MARCH 2005 Employment Team Members

Michael Quigg Partner DDI: 474 0766 [email protected]

Quick Reference: SERIOUS MISCONDUCT – COMPANY POLICIES – EVENHANDED TREATMENT – REINSTATEMENT Serious Misconduct 1 Company Policies – Evenhanded Treatment A recent decision of the - Reinstatement Employment Court in Chief

Best Policy 4 Executive of the Department of Jol Bates Inland Revenue v Buchanan is DDI: 474 0759 Anton Piller Orders – important for its consideration of: Civil Search Warrants 5

£7.5m Sex • what constitutes serious misconduct, Discrimination Case 7 • the need to show staff have read policies and procedures Mandatory Discretionary • the availability of reinstatement (even where Bonus Payments 8 the employee’s conduct contributes to the dismissal). Contractor/Employees 9 Sean Heywood The Facts DDI: 474 0752 Holiday Surcharges 10 The case concerned two employees of the Department

Competition Winner 10 of Inland Revenue (IRD), Gillian Buchanan and Lynn Symes, who were summarily dismissed in July 2003. Further Information 11 Both were long-serving employees with very good service records. They were dismissed after a general Employment Seminar 12 audit of employees’ use of the department’s database Programme 2005 of taxpayer records. The general audit generated 35 disciplinary investigations. In this case it revealed Deirdre Marshall that they had accessed, on multiple occasions, the DDI: 474 0765 Quigg Partners files of family members. It was found that the Level 7, The Bayleys Building employees had changed addresses, issued and 28 Brandon Street P O Box 3035, Wellington confirmed personal taxation summaries, issued Phone: 04 472 7471 stationery, and in Ms Buchanan’s case, transferred a Fax: 04 472 7871 credit from one tax year to another. www.quiggpartners.com

Tim Sissons 472 7471

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These actions were found by IRD to be in breach of the employees’ obligations under the department’s code of conduct, to be in breach of their statutory obligations under the Tax Administration Act, and to be in breach of their employment agreements, which obliged them to comply with the code of conduct.

The Determination of the Employment Relations Authority The department had, in accordance with its obligations under the State Sector Act, issued a code of conduct. The most recent code had been issued in 2001, at which time training was provided to staff. Both employees attended these training sessions, at which they were given copies of the code and asked to sign forms acknowledging their receipt of the code and their attendance at the session. Both did so. However, it was accepted that neither employee read the code, even though they received a number of newsletters stressing the importance of understanding it. The Authority found that they were aware that the IRD had concerns, but thought that these related to “celebrity surfing” – looking into the tax affairs of celebrities. In fact, the communications had been of a more general nature, and had explicitly referred to accessing the files of staff members’ families.

While the Authority determined that neither employee was aware that they had done anything wrong, this was only because they had “completely failed to take on board the repeated messages that they had been given about what constituted serious misconduct”. The Authority found that this did not necessarily mean that their serious misconduct was excusable.

Despite finding that serious misconduct occurred, the Authority granted the employees reinstatement on the basis of disparity of treatment. It was found that three other workers whose misconduct had come to light as a result of the same audit process, and whose circumstances were very similar had received only a final warning. Because there were no other factors justifying the harsher treatment of Ms Symes and Ms Buchanan, their dismissals were held to have been unjustifiable, and reinstatement was ordered.

The Employment Court Decision Misconduct- Serious or not? The Employment Court noted that the actions of the employees were serious, even when done with the permission of the taxpayer involved, because they were suggestive of preferential treatment, and could give rise to suspicion of “some degree of favouritism bordering on corruption” in a department where employees are required to be above suspicion. This was despite the fact that there was no suggestion of actual wrongdoing. It was held that the employees’ actions, when viewed in isolation, included activities potentially amounting to serious misconduct.

