Part 1: Employment Settlements and the Risks Associated With Them

1.1
This Part describes the context in which employment settlements are made. We address three questions:

• Why do employment settlements happen?
• Should a public sector employer ever agree to enter into an employment settlement?
• What are the risks in doing so?

Why do employment settlements happen?

1.2
Employment disputes are a fact of life. A dispute can result in either party deciding to terminate the employment relationship – or indicating an intention to do so.

1.3
The employee can terminate the relationship by resigning. But if the resignation was triggered by the employer’s conduct, the employee can also raise a “personal grievance” with the employer – claiming constructive dismissal or some other breach of the employer’s obligations under the employment agreement.

1.4
The employer might terminate the relationship because, for example:

• the employer believes that the employee has breached the employment agreement or performed unsatisfactorily;
• the relationship has broken down; or
• the employee’s position is redundant.

1.5
Alternatively, the term of the employment agreement may have expired and the employer may not wish to renew it.

1.6
The employee has the right to contest the termination (or, as the case may be, the non-renewal) of the agreement, by raising a personal grievance.

1.7 In any of the above circumstances, the Employment Relations Act 2000 encourages the parties to explore the possibility of resolving the dispute by agreement, without having to resort to litigation¹. This is so whether termination has actually happened or has merely been indicated as a possibility. Mediation is the primary means by which the Act encourages resolution. However, either party may choose litigation if it wishes. (Appendix A on pages 29-31 contains a more detailed description of the procedures and remedies available under the Act.)

1.8
An employer therefore has a choice whether to:

• refuse to mediate or enter negotiations for a settlement – leaving it to the employee to pursue the avenue of litigation;
• agree to explore possibilities of resolution through a process of mediation – reserving its options if mediation is unsuccessful; or
• enter negotiations directly with the employee with a view to reaching an employment settlement.

1.9
If the employment relationship ends with a settlement, there is a strong expectation (arising from practice in the employment industry) that the settlement will include:

• • a payment to the employee of lost remuneration;
• • compensation for humiliation, loss of dignity, and injury to feelings (referred to from here on as a “payment for hurt and humiliation”); and
• • a confidentiality clause to protect the terms of settlement from publication.

Should a public sector employer ever agree to enter into an employment settlement?

1.10
Public sector employers are subject to the same rules about resolving employment disputes as employers in the private sector.

1.11
Different interests and incentives may influence an employer’s decision to enter settlement negotiations – for example:

• who has been most at fault, and the likely outcome if the personal grievance is taken to litigation; or
• commercial, management, and reputational issues (or, put another way, economic and emotional costs).

1.12
The “bottom line” may be that the cost of an employment settlement is not only cheaper than litigation but all that the employer can afford. Alternatively, an employer may decide to defend a case on principle, whatever the economic and emotional costs.

1.13
For these reasons, we do not think there is any basis for restricting public sector employers’ ability to settle employment disputes. Each case is unique. Some cases may not justify settlement. Others will. For example, a settlement may be inappropriate where:

• the origin of the dispute is in poor performance or misconduct by the employee;
• the employer is confident that it could justifiably dismiss the employee; and
• the employer believes that it has used a fair and appropriate process to manage the dispute.

1.14
In other circumstances, it may be just and reasonable for a public sector employer – acting on appropriate legal advice about its liability in respect of a personal grievance – to make a considered decision to settle and make a payment to the employee.

The risks involved in employment settlements in the public sector

1.15
The question, therefore, is not so much whether, but when, employment settlements are appropriate.

1.16
Employment settlements pose particular risks for public sector employers. An employer ignores such risks at its peril. From our observations, the risks are of two kinds – relating to matters of:

• external accountability; and
• lawful authority.

External accountability

1.17
Any institutional employer can be held to account by its stakeholders – whether they be shareholders, beneficiaries, a responsible Minister, or – more broadly – taxpayers or ratepayers.

1.18
Standard practice in corporate governance is for external stakeholders (such as a company’s shareholders) to appoint the entity’s governing body which is, in turn, responsible for employing the entity’s staff. An external stakeholder does not, therefore, have a direct interest in an entity’s employment decisions.

1.19
Nevertheless, the governing body may need to keep a stakeholder informed about:

• the entity’s general performance in discharging its functions as an employer; and
• specific employment decisions which may have strategic implications or affect the entity’s reputation or credibility.

1.20
These considerations are especially important in the public sector, where the governance environment can be both complex and politically charged – which can affect:

• • the way an entity makes sensitive or strategic employment decisions;
• • the extent to which the entity is externally accountable for those decisions; and
• • to whom the entity is accountable.

1.21
Because employment settlements can so easily create adverse public perceptions, it is essential that a public sector employer not only understands its governance environment but also considers the full range of factors which might affect its ability to justify an employment settlement to its stakeholders.

