Introduction and Summary

1. It has long been established that in order to justify a dismissal or disciplinary action, an employer must prove that it had substantive grounds for dismissal and had acted in a procedurally fair manner. However, the weight that the Authority and the courts have accorded to the employer’s “discretion” to dismiss has been in flux over the past decade.

2. This paper examines the repeal and substitution of a new section 103A of the Employment Relations Act 2000, which:

(a) changes the test for justification by substituting the word “could” for the word “would”;

(b) explicitly sets out minimum requirements of a fair and reasonable process; and

(c) ensures that the employer’s processes will not be subject to a level of scrutiny that is so pedantic or technical that it means an otherwise justifiable action is considered unjust.

3. In summary, the amendments are welcome changes for employers. The change to the test for justification should give employers more flexibility as to the range of acceptable possible outcomes, and reduce the risk that the Authority or courts may substitute their judgement for that of the employer. The introduction of explicit minimum procedural requirements should improve an employer’s position by making this area more certain. Finally, the fact that an employer’s decision will not be subject to “pedantic scrutiny” is also a step in the right direction.

The common law test of justification before section 103A
4. As summarised in Air New Zealand v Hudson [1] and Air New Zealand Ltd v V, [2] the early common law tests required the courts objectively to assess the justification for dismissal and to balance a number of factors to determine whether it was justified. However, over time there was a gradual shift towards focusing primarily on procedural fairness, so that once an employer could prove that it had complied with all the natural justice rules and principles, the employer had more latitude to dismiss provided the dismissal was within a range of options that was available to that particular fair and reasonable employer.

5. In 1992, the Court of Appeal in Northern Distribution Union v BP Oil New Zealand [3] endorsed the “would” test. Under this approach, the Authority or the Employment Court would take an objective approach as a dispassionate third party in the circumstances of the employer, and consider what the fair and reasonable employer would have done in the particular circumstances. The Court of Appeal made it clear that it would not substitute its judgement for that of the employer: But for the Court to enter upon that territory was to usurp the responsibility and the prerogative of the employer. We cannot put the position better than Judge Castle did in Read v Air NZ [1991] [3] ERNZ 139, 146: The breach of trust was serious and of such a nature as to warrant a fair and reasonable employer deciding that she should be dismissed. That being so, it is not for the Court to substitute its judgment as to what penalty should or should not actually have been imposed.With respect, we think the rather remarkable outcome of this case resulted from the Court substituting its judgment for that of the employer in a matter of which the employer was in reality the best and in law the only judge.

6. These developments finally culminated in the case of W&H Newspapers v Oram.[4] Mr Oram, a reporter, failed to ensure that the caption of a photograph was correct before the photo was printed in the newspaper, labelling the photograph of a social worker as a “gang chief”. W&H Newspapers considered this constituted serious misconduct and dismissed the reporter. In upholding the employer’s decision, the Court of Appeal held that:5The Court has to be satisfied that the decision to dismiss was one which a reasonable and fair employer could have taken. Bearing in mind that there may be more than one correct response open to a fair and reasonable employer, we prefer to express this in terms of “could” rather than “would”, used in the formulation expressed in [the first BP Oil case].Distinction between “would” and “could”

7. The distinction between “would” and “could” is not just a technical linguistic difference. The difference was described by Judge Shaw in Air New Zealand v Hudson [6] as follows:When judging possible responses to evidence of misconduct, the difference between “could” and “would” can be described as the difference between whether a person is able to respond in a certain way or whether a person who is able to respond would actually respond in that way. ......The reference to what a fair and reasonable employer would have done represented a statutory curb on the range of responses any employer may justifiably take

8. Although the courts have continued to say that an employer will have recourse to a range of legitimate options in determining whether to dismiss [7], the "would” test suggests that there is only one single right answer. “Would” expresses probability or expectation, or some inevitable outcome. That test infers that an employer would need to come to an inescapable conclusion that a dismissal was inevitable, rather than alternative outcomes.

9. On the other hand, “could” suggests there is a choice between a number of potential options which are capable of being permitted. Therefore, once an employer has acted in a procedurally fair way, there is a range of possible responses open to a fair and reasonable employer. If an employer chooses an option within the fair and reasonable spectrum, the courts will not question the decision. In Oram and earlier decisions, the courts emphasised that they should not substitute their own judgement for that of the employer (known as the “business judgement” rule at common law, or management prerogative). This is because the employer would know the circumstances and their business better than the courts do, and therefore have a better grasp of whether dismissal was warranted.