However, it was held that such activity “cannot amount to serious misconduct irrespective of circumstances”. The Court found that misconduct occurred, but that it was not serious misconduct, having taken into account a number of factors:

ƒ the employees were open and honest with the decision-maker

ƒ IRD accepted their explanations

ƒ the dismissal was for not reading the code

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ƒ the decision to dismiss was based largely on the number of occasions of access and the time over which it occurred; and

ƒ the fact that failure to read the code would explain the multiple access over a long period;

Disparity Disparity of treatment is an issue which crops up not infrequently in employment law decisions. As described by the Chief Judge in this case, it involves the proposition that “employees who behave in much the same way should sustain much the same punishment”, and, where an employee can establish that another employee guilty of a similar offence was penalised significantly less heavily, it may be found that the more severe punishment is not justifiable.

In this case, the principles governing disparity issues were identified as: “a.) If disparity is established, an employer may be found to have dismissed unjustifiably unless an adequate explanation is forthcoming.

b.) If the explanation is adequate, the disparity becomes irrelevant.”

In this case the explanation for the disparity was considered inadequate to justify the dismissals. The Court accepted the Authority’s factual finding that IRD had accepted that the employees were unaware of the prohibition and therefore that the misconduct had been committed unconsciously. It held they were treated as if they were aware – the decision to dismiss was influenced by the number of times access occurred and the period over which it occurred. The Chief Judge suggested that guidelines, or a short internal review or confirmation of decisions to ensure consistency could have prevented the disparity.

As regards the timing issue, it was held that the other cases were part of the same process, and that “consistency across the relatively brief period of time of these disciplinary inquiries could be expected”.

It was held that given the conclusions reached about the employees’ conduct, it could not be said that their contribution to the situation was such as to require them to forfeit their entitlement to reinstatement. If a reduction was to occur, this should be made from any monetary remedies ordered, whether for loss of remuneration or as compensation for hurt and humiliation. The Court left the determination of such remedies, and any reductions, to the Authority.

Comment

ƒ Serious misconduct in this case was assessed under the Oram test as the case arose prior to the new test now found in s103A of the Employment Relations Act. A significant test case is still awaited as to the difference between what a fair and reasonable employer could have done in all the circumstances (the Oram test) and what a fair and reasonable employer would have done ie ERA Amendment Act.

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ƒ The ERA found the conduct to be serious misconduct. The Employment Court disagreed, holding it was potentially serious misconduct but not serious misconduct in this case given the circumstances. Hence BEWARE if there is a list in an employment agreement, code, manual etc. of what constitutes serious misconduct. It does not automatically follow every incident of that type will be serious misconduct.

ƒ This case illustrates the importance of codes of conduct, and of making sure that employees are aware of their existence and their contents.

ƒ The case also illustrates the need for careful consideration of how employees are to be punished for misconduct. Employers must ensure not only that the punishment fits the crime, but also if a number of employees are guilty of similar conduct, that punishments are comparable across the board.

ƒ There is a need, particularly in large organisations for someone (eg HR or legal) to have an overview of all disciplinary decisions made to ensure consistency and evenhanded treatment.

BEST POLICY – WHEN IS A POLICY MANUAL PART OF AN EMPLOYMENT AGREEMENT?

In December 2004, the Court of Appeal declined the application of Unisys New Zealand Ltd (“Unisys”) for leave to appeal against an Employment Court decision which had held that Unisys was obliged to pay its employees salaries within 10% of “market reference points” (“MRP”). An MRP was a point set through market research into salaries for equivalent positions.

The Agreement The plaintiffs’ employment agreements stipulated that Unisys’ Policies and Procedures Manual was a part of the terms and conditions of employment between the parties, and provided that a key objective of Unisys’ remuneration policy was to:

“establish and maintain fair and competitive market remuneration”.

The remuneration policy provided that:

“Since market reference points are norms, actual salaries that are 10% above or 10% below a market reference point are considered at market”.

The plaintiffs in this case were being paid more than 10% less than their MRPs, while people in the same positions who subsequently joined the company were paid a higher percentage of their MRPs.