1.22
These factors are likely to include factors in addition to those which normally arise in the employment law context. We think the additional factors fall into the three groups discussed in paragraphs 1.23 to 1.26.

1.23
A decision to settle a dispute by a monetary payment may not – despite the normal incentives to do so – be in the wider public interest. Examples include:

• The risk in paying taxpayers’ or ratepayers’ money to an employee whose legal entitlement or deservedness has not been put to the test by independent adjudication. The conventional cost-benefit analysis – that it is more efficient to settle than to litigate – may not sufficiently justify a settlement decision.
• The risk of setting a precedent (such as, about the employer’s general willingness to settle personal grievances, or the amounts it is willing to pay).
• The notion of a wider employment interest beyond that of the entity itself. For instance, a confidential settlement with a poorly performing employee could result in the employee being re-employed elsewhere in the public sector, without other employers being aware of why the employee left his or her last position. In some sectors, the employee could also keep entitlements which he or she would otherwise lose by having a break in service.

1.24
A public sector employer faces high stakeholder expectations as to integrity – such that:

• The employer’s conduct during the dispute will be beyond reproach – reflecting the public nature of the funds involved. For example, the employer should not make an over-generous payment to an employee out of sympathy. Conversely, the employer should not use technical or petty arguments to resist an otherwise sensible settlement.
• The settlement package will be appropriate. The way settlements are structured poses particular risks. There is an incentive for parties to structure a settlement primarily around a payment for hurt and humiliation (which is usually not taxable) rather than lost remuneration (which always is). This can increase the overall cash value of the settlement to the employee, but make no difference to what the employer has to pay. It is a common employment practice, but one which has tax implications² and can expose a public sector employer to criticism, and potential tax penalties, if used inappropriately.

1.25
Making a settlement confidential is directly inconsistent with public expectations of transparency and accountability. Confidentiality has its place – such as to protect information which is genuinely sensitive commercially, or to prevent unwarranted damage to an employee’s privacy or state of personal health. But this protection can also be at the cost of transparency.

1.26
For many, secrecy is evidence of public officials having something to hide. Indeed, if an employer has been at fault in its conduct leading up to or during a dispute, it should be accountable for that. Yet the confidentiality clause prevents explanation if questions are asked – which in high-profile cases they inevitably are. Adverse publicity about a confidential agreement can result in far more scrutiny of – and damage to – the parties’ reputations than the confidentiality clause was designed to prevent.

Lawful authority

1.27
Many public entities are subject to statutory or administrative constraints in their role as employers. From our observations, once a dispute gathers momentum and heads towards settlement, important matters such as lawful authority are easily overlooked. The result can be contracts or payments which are unlawful.

1.28
Here are three examples of these constraints:

• Many Crown entity boards must consult (or obtain the concurrent of) the State Services Commissioner before agreeing or varying the terms and conditions of employment for their chief executive. Others must also consult about terms and conditions of employment for other employees.
• Chief executives of government departments cannot authorise expenditure for compensation or damages or settlement of claims if the amount exceeds $100,000 without reference to their Minister.³
• A chief executive may be required to report to the governing body (or, in the case of a government department, the responsible Minister) on sensitive matters of expenditure. An employment settlement with a senior employee would be a case in point.

1.29
Decisions on employment matters must also be consistent with internal delegations. An entity’s chief executive is often expected to deal with all employment disputes.⁴ However, the chief executive’s authority to incur expenditure is likely to be subject to an explicit delegation from the governing body, which may include a financial limit.

1.30
The governing body may also need to be involved in decision-making about an employment settlement where the manager responsible for dealing with the matter has a conflict of interest.

Conclusion

1.31
Settling disputes is at the heart of employment law and practice, which applies in both the public and private sectors. Some settlements in the public sector are inevitable. What is important is that they are:

• made for the right reasons;
• structured appropriately; and
• as transparent as possible.

1.32
We find that public sector employers sometimes pay inadequate attention to the kinds of risk discussed in this Part. In our view, this has been a major cause of public criticism of some employment settlements.

1: We use the term “litigation” to describe any process which results in a binding determination – including, for example, investigation and adjudication by the Employment Relations Authority.

2: We explore the tax implications in Part 2 (paragraphs 2.34-2.35) and Appendix B on page 32.

3: Cabinet Office Circular CO (99) 7 Financial Delegations and Delegation Limits for Responsible Ministers and Departmental Chief Executives (30 June 1999). Expenses for compensation or damages for settlement of claims must be endorsed either by the Crown Law Office or a court judgment. Claims under $50,000 need not be referred to the Crown Law Office if a departmental solicitor certifies that such claims are in order.

4: In the case of a local authority or a tertiary education institution, the chief executive is the statutory employer of the entity’s staff.

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