10. Therefore, the effect of the Oram decision is that “harsh but fair” decision would nevertheless be acceptable from a legal point of view. A dismissal is always “harsh” because it is at the upper end of the range of disciplinary options, but it may still be fair.

Introduction of section 103A
11. As a result of the Oram decision, there was a concern by some people that the test gave employers too much discretion and the courts too little jurisdiction in the area of unjustified dismissals, because it shifted from a neutral, balanced evaluation to a subjective standard. Some argued that the starting point seemed to be that the employer’s decision could not be overturned except in extreme circumstances.

12. Parliament considered that uncertainties had arisen from the Court of Appeal decision in Oram (although these “uncertainties” were not identified), and that the test did not adequately balance issues of fairness between employer and employee. Parliament therefore decided that a new test was required to shift the balance in personal grievance cases.[8] For the first time Parliament introduced (in 2004) a statutory definition of the test for justification for what had previously been defined by the courts. Section 103A of the Employment Relations Act 2000 provides:... the question of whether a dismissal or an action was justifiable must be determined, on an objective basis, by considering whether the employer's actions, and how the employer acted, were what a fair and reasonable employer would have done in all the circumstances at the time the dismissal or action occurred.

13. Section 103A was introduced to overturn the Oram decision (and return to the test in BP Oil) by giving the Authority and the Court the opportunity to evaluate objectively an employer’s subjective decision against the standard of a hypothetical fair and reasonable employer. In Air New Zealand v Hudson, Judge Shaw stated that the s 103A requirement for the Authority and the Court to stand back and determine the matter on an objective basis does not give an unbridled licence to substitute their views for that of an employer. [9] Rather, it requires an objective evaluation of the actions of the employer against a statutorily imposed standard.

14. Many employers consider that the current statutory formulation of the “would” test is unreasonably restrictive and uncertain for employers.

15. The notion of an objective standard of a fair and reasonable employer provides no practical guidance for employers and for legal practitioners advising their clients. While the concept of an objective standard imports the notion of fairness, the reality is that the Authority and the Court will closely scrutinise the employer’s decision and their process (the “what” and “how”) and reach their own assessment of what a fair and reasonable employer would have done[10], despite the warning of Judge Shaw that they cannot substitute their judgement for that of the employer.In doing so the Court (and the Authority) must draw on their knowledge and experience of, and expertise in, employment relations in determining whether they are satisfied that what the employer did met those notional standards.[11]

Changes to section 103A
16. Because of these concerns, Parliament has now amended s 103A to state:The test is whether the employer’s actions, and how the employer acted, were what a fair and reasonable employer could have done in all the circumstances at the time the dismissal or action occurred.

17. In Parliament’s words [12] the “would test” is based on a false assumption that there is only one possible fair and reasonable course of action that can be taken by an employer, and that anything that deviates from that one possible course of action can neither be fair nor reasonable. Even if an employer is trying to be fair, it does not have any confidence whether its sense of what is fair and reasonable will correspond to the Authority or Court’s sense of fairness and reasonableness. As a consequence, there is no certainty, consistency or predictability for employers – or for lawyers advising their clients as to whether the decision will withstand closer scrutiny. The test has become “What would the Authority member decide?”- rather than leaving something for the employer.

18. In addition, there appears to be a difference in approach between dismissals for serious misconduct and dismissals by way of redundancy. Under s 103A, it could be argued that the Authority or Court should look objectively at the employer’s decision to restructure and determine whether the fair and reasonable employer would make such structural changes. In Simpsons Farms Ltd v Aberhart [13] the first redundancy case since the enactment of s 103A, the Employment Court confirmed that Parliament had made no distinction between different sorts of personal grievance and s 103A applies to all dismissal and disadvantage grievances. However, the Court went on to hold that so long as an employer acted genuinely and not for ulterior motives, a business decision to make positions redundant was for the employer to make and not for the Authority or the Court. The Court considered s 103A marked a return to the position in Hale, in which Cooke P had relied on the “business judgement” rule stated in BP Oil. This seems to be at odds with dismissals for cause where the Authority or the courts are required to determine what a fair and reasonable employer would have done.Practical effect for employers

19. In practice, shifting the “would” test back to the “could” test should improve the law for employers by relaxing the burden on them to crystal-ball gaze and anticipate whether the Authority or Court would think their actions were justifiable.