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The Employment Court Decision The Employment Court considered all of the documents that formed the conditions of employment, and found that:

“As these obligations are expressed as objectives, without more they would be unlikely to have full binding force. However, the objectives inform the rest of the agreement and at the very least are a guide to the interpretation of other parts of the agreement which deal with remuneration.”

The Employment Court went on to find that Unisys was obliged to set an MRP for each role, and to pay salaries within 10% of the MRP. By paying the plaintiffs outside this range, it was held that Unisys was in breach of its contractual obligation.

Arguments at the Court of Appeal Unisys applied to the Court of Appeal for leave to appeal this decision, arguing that the policy manual could only be used as an aid to ascertaining the meaning of the substantive provisions of an agreement, rather than as containing terms with binding effects of their own.

The plaintiffs argued that the provisions of the policy manual had clearly been incorporated into the contract, and the obligations drawn from them were contractual terms. They also submitted that this appeal was precluded from succeeding by section 214(1) of the Employment Relations Act which prevents appeals from decisions of the Employment Court which relate only to the interpretation of an agreement.

The Court of Appeal Decision The Court of Appeal held that the Employment Court’s approach to the interpretation of the agreement was correct in interpreting the objectives provision as the equivalent of a contractual term to be applied as a guide to interpreting the other provisions of the agreement rather than being directly enforceable itself. It held that the Employment Court took an orthodox approach in finding that by paying the plaintiffs more than 10% less than the MRP Unisys was in breach of a contractual obligation, and there was no error of approach or principle. It was held that the appeal was solely an attack on the Employment Court’s interpretation of an agreement, and so prevented by section 214(1) from proceeding.

Comment Employers should be very wary about how they import into employment agreements various codes, policies, manuals, guidelines etc. Employers may see policy documents as binding on employees but able to be changed by employers. This decision shows that if such provisions are incorporated into an employment agreement as a term and condition of employment, such policy documents can create obligations that the employer may have not intended to have contractual force.

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ANTON PILLER ORDERS – SEARCH WARRANTS THAT AREN’T

In Axiom Rolle PRP Valuations Services Ltd v Kapadia, the Employment Court granted, ex parte, what is known as an Anton Piller order to the applicant, in order to conduct a search of the premises of another company for, amongst other things, a missing backup hard-disk.

The Order An Anton Piller order is available in situations in which one party has important information in its possession, in which there is a real possibility the information would be destroyed before both parties could be consulted, and where serious damage to the applying party is risked if destruction occurs. An order is usually obtained by one party without giving notice to the other party, as allowing both sides to argue the case is likely to defeat the order’s purpose.

While different from a civil search warrant (which the common law has, for centuries, refused to accept as legal) an Anton Piller order is in many respects similar to a search warrant: it allows access to another person’s premises for the purpose of search and seizure.

Because it is a fairly serious invasion of the other person’s privacy, such an order is considered an extreme measure, and (in theory at least) is to be resorted to only in the most unusual of situations. In practice, such orders are relatively common, and the distinction between one and a search warrant perhaps more academic than real.

In the decision of the English Court of Appeal which gives the order its name, Anton Piller KG v Manufacturing Processes Ltd, Lord Denning said:

“Let me say at once that no court in this land has any power to issue a search warrant to enter a man's house so as to see if there are papers or documents there which are of an incriminating nature ... But the order sought in this case is not a search warrant … The plaintiffs must get the defendants' permission. But it does do this: it brings pressure on the defendants to give permission. It does more. It actually orders them to give permission—with, I suppose, the result that if they do not give permission, they are guilty of contempt of court.

So, although it does not actually allow the breaking down of doors, or entry without permission, an Anton Piller order, backed up by the threat of contempt of court, is a significant remedy, albeit one which incorporates a number of limits.

To obtain an order, a party must establish that there is: ƒ a sufficiently strong prima facie case to justify such an extreme remedy; and

ƒ potential or actual very serious damage to themselves; and

ƒ clear evidence that the defendant has the material in their possession; and

ƒ a real possibility this material might be destroyed before an application involving both parties could occur.

