Part 3: The management of dealings with the contractor

Inquiry into certain allegations about Housing New Zealand Corporation.

3.1
In this Part, we describe:

3.2
We discuss one aspect of the settlement agreement – the provision by which the contractor agreed not to raise his concerns with the Minister, members of Parliament, or the news media – along with issues related to the Protected Disclosures Act 2000 in Part 4.

What was the nature of the agreement?

3.3
Important points about the contractor’s relationship with the Corporation are that:

  • The contractor was not an employee of the Corporation. All arrangements concerning his engagement, and his remuneration and expenses, were covered by the contract between the Corporation and the leasing company. The contractor had signed a confidentiality statement as part of his contract with the leasing company.
  • In particular, no money was to change hands between the Corporation and the contractor under that contract, and any arrangements about ending the engagement were to be made with the leasing company.
  • The contractor nevertheless considered that the engagement had unfairly and abruptly ended, and that the Corporation was at fault for this. Accordingly, he sought an apology and a payment from the Corporation directly.

3.4
In our view, the contractor’s claim for a “payment in lieu of notice” was, in legal terms, a claim for compensation for the abrupt manner in which the contractor’s engagement had ended. The contractor was seeking compensation for the income he thought he should receive if the engagement had been terminated with a period of notice. The contract between the leasing company and the Corporation did not provide for a notice period.

3.5
The dispute between the contractor and the Corporation had the characteristics of an employment dispute. Similarly, the settlement agreement had the characteristics of a severance agreement with a departing employee. However, while there was clearly a dispute between the Corporation and the contractor, there was no written contract directly between them. Nevertheless, there is clear evidence of the contractor’s grievance and the Corporation’s willingness to accept some responsibility for it.

3.6
We consider that the payment made to the contractor was, in essence, an ex gratia (voluntary) payment in recognition of that responsibility, but without any formal admission of liability. In our view, the agreement was reached as a pragmatic solution in the circumstances, to enable the contractor’s allegations to be investigated.

Our expectations

3.7
There were 2 elements to the Corporation’s response to the contractor’s allegations.

3.8
First, in relation to the allegations about inappropriate financial management and managers’ conduct, we expected that the Corporation would have taken steps to investigate the allegations promptly, and with a level of resource suitable for the nature and seriousness of the allegations.

3.9
Secondly, because the legal foundation for the contractor’s claim to the Corporation for an apology and a payment in lieu of notice was unclear, we expected the Corporation to have considered the claim first in the context of its contract with the leasing company. In the normal course of events, a contractor on an assignment through a third party leasing company would have advised the leasing company of any wish to end the assignment. It would then be up to the leasing company and the Corporation, as its client, to decide whether another individual should be supplied to complete the assignment.

3.10
Nevertheless, the circumstances indicate that, for one reason or another, the matter was not resolved like that. Instead, the Corporation decided to negotiate a settlement directly with the contractor. We expected to find a clear and documented rationale for taking that step.

3.11
We expected that the Corporation, having decided to negotiate a settlement similar in its terms to an employment settlement, would apply the accepted “best practice” (with necessary modifications) for resolving employment disputes that end in termination of the employment relationship. Accordingly, we have used our 2002 report Severance Payments in the Public Sector1 as the basis for our expectations about the settlement and the events that came before it.

3.12
Our 2002 report was designed to illustrate some of the risks involved when employers in the public sector make severance payments, and other kinds of non-contractual payments, to departing employees. But it also acknowledged –

… the obvious point that an employer should endeavour to manage the employment relationship in such a way that makes these situations truly exceptional. … Public sector employers need to act in a manner that is consistent with their obligations both as an employer and in respect of the public funds that they manage. Balancing the two sets of obligations can be difficult. The main purpose of the report is to find an effective way of doing so.2

3.13
In preparing our 2002 report, we formed a set of expectations about what a public sector employer ought to do or consider before making a severance payment. The expectations were reflected in 6 principles. In summary, we said –

... we expect a public sector employer to:

  • seek and obtain specialist advice (in writing) before reaching a severance agreement;
  • use a fair, sound, and documented process to reach the severance agreement;
  • ensure that the terms of the severance agreement are fair, reasonable, transparent, and properly authorised; and
  • keep its stakeholders appropriately informed throughout the process, taking into account the nature of the stakeholder’s interest and the need to protect other interests (such as the privacy of employees).3

Our views on the response to the contractor

What was the dispute really about?