20. An example of the difference this would make in practice can be illustrated through Judge Shaw’s example in Air New Zealand v Hudson.14 If an employee is caught red-handed stealing large amounts of money, a fair and reasonable employer both could and would dismiss with justification, so that under either statutory test dismissal would be justifiable. On the other hand, if an employee has made a negligent accounting error, the employer could dismiss them, but whether a fair and reasonable employer would dismiss is a matter for evaluation against all the relevant circumstances.

21. Under the current s 103A, the Authority or Court would have to consider all the relevant circumstances in the shoes of an objective employer, such as whether the accountant had a history of negligence, whether the employer had dismissed for such negligence before, whether there were any mitigating circumstances, and so on. Under the amended test, if an employer decided to dismiss, as long as the dismissal was procedurally fair, and dismissal was within the range of reasonable responses, the Authority or Court would be more reluctant to set aside the employer’s decision to dismiss.

22. One trade union commentator has suggested that this change to the “could” test might lead employers and the courts to focus on how far one can stretch the extremities of reasonableness.15 Despite this criticism, this amendment is a welcome change for an employer makes a genuine attempt at arriving at a fair and reasonable decision. While there are no guarantees, provided that the minimum procedural requirements (like giving the employee a right to be heard) have been met, employers can take comfort knowing that their decision need only fall within a range of possible acceptable responses, rather than having to arrive at the one and only “right” decision.

23. Exactly how much flexibility will this new test bring? Employers will still not have free reign to dismiss without just cause. Although, there will be more choice as to the range of possible options, these alternatives must still be within the fair and reasonable range. For example, if an accountant makes a negligent calculation that is only off by a few cents, dismissal is highly unlikely to fall within the reasonable spectrum. In such a case, even the more flexible “could” test would not help. Therefore, while the focus is likely to change following this amendment, the outcome of many cases will be the same. It is likely that relaxed test will have the most significant impact in relation to borderline cases.

24. In this regard, it is useful to consider the recent case of Secretary for Justice v Dodd.16 Mrs Dodd was dismissed for abusing her position as an employee of the courts. She improperly accessed information about her nephew’s case and supplied it to his lawyer, as well as contacting the complainant to question her about her victim impact statement. While the Court accepted that this was serious misconduct, the decision-maker did not take into account factors like indicators of non-repetition of past misconduct and alternative possible outcomes. The Court noted that this was a case where an employee had misconducted herself and accepted that there should be some sanction. Further, the employer had failed to properly consider alternative sanctions to dismissal, including demotion (temporary or permanent) or reassignment of duties, both of which were permissible under the employer’s own policies. As a consequence, the Court held that this was one of those rare cases where although there was serious misconduct, the employer was nevertheless not justified in summarily dismissing the employee in all the circumstances.

25. If the “could” test had been in force when Dodd was decided, the outcome of the case may well have been different. However, even in cases of serious misconduct, it is clear from the full Court’s decision in Air New Zealand Ltd v V17 that the disposition of the matter (i.e. the employer’s decision as to whether dismissal should result) is reviewable by the Authority or Court. Although serious misconduct will usually constitute good grounds for dismissal, it will not necessarily do so in every case. Applying the “could” test, if summary dismissal falls within the “range of reasonable responses”, the Court should not interfere with the employer’s decision.Explicit minimum procedural requirements

26. The new amendment brings about another change by introducing four minimum procedural requirements for a disciplinary process that the Authority or the Court “must consider” when determining whether the employer’s actions were fair and reasonable.

27. According to the new subsection (3), before dismissing or taking action against the employee, the employer must have:(a) sufficiently investigated the allegations, having regard to the resources available to the employer;(b) raised the concerns that the employer had with the employee;(c) given the employee a reasonable opportunity to respond; and(d) genuinely considered the employee’s explanation in relation to the allegation.

28. These minimum requirements may provide some guidance as to best practice for small to medium-sized employers. While this change is an improvement, it does not purport to represent an ideal state of perfection by prescribing an exhaustive list of procedural steps. Employers must still ensure that common law natural justice requirements have been met when taking disciplinary action, and subsection (4) makes it clear that the Authority may consider any other factors it thinks appropriate. It would therefore be a mistake to consider the legislative procedural requirements to be of a higher status than simply minimal requirements.

29. In any event, it would not be possible to attempt to prescribe an exhaustive list of procedural requirements. The relevant procedure to be adopted by an employer must necessarily be flexible and tailored to the facts and circumstances of each case.Not subject to “pedantic scrutiny”

30. Another notable amendment is the new subsection (5). This introduces the requirement that the Authority or the Court must not determine a dismissal or an action to be unjustifiable under this section solely because of minor defects that did not result in the employee being treated unfairly.