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The Facts The rather cumbersomely named Axiom Rolle PRP Valuations Services Ltd (Axiom) is a property valuation firm that purchased a business which employed defendant (Mr Kapadia) as Auckland branch manager. That business also held a franchise from an Australian company. Axiom discovered an encrypted e-mail file on Mr Kapadia’s computer indicating that he had been communicating with the Australian franchisor with a view to obtaining the franchise himself and employing a number of Axiom’s staff. The e-mails also suggested that some of the franchise would be shared with Equity Realty Limited, a company at whose offices Mr Kapadia was later seen.

Axiom, in separate proceedings at the Employment Relations Authority, was pursuing an action against Mr Kapadia for breach of the duty of fidelity and the duty of confidentiality.

The order was sought so as to recover a backup hard-disk owned by Axiom, which had disappeared from Axiom’s offices, and was believed to have been taken by Mr Kapadia and stored on the premises of Equity Realty.

The Decision In this case, the Employment Court was satisfied that there was a strong prima facie case that Mr Kapadia had the hard-disk in his possession, along with the ability to destroy it or any material on it.

It was also considered that there was: “compelling evidence of conduct which, until explained, established a strong prima facie case of a breach of the defendant’s duty of fidelity and confidence.” Coupled with the disappearance of the backup hard-drive and the evidence that it was in Mr Kapadia’s possession, this evidence satisfied the Court that: “there was a real risk of destruction of the device, if the order sought was not made.” The order was granted on the day it was applied for, on the condition that adequate safeguards were being provided for, including the presence of an independent solicitor during the search, the requirement that the order be used in a way that did not interfere with the ordinary business of Equity Realty, and the requirement that the seizure be limited to the items identified by Axiom – personal computers, laptops, PDAs, hard drives, other storage media, cellular phones and hard copy print outs. Axiom was also required to make extensive undertakings as to damages as to the conduct of the search and seizure.

Lessons • This case illustrates a possible use of an important tool available in employment cases where there is real, well founded concern that vital evidence will be destroyed.

• It also shows that in sufficiently serious circumstances, fairly radical invasions of privacy (in this case the search and seizure of a large variety of pieces of important equipment contained in the offices of a company not a party to the proceedings) will be authorised by the Courts in an employment law context.

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£7.5 MILLION SEX DISCRIMINATION CASE FAILS

In a case that has been dubbed “Sexism in the City”, the Croydon Employment Tribunal in London has recently decided in favour of Merrill Lynch in a sex discrimination case brought by Stephanie Villalba, the former head of the investment bank’s European private client group.

The Claim In 2003, after 17 years with the company, Ms Villalba was made redundant. The company claimed that she was removed from the job because the arm of the business she headed was performing very poorly financially, losing £1 million each week, and because she was unwilling to travel to the countries she was in charge of.

Ms Villalba brought a claim against Merrill Lynch for £7.5 million (approximately NZ$20 million) for sex discrimination, unequal pay, victimisation, and unfair dismissal, describing the company as “institutionally sexist”. Ms Villalba worked out of the bank’s offices in London’s financial district, an area with a reputation for secrecy and male-dominated culture.

Amongst other allegations, Ms Villalba claimed that during a flight on the bank’s corporate jet, she had been ordered to sit in the ‘stewardess’ seat’, and to serve drinks to the other (male) passengers. There was also evidence that her supervisor Ausaf Abbas had described her as “high maintenance”, and in response to Ms Villalba’s complaints about her workload, had replied “Stephanie, my maid works hard”.

“Trench Warfare” The case was bitterly fought, at one point being described by the Tribunal Chairman as “trench warfare”. Merrill Lynch flew a number of its senior executives to the Croydon Tribunal, along with media minders, but strenuously resisted the attempts of Ms Villalba’s lawyers to determine the salaries of other Merrill Lynch executives. The Tribunal noted a “culture of secrecy and opaqueness regarding pay”, “a subjective approach to bonuses”, a hardly glowing litigation history and the company’s “refusal to provide pay data regarding comparators.” Worldwide, the company has faced a spate of sex discrimination claims recently, having paid US$100 million to settle the sexual harassment and discrimination claims of more than 900 women in the United States. Despite these findings, the Tribunal did not find the discrimination claim to have been made out.

