Legal Updates

Employment Court Clarifies Criteria for Fixed Term Employment Agreements

A sincere belief that the circumstances warrant a fixed term agreement will not meet the criteria set by the Employment Relations Act

Fixed term employment agreements are strictly regulated by section 66 of the Employment Relations Act 2000 ("the Act"). If the criteria set by section 66 are not met, a fixed term agreement may be held to be invalid, resulting in the employee being a permanent employee instead.

Under section 66, an employee may only be employed under a fixed term agreement if:

  • The parties agree that the employment will end at the close of a specific date, period, on the occurrence of a specified event or at the conclusion of a specified project; and
  • The employer has a genuine reason based on reasonable grounds for specifying that the employment is for a fixed term only and the employee is advised of these reasons.

Section 66(3) further clarifies that establishing the suitability of the employee for permanent employment or excluding/limited the rights of the employee under the Act or the Holidays Act 2003 are not genuine reasons the employer can rely on to justify a fixed term agreement.

Recently, the Employment Court issued a decision clarifying what constitutes a 'genuine reason' for specifying that employment is for a fixed term only.

Kwik Kiwi Cars Ltd T/A Mark Cromie Motor Group V Kerry Crossley [2020] NZEMPC 142

Ms Crossley was employed by IC Motor Group Limited ("ICMG"). ICMG was sold to Mark Cromie Holden ("MCH", following which the two businesses would merge to become Mark Cromie Motor Group ("MCMG").

In January 2019, a meeting occurred between ICMG's staff and Mr Cromie, owner of MCH, in which staff were informed that the upcoming merger would likely create some role duplications across the departments and that restructuring would therefore be required. However, extra staff would be required over a certain period until the merger was complete.

Ms Crossley and other staff were then offered a four month fixed term employment agreement, which she signed and returned the following day.

Terms of Fixed Term Agreement

The employment agreement stated that Ms Crossley would work for MCMG as a booking consultant from 8 February 2019 to 7 June 2019, at which time the employment relationship would automatically end without notice unless either party ended the employment relationship earlier under the employment agreement. 

The agreement contained a clause stating that "the employer and employee agree there is a genuine reason for the fixed term and for the employment to finish when the term ends. The reason for it being fixed term, and finishing at the end of the term, is within this four month period there will be a merger between the two existing entities, this will more than likely create some role duplication across most departments and therefore require some restructuring".

The agreement also contained a redundancy provision, which stated that if the role was no longer needed before the ending of the fixed term, there would be a good faith restructuring process, and that redundancy notice would be given.

End of Ms Crossley's Employment

On 8 May 2019, Ms Crossley, without prior notice, was asked to join a meeting with Mr Evans, director of MCMG, and Mr Cromie, during which Ms Crossley was informed she no longer had a job. Mr Evans referred to the fixed term agreement and noted that after three months of trading, MCMG had identified a suitable structure, which meant Ms Crossley would not be offered a new contract once the fixed term agreement ended.

Ms Crossley became upset and left the meeting despite Mr Evans encouraging her to stay and discuss the matter.

The following day, Mr Evans emailed a letter confirming what was discussed at the meeting to Ms Crossley and confirmed her standard wages would be paid until 7 June 2019. Ms Crossley responded to the email and said she would have to have been given notice about the meeting so she could bring a support person and that there had been no opportunity to discuss other options.

A further email by Mr Evans noted there was no opportunity to discuss other options because Ms Crossley refused to stay in the meeting, which was her choice.

Employment Relationship Problem

Ms Crossley raised an employment relationship problem because the criteria under section 66 for being placed on a fixed term agreement were not met and that her fixed term agreement was therefore not valid. Ms Crossley's dismissal was therefore said to result from a procedurally flawed process, leading to her dismissal being unjustified.

MCMG argued that Ms Crossley's employment ended under her fixed term employment agreement, which met the requirements of section 66 as MCMG had genuine reasons based on reasonable grounds for placing Ms Crossley on a fixed term agreement.

The matter was heard before the Employment Relations Authority ("the ERA"), which held that the possibility of a business needing to restructure and employees becoming surplus to requirements was an ordinary business risk. The criteria for fixed term agreements under section 66 of the Act were therefore not satisfied and Ms Crossley was held to haven been unjustifiably dismissed.

MCMG lodged a challenge to the ERA decision with the Employment Court.

Employment Court Decision

FIXED TERM EMPLOYEE VS PERMANENT EMPLOYEE

On the facts the parties signed an agreement that Ms Crossley's employment will end at the close of the period from 8 February 2019 to 7 June 2019. The first element of section 66 of the Act was therefore satisfied.

The Court accepted that MCMG was sincere when concluding that it may need to restructure, and that it believed this constituted a reasonable ground for entering into a fixed term agreement with Ms Crossley.

However, a sincere belief does not automatically translate into a genuine reason.

The Court found that the redundancy provision in Ms Crossley's agreement undermined MCMG's claim that the fixed term provision was justified. The redundancy provision was subject to a caveat which stated that the redundancy clause would only apply if the role was no longer needed before the fixed term ended. The fixed term agreement overrode the protections of the redundancy regime. On that basis, the Court found that the reason given for the fixed term agreement cannot be regarded as genuine.

The Court also objected to MCMG's intention to undertake a review of staffing needs once the two businesses mergerd, which would involve consideration of roles and suitability of existing staff to fulfill those roles. This process fell squarely within section 66(3) of the Act as staff were being assessed for suitability of permanent employment, which could not qualify as a genuine reason to justify a fixed term employment agreement.

The Court found that the criteria of section 66 of the Act were not met and Ms Crossley's employment agreement was not a qualifying fixed term agreement.

Ms Crossley was therefore a permanent employee and ordinary protections of the redundancy regime must be observed.

Procedural Defects in Redundancy Process

When considering whether to make an employee redundant, a procedurally fair process must be followed.

In the present circumstances, the Court found the process followed by MCMG when dismissing Ms Crossley had several procedural defects:

  • No prior notice of the redundancy meeting;
  • No compliance with the good faith provision of the Act including disclosure of the information which the employer possessed about this decision about Ms Crossley's role;
  • No opportunity for consultation as the decision to end Ms Crossley's employment was made without reference to her; and
  • No other options were considered by MCMG.

MCMG therefore unjustifiably dismissed Ms Crossley.

MCMG was ordered to pay $2,470 gross for lost remuneration and $20,000 for compensation for humiliation, loss of dignity and injury to feelings, as well as costs on a 2B basis.

Comment

This judgement demonstrates that a mere belief that an employer has a genuine reason based on what are believed to be reasonable grounds for entering into a fixed term employment agreement will not satisfy the criteria of section 66 of the Act.

The reason for placing an employee on a fixed term agreement must be genuine from an objective standpoint for the fixed term provision to be valid.

This judgement also crystalizes that placing employees on fixed term agreements based on anticipated role duplication in the near future is akin to placing employees on fixed term agreements so their suitability for permanent employment could be assessed. Per section 66(3), that is excluded as a genuine reason to enter into a fixed term agreement.

 

If you require any assistance with fixed term agreements, please contact Jaesen, Sharee or Nina.