31. According to the Explanatory Note to the Amendment Bill, the new provision endeavours to ensure that “the employer’s processes will not be subject to a level of scrutiny that is so pedantic or technical that it means an otherwise justifiable action is considered “unjust”. It suggests that the current justification test under s 103A is such that if an employee has done something that warrants dismissal, but the employer has failed procedurally in respect of even a minor natural justice principle when dealing with the complaint, the employee will be held to be unjustifiably dismissed. This consequence would be particularly costly for small employers. Chief Judge Colgan described procedural fairness as being about ensuring that an employer’s decision has a properly informed basis and so is a fair and reasonable decision.18 Thus, the focus should be on overall principles of fairness, rather that identifying procedural defects.

32. While there is a body of case law outlawing such “pedantic scrutiny”, there has been significant uncertainty in this area for employers and statutory reinforcement will be welcome. The term “pedantic scrutiny” was first espoused by the Court in NZ Food Processing etc IUOW v Unilever NZ Ltd 19, in which Judge Goddard said: That is not to say that the employer’s conduct of the disciplinary process is to be put under a microscope and subjected to pedantic scrutiny, nor that unreasonably stringent procedural requirements are to be imposed. Slight or immaterial deviations from the ideal are not to be visited with consequences for the employer wholly out of proportion to the gravity, viewed in real terms, of the departure from procedural perfection. What is looked at is substantial fairness and substantial reasonableness according to the standards of a fair-minded but not over-indulgent person.

33. Most recently, in Lewis v Howick College, 20 the Court held that procedural fairness is not about being pedantic about minor procedural defects. Procedural considerations will only make a dismissal unjustifiable if the process is “fundamentally, pervasively and manifestly unfair”.

Conclusion
34. The change from the current s 103A “would” test to a “could” test represents Parliament’s intention to shift back to the position in Oram. While in most cases there are few practical implications of this change for employers, it has the potential to make a difference in borderline cases.

35. The introduction of new minimum procedural requirements should improve an employer’s position by making this area more certain and providing flexibility – it does not attempt to codify an exhaustive list of natural justice principles that are already considered in employment law cases.

36. Finally, the express statement that minor procedural defects will not in themselves make an employer’s decision to dismiss unjustifiable takes the law a step in the right direction. However, at common law the list of procedural requirements continues to expand, and there is increasingly less flexibility for employers in procedural fairness requirements (for example, there is now a requirement for a separate meeting regarding penalty). The fact that large organisations with sophisticated HR teams can still get it wrong suggests that the balance is still not right – what hope is there for small employers?

1. Air New Zealand v Hudson [2006] ERNZ 415 at [92] - [107].
2. Air New Zealand Ltd v V [2009] ERNZ 185 at [29] - [62]3 Northern Distribution Union v BP Oil New Zealand [1992]
3. ERNZ 483 (CA) at 48812347466 2
4. W&H Newspapers Ltd v Oram [2001] 3 NZLR 29.
5. Oram (supra) at [31].
6. Air New Zealand v Hudson [2006] ERNZ 415 at [139] – [140].
7. Air New Zealand v Hudson [2006] 1 ERNZ 415 at [119].12347466 3
8. Report of the Transport and Industrial Relations Committee on the Employment Relations Law Reform Bill.
9. Air New Zealand v Hudson [2006] 1 ERNZ 415 at [120].
10. See commentary in Mazengarb’s Employment Law at ERA103A.8A
11. X v Auckland DHB [2007] ERNZ 66 at [97]12347466 4
12. Explanatory note to the Employment Relations Amendment Bill (No 2)
13. [2006] ERNZ 925 at [38], [57], [67]
14. Ibid at [141].
15. Helen Kelly “Proposed changes to the test of justification” [2010] ELB 84 at 84.12347466 5
16. Secretary for Justice v Dodd [2010] NZEMPC 84.
17. Air New Zealand Ltd v V [2009] ERNZ 18512347466 6
18. Chief Judge Colgan, “Justified dismissal: the myth of impossibility” Employment Law Institute 2006
19. NZ Food Processing etc IUOW v Unilever NZ Ltd [1990] 1 NZILR 34 at [46]
20. Lewis v Howick College Board of Trustees [2010] NZEMPC 4 at [45].