The Decision The Tribunal held that “a man roughly of Ms Villalba’s level, about whom there had been similar performance concerns, would not have been treated more favourably”. However, it did hold that her dismissal was unfair, and that she was “shabbily and unreasonably treated.” It was held that following her removal from the senior role, she should have been given the opportunity to see if an alternative position could be found for her within the organisation.

Ms Villalba was awarded £55,000 in her unfair dismissal claim, the maximum amount that could be awarded in such a claim. This statutory cap has been linked to the vast increase in the number of discrimination cases being taken in Britain, with discrimination claims being ‘tacked on’ to unfair dismissal claims in the hope of obtaining higher awards, there being no cap on remedies for discrimination claims.

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However, despite winning on the unfair dismissal claim, Ms Viallalba will be left substantially out of pocket – her legal bill is estimated to be in the millions of pounds.

MANDATORY DISCRETIONARY BONUS PAYMENTS

An Appeal has recently been decided in another significant British case, mentioned in our August 2004 Newsletter in relation to bullying, but also having significant implications as regards ‘discretionary’ bonus payments. Clauses specifying that such payments may be made are relatively common in high-level contracts.

Steven Horkulak was a senior manager at Cantor Fitzgerald International (CFI), a bond and money-broking house. He resigned in June 2000, giving as his reason the continued bullying, abusive and intolerable behaviour of his immediate superior, Lee Amaitis. He then brought proceedings, claiming that this treatment amounted to constructive dismissal. CFI responded that Mr Horkulak simply could not cope with the pressures of the job.

The High Court found for Mr Horkulak, despite finding that his heavy drinking and cocaine addiction had had some effect on his work, holding that he was constructively dismissed by the unacceptable behaviour of Mr Amaitis, and awarding him damages totalling £892,000 (approximately NZ$2.4 million), which included “discretionary bonuses” totalling £630,000.

CFI appealed, but only as to the amount of the damages, their application for permission to appeal the substantive decision having been refused.

The High Court Decision The main issue was over the lower court judge’s interpretation of a bonus clause in Mr Horkulak’s employment contract. The clause stipulated that: “the Company may in its discretion, pay you an annual discretionary bonus … the amount of which shall be mutually agreed by yourself and the President of [CFI], however, the final decision shall be in the sole discretion of the President of [CFI]” Despite this provision, the judge awarded damages on the assumption that Mr Horkulak would have received the bonus had his employment continued.

The Appeal The Court of Appeal also rejected CFI’s argument that the bonus was wholly discretionary, holding that Mr Horkulak’s contract entitled him to “a bona fide and rational exercise by CFI of their discretion as to whether or not to pay him a bonus and in what sum.” The bonus structure was held to be a part of the overall employment structure, and the clause concerning discretionary bonuses was held to be more than merely an expression of the company’s ability to do something it could do anyway – give its employees bonuses. If the provision did not entitle Mr Horkulak to a rational and bona fide exercise of CFI’s discretion, then it would be of no effect, which does not accord with the standard rule of contractual interpretation that contractual terms should be interpreted so as not to be meaningless.

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Despite this finding, holding that the general approach of the High Court judge was correct, the Court of Appeal held that there was insufficient reasoning in the earlier judgment to support the damages awarded (although there was not reason to suspect that the figures arrived at were out of line) and so the issue of the amount of damages was referred back to the High Court judge for redetermination.

Comment ƒ As a decision on contractual interpretation rather than one related to more nationally- specific employment law, this decision is likely to have some weight in New Zealand courts.

ƒ Like the Unisys case above, this case emphasises the fact that the terms of employment agreements must be very carefully considered - even apparently discretionary obligations may be upheld as imparting almost mandatory benefits.

CONTRACTOR/EMPLOYEES? HOLD ALL TICKETS!