3.14
In our view, the disagreement between the contractor and the Financial Services Manager started a chain of events. The conflict was initially about the contractor’s extensive personal use of a mobile telephone. The Financial Services Manager identified this personal use, and $1,909.62 owing to the Corporation for personal calls, in June 2005.

3.15
As noted in Part 2, other factors emerged during July and August 2005. The contractor raised concerns about accounting practices, which in turn led to a strained relationship with the TPU. The contractor also believed that he had been told to apologise for upsetting TPU staff. More widely, the contractor’s own accounting competence was beginning to be challenged by the Finance team.

3.16
In an effort to resolve these issues, the leasing company met with the contractor and the Special Programmes Manager in either June or July 2005. The leasing company told us that the contractor was someone who required strong management. It had attempted to provide support by keeping in regular contact with both the contractor and the Special Programmes Manager.

3.17
The Corporation’s actions around both the contractor’s allegations and his claim for an apology and a payment were heavily influenced by the contractor’s e-mail to the Chief Executive on 8 August 2005 (see paragraph 2.16). The Chief Executive told us that, rightly in our view, she expected that any member of staff who had significant concerns about the way the Corporation was carrying out its business should feel free to communicate those concerns directly to her. After that, it would be a matter for local managers to investigate and report on the concerns to the relevant General Manager. The Chief Executive and, if necessary, the Board and the responsible Minister would be informed after that.

3.18
However, in this instance, the matter became complicated by the contractor’s persistence in raising his concerns with General Managers, even after his claims had initially been investigated and a response given to him. It is clear to us that the Corporation’s difficulties in dealing with the contractor were also exacerbated by:

  • the ongoing lack of specific details about his allegations;
  • his unwillingness to provide those details until his grievance about the circumstances of his departure from the Corporation had been addressed and an apology had been received;
  • his repeated indications that he would approach the news media or the Minister of Housing if he did not receive satisfaction; and
  • his reference to “taking the matter as far as it can go”.

3.19
From the outset, the Corporation drew a distinction between the allegations and the need for them to be investigated, and the resolution of the contractor’s grievance. But the extent to which the Corporation allowed itself to be influenced by the contractor’s persistence, and his indications of willingness to publicise his concerns, are also important. In our view, the Corporation was also driven by a degree of pragmatism in seeking to reach a settlement with the contractor, when there was clearly no legal obligation to do so.

The Corporation’s response to the contractor’s accounting and reporting allegations

3.20
We are satisfied that the Corporation made an immediate and genuine effort to conduct an investigation into the contractor’s accounting and reporting allegations. These efforts were not helped by the contractor’s unwillingness to provide more information to support those allegations, which were not specific enough for the internal auditor to fully pursue. We consider that:

  • the approach of seeking an agreement with the contractor about what the allegations were (that is, making an agreed list of allegations) was a sensible way to proceed; and
  • agreeing for this matter to be looked at internally, with a level of review by the external auditor, was a reasonable response in the circumstances.

3.21
The lack of a clear understanding between the GM Assurance Services and the contractor about how the investigation would be carried out was unfortunate. However, we consider that the proposed approach of the GM Assurance Services – that Ernst & Young would review the Corporation’s internal investigation – is consistent with the wording of the settlement agreement.

3.22
The GM Assurance Services’ inclusion of the matter in the internal audit programme did not lead to a timely resolution. However, this needs to be balanced against the difficulty of substantiating the allegations and obtaining enough detail about the contractor’s concerns to be able to audit them. The Christmas-New Year holiday period was also a contributing factor.

3.23
The Corporation briefed Ernst & Young in detail only in late March 2006. This was when Ernst & Young was told the detail of the allegations, and that the Corporation expected the investigation to be carried out to the satisfaction of the Corporation’s external auditor. Ernst & Young in turn briefed us about the allegations on 27 March, noting that it had told the Corporation that Ernst & Young (and therefore the Auditor-General) could be satisfied with an investigation only if Ernst & Young did it or was heavily involved in the investigation.

3.24
It is clear that the Chief Executive of the Corporation was both aware of, and concerned about, the delay, and rightly expected the GM Assurance Services to fulfil the responsibility he had assumed in the settlement agreement. In our view, the Chief Executive’s monitoring of progress on the matter through her General Managers was appropriate.

