The Economics of Employment Litigation
By Rick Hargreaves, a senior associate in the Employment and Workplace Relations team at DLA Phillips Fox.
It is inevitable that at some point your company will have an employment relationship problem that escalates into a conflict situation. Often the merits of such a grievance will be questionable and your initial reaction is to want to defend the claim to the 'hilt'. But there is a good chance that despite your best efforts some part of the disciplinary investigation or decision-making process will not meet the scrutiny of the Employment Relations Authority (ERA) or Employment Court (EC).
Litigation is limited in what it can achieve for a company. The only outcome you will get is the decision of the ERA or the Court. On the other hand you can get complete certainty from a settlement insofar as the problem is gone and will cost no more than you agreed to. So before embarking on an adversarial approach you need to pause and consider the costs, (in terms of managerial time, legal fees and liability risk), of vigorously defending a 'point of principle'.
What are the costs?
The costs of litigation include managerial costs. These take into account time spent by you and your staff carrying out the employment processes, attending mediation, preparing evidence and participating in the legal procedures if the matter goes to the ERA or EC.
Initially there will be the disciplinary investigation process that you are obliged to undertake. Depending on the nature of the issue (for example the poor performance process) the matter could take several months before you are in a position to determine whether or not the employee's employment should continue.
If disciplinary action results from the investigation process there will be the inevitable personal grievance. At the beginning this will involve some correspondence between you and the employee and/or their representative. At this point you may seek some advice from your own lawyer. But one way or another you will usually end up in mediation.
Mediation is essentially 'compulsory' in New Zealand employment jurisdiction. If you do not consent to go to mediation the ERA/EC will in almost all cases direct you to attend.
Before going to mediation you will want to do your BATNA (best alternative to a negotiated agreement) and WATNA (worst alternative to a negotiated agreement). Basically you will want to analyse what is the best and worst possible outcomes for your company arising from the issues of this particular employment relationship problem. This analysis is not so much whether or not you would lose in Court but rather what will be the impact on the company of each alternative path.
Part of your BATNA/WATNA analysis will include a risk analysis based on the 'costs' and risks of proceeding to a full ERA investigation meeting and, if the case warrants it, to a de nova EC hearing.
It may be that the particular problem will benefit from at least some steps being taken to moving it towards an investigation meeting or hearing. Preparation of a statement of problem (SOP) and a statement in reply (SIR) may help the parties focus on their issues and to some extent understand where the other party is coming from.
You should allow yourself some preparation time and around four hours to attend the mediation. If you are represented at mediation you will need to consider that cost as well. The cost of mediation is not recoverable in the ERA/EC even if you win the case.
If mediation is unsuccessful the matter will proceed to an ERA investigation meeting. If either party is unsatisfied with the ERA they may appeal to the EC on a point of law or 'de novo' (a brand new hearing).
The next level of costs will be 'legal costs'. These will include any advice that you seek before and during the investigation process, assistance in preparing for an attendance at mediation, preparation of witness statements and preparation for an ERA investigation meeting. If the matter proceeds to a de novo hearing in the EC these costs will be repeated.
Once you are involved in an adversarial process there is always a risk that you may lose the case. If you do so the Employment Relations Act 2000 provides various remedies for the successful employee party. These include reinstatement, (primary remedy under the Act), reimbursement of any wages or other money lost as a result of the grievance, compensation for hurt and humiliation, compensation for the loss of any benefit (whether money or not) and perhaps a penalty.
The remedy of reinstatements speaks for itself. There are obvious inconveniences and relationship issues arising from reinstatement. Where there has been a contentious issue between the parties this can create internal costs which will involve rebuilding the trust and confidence between the parties and can include employment assistance programmes, retraining and perhaps transfers.
Reimbursement can, in some cases, be the most costly part of a personal grievance claim. Basically, if an employee is unjustifiably dismissed the lost remuneration that they incur up until the ERA investigation meeting may be awarded to them. This award could be three months remuneration or, at the discretion of the Authority, complete reimbursement of lost wages or salary for the period up to the investigation meeting.
The onus is on the employee to prove that they have lost remuneration because of the grievance and that they have taken reasonable steps to find new work in the interim. In the current employment market lost remuneration award may not be significant because new jobs are available. However there have been cases involving executives where the lost remuneration portion of the award has exceeded $300,000. It is rare in the current labour market for an award under this category to exceed three months wages or salary.
Compensation levels for hurt and humiliation are fairly tightly controlled in New Zealand. The New Zealand Courts do not subscribe to the huge awards that some overseas Courts allow. There have been only a handful of exceptional cases where compensation awards have exceeded $30,000. The statistics available from the Department of Labour have consistently shown that the average hurt and humiliation payment hovers around $5,000.
Typically a procedural mistake by an employer in the investigation process will attract a compensation award of $5,000 or below but an unjustified dismissal may attract awards of $15,000 to $30,000. The top end compensation payments are reserved for those cases where the ERA/EC decides that the employee has been put to an enormous amount of unnecessary distress by an employer.
Winning party's legal costs
Another matter to consider is the cost awards given by the ERA to the winning party. There is an unofficial tariff in the ERA that ranges between $1,000 and $3,000 depending on the complexity of the case. The successful party will hardly ever recover their actual legal costs on an indemnity basis. So do not count on getting your legal costs back.
Awards for legal costs in the EC are a lot higher. The level of these also depends on the urgency and complexity of a case. But a rule of thumb is an award of two to three days legal costs at between $250 and $350 per hour (even if your lawyer costs more) for each day in Court.
Penalties are ordered by the ERA/EC when there has been a breach of the employment agreement or the Employment Relations Act 2000. A penalty against a company cannot exceed $10,000. But it is rare for a penalty to exceed $4,000.
Should I go all the way or not
The nature of the case will often determine whether or not there is a reasonable hope of parties resolving their employment relationship problems themselves. A purely commercial case (ie one involving restraints of trade, the taking of confidential information and/or the solicitation of clients) is frequently difficult to resolve without a determination.
There are other cases where the key issue is a matter of interpretation of the contract and these are also quite difficult for the parties to resolve. But a personal grievance involving an unjustified dismissal will usually be resolved by the parties before it goes to an ERA investigation meeting.
Settlement is not the answer to every employment problem. Often a company needs to take steps to ensure that it doesn't become an 'easy mark' by having a reputation of always paying out when a grievance is raised. For example if you settle a case with a person who is an obvious poor performer the message may be that poor performance is rewarded.
If you choose to go to Court be prepared to incur costs in time and money that you will not recover.
Some times settlement can be a 'success' for a company because it allows its managers to get back to the business of business. It is to no one's benefit to have an employment relationship problem unnecessarily taking up valuable managerial time and depleting the company's resources when settlement is a viable option. The advantages of an early settlement is that it avoids the costs of any hearing but at the same time it may send the wrong message to staff who remain.