In our February 2004 Newsletter we reported on the Lord of the Rings case of Bryson v Three Foot Six. The Court of Appeal’s decision that Bryson was a contractor is now headed for the Supreme Court. Leave to appeal was granted in the last few weeks. Last week both the CTU and Business New Zealand applied and were granted intervener status to allow them to have their say. A most interesting legal/political/philosophical debate is awaited.

HOLIDAY SURCHARGES

1 April this year will mark the first anniversary of the coming into effect of the Holidays Act 2003, and its requirement that employees working on public holidays be paid ‘time and a half’ and given a paid day off work in lieu of the holiday.

The changes obviously brought with them higher costs to employers who trade on public holidays, and these have since been reflected in the appearance of surcharges on goods bought on public holidays.

Initially appearing in cafés and bars, the phenomenon has since spread somewhat, with the New Zealand Herald reporting a service station in Mapua, Tasman Bay as having attached a 15% surcharge to petrol, and the Consumers’ Institute noting surcharges at cinemas, and on ice-creams at holiday resorts.

The Commerce Commission has recently issued a media release noting that while the charging of holiday surcharges is not illegal (generally, businesses are allowed to charge whatever they like for their goods or services), charging a holiday surcharge without telling customers that it applies is illegal under the Fair Trading Act.

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The Act obliges businesses to make customers aware of the surcharge before a decision to purchase is made. If regular prices are listed but the charging of a holiday premium is not clear to the customer, a breach of the Act may have occurred.

Comment ƒ If you are employing staff on public holidays, remember your obligations under the Holidays Act.

ƒ If you are charging a surcharge to cover increased staff costs on holidays, make sure that the extra charge is clear to customers.

ƒ Compliance with various changes introduced in the Holidays Act 2003 (operative from 1 April 2004) must be in place by 1 April 2005.

COMPETITION WINNER – PRIZE

The Competition Winner for the bottle of French Champagne was Shirley Flaherty of the Ministry of Economic Development. A bottle of French Champagne is winging its way to her. Congratulations Shirley!

FURTHER INFORMATION

Employment Michael Quigg + 64 4 4740766 [email protected] Sean Heywood + 64 4 4740752 [email protected] Jol Bates + 64 4 4740759 [email protected] Deirdre Marshall + 64 4 4740765 [email protected] Tim Sissons + 64 4 4727471 [email protected]

M&A Corporate David Quigg + 64 4 4740755 [email protected] John Horner + 64 4 4740754 [email protected] Nick White + 64 4 4740751 [email protected] Matt Yates + 64 4 4740768 [email protected] Barbara Pearse + 64 4 4740757 [email protected]

12 Quigg Partners - committed to making a difference in Employment Relations

EMPLOYMENT SEMINAR PROGRAMME 2005 To register for the Seminar series, please complete this form and return it to:

Quigg Partners, PO Box 3035, Wellington OR EMAIL TO: [email protected]

Tick Box April 26 Termination of Employment - When you can do it - How to do it right May 24 Fixed Term Employment/Contractors - When it’s allowed and how to ensure it stays fixed - The latest on Contractors June 13 Managed Exits - Golden Handshakes - Irreconcilable differences clauses July 19 Employment Relations Law Reform Act - How it’s working - The Fishhooks August 23 Stress and Bullying (with Andrea Needham) - Latest stress cases - Bullying in the workplace September (exact date to Election Special be advised) (with invited politicians) October 25 Ill Health – Possible Frustration - The best clauses - The appropriate procedures November 22 Health & Safety - Compliance issues - Mitigating strategies December 13 2005 In Review (with Xmas drinks)

Please enclose your cheque for $80.00 inclusive of GST per seminar, or alternatively we can invoice you. All seminars will start at 12.15pm through to 2pm accompanied by a light lunch and refreshments.

Name ______Position ______Organisation ______Address ______Phone ______Fax ______Email ______

All Seminars are held on Level 6, The Bayleys Building, 28 Brandon Street, Wellington