The Corporation’s response to the contractor’s claim for an apology and payment in lieu of notice

3.25
In our view, the contractor ended his engagement with the Corporation on 8 August 2005. We acknowledge that the contractor believes that he was effectively forced to leave because he would not apologise. However, his purported “resignation”, with immediate effect, was in writing. We consider that the Corporation was entitled to view the engagement as having ended.

3.26
It was therefore reasonable, and what we would expect, for the Corporation to require the contractor to return its property (such as the mobile telephone and office access key) immediately after his departure. It was also reasonable for the Corporation to ensure that the contractor reimbursed it for the cost of any unauthorised or personal use of the mobile telephone.

3.27
We would have expected all communications between the Corporation and the contractor after his departure to have been through the leasing company. We are satisfied that the Corporation was fully aware of the nature of the relationship and tried to do this. However, the contractor persisted with direct communication with the Corporation’s staff. It was reasonable for staff to deal directly with him from that point.

3.28
The Corporation might have been less inclined to settle the contractor’s claim had the settlement not been a condition of providing further information to substantiate his allegations. It therefore needed a firm rationale for the decision to enter negotiations, and we are satisfied that the GM Assurance Services understood this. He was of the opinion that the Corporation should take some responsibility for what had happened.

3.29
However, we have several concerns about the process that resulted in the settlement agreement:

  • We expected to see a documented rationale for the settlement agreement, and we also expected to see written legal advice on the decision to enter settlement negotiations. There was no documented rationale, and the only legal advice obtained was oral.
  • The lack of documentation became a problem when the GM Assurance Services sought the Chief Executive’s approval of the financial terms for the settlement. The GM Assurance Services had discussed the need for a settlement at a regular management meeting with the Chief Executive. It is possible that there was a common understanding, at that time, about the rationale for making a payment. However, the evidence about the approval tends to show a lack of a common understanding. The Chief Executive appears to have been under the impression that the Corporation would be paying the contractor an amount calculated by reference to the balance of his contract. That was not the case. It would have helped if the matter had been documented, and authorisation given in writing.
  • We have also been unable to establish precisely why the Chief Executive’s approval was necessary, either for the financial parameters of the settlement (as approved by the Chief Executive before she went on leave) or for its terms (approved by the Acting Chief Executive, according to the GM Assurance Services’ evidence). We did not find any documented support for the Chief Executive’s understanding that she should approve the parameters of any severance payment. However, the practice clearly has merit, and we urge the Corporation to consider including it in its employment policies and procedures.
  • Because the agreement was not, strictly speaking, an employment settlement, it may be that the policy on severance payments did not apply. But we would have expected the Corporation to follow the intent of that policy and, in particular, for the Corporation’s human resources staff to have been consulted on the terms of the settlement agreement.

3.30
Despite these reservations, there can be no question that the GM Assurance Services acted appropriately by seeking the Chief Executive’s approval of the decision to enter negotiations, the financial parameters, and (through the Acting Chief Executive) the terms.

3.31
In the context of the “best practice” guidance in our 2002 report, we conclude:

  • The GM Assurance Services had a clearly formulated rationale for the decision to settle with the contractor and make a payment to him. The GM Assurance Services sought appropriate legal advice on the decision to settle and the terms of the agreement. However, the decision-making process could have been better documented and written legal advice should have been obtained.
  • The payment made to the contractor was not large, and was calculated appropriately. It was based on about 2 weeks’ income that the contractor might have expected to receive if the engagement had been terminated with notice.
  • The agreement was properly authorised, and its terms were fair and reasonable. (This finding excludes the non-disclosure clause, which we discuss in Part 4.)
  • The Chief Executive was kept properly informed of the contractor’s allegations, the dispute and its resolution, and the ensuing investigation. The Board was rightly informed through its Assurance Committee in October 2005, albeit briefly, that concerns had been raised about some of the Corporation’s practices. We note that it was the Chief Executive’s intention to inform the Board of the outcome of the investigation in 2006.
  • We do not consider the settlement with the contractor was sufficiently momentous or important to have been brought to the Chief Executive’s or the Board’s attention. There was no need for the Chief Executive to have seen the terms of the agreement after she returned from leave.

1: ISBN 0-477-02895-0.

2: Ibid, page 7.

3: Ibid, page 8.

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