day it was signed, i.e. Tuesday.

The Chief Judge therefore decided that Ms Smith had been previously employed by the owners, albeit for one day and, therefore, she could pursue her claim for unjustifiable dismissal.

Secondly, the written notice they gave her was for two weeks when the agreement said four. She was told they were prepared to pay her in lieu of the two weeks' notice and advised the termination would take effect immediately.

The Chief Judge held no notice had been given because anything less than required period of notice is not notice at all. He said she had been dismissed instantly, which was only available to the employer where serious misconduct had occurred and none had occurred. She was therefore unjustifiably dismissed.

Thirdly, she was also unjustifiably dismissed because, having relied mistakenly on the trial period immunity, they had not given her information that was relevant to her future employment and the opportunity to explain her conduct. Further she was not given the chance to get legal advice. He observed that she had no “inkling” her employment was in jeopardy.

Thirdly, there were specific contractual commitments to have regular meetings for the purpose of performance assessment and improvement and to have in place performance targets. The owners had failed to do these things and, therefore, were in breach of the agreement. This breach constituted an unjustified disadvantage to Ms Smith and provided the basis for a personal grievance and a claim for penalties. In short they had deprived her of the opportunity to perform to their standards.

It should be noted that the owners of the pharmacy could take some comfort, albeit small, from an otherwise unpleasant decision (unpleasant for them that is) in that the Judge pointed out that the case was about the legal advice they had received and commented that they could not really be criticised for having relied on and followed it.

No doubt in anticipation that Business New Zealand and the Government would come out of their corner swinging wildly in his direction he made some telling observations. First, knowing they would repeat previous accusations that the Courts subject the actions of employers to pedantic scrutiny, he commented that the elements of unreasonableness involve a “signal failure of fair and reasonable treatment” and were not identified through “pedantic scrutiny after the event”. As an aside the Courts have said repeatedly since the 1980's that they don’t subject the actions of employers to pedantic scrutiny but politicians and lobbyists prefer not to hear this.

Secondly, throughout his decision he repeatedly illustrated how badly the law had been drafted and observed the amending Act in 2008 had been “enacted without recourse to the important Select Committee process”. In short, in a judge like manner he was telling the Government that its bad processes had produced bad law.

Finally, what should employers do to avoid the mines and the injuries they will cause? The best advice we can give is that even if they believe they have ticked the boxes employers should ensure they comply with all commitments on training, target setting and appraisals and most importantly follow a fair and open process before terminating the employment of an employee undergoing a trial period.