by An interesting trial period case has been considered by the Court of Appeal recently with surprisingly positive results for employers! Making payments in lieu of notice when terminating an employment agreement under the trial period has always been risky. The law surrounding this practise has been unclear, and we have always advised against it.
However, in the case of Loan v Scott Technology NZ Ltd, the Employment Court examined the unique circumstances of this trial period dismissal and found that the payment made in lieu of notice satisfied the requirements of ‘giving notice’ for the purposes of section 67B(1) of the Employment Relations Act. The Court of Appeal agreed.
In this case, the employment agreement contained a provision within the standard termination clause that specified:
The Employer may elect to not require the employee to work out the required notice in which case the remaining balance of the notice period shall be paid by the Employer.
What we would generally regard as ‘payment in lieu of notice’ was therefore permitted under the employment agreement. However, those exact words (payment in lieu of notice) were not actually used in this case – so it’s still all a little bit contentious…
As section 67B(1) of the Act applies when an employer “terminates an employment agreement … by giving the employee notice of the termination before the end of the trial period”, it has often been thought that making a payment in lieu of notice would not be considered ‘giving notice’, and would therefore not comply with the Act.
The Employment Court reviewed the case law on ‘giving notice’ and highlighted the following key principles:
- Notice must be given and must be in accordance with the employment agreement.
- It must be clear and unambiguous, and explain how and when employment is to be terminated.
- Making a payment in lieu of notice does not override the need to give notice.
The Court noted that also relevant in this matter is the distinction between the termination of the employment agreement and the termination of employment itself (although they will often be the same) – as section 67B(1) of the Act requires that it be the employment agreement that is terminated.
In terminating the employment agreement, the employer in this case provided the employee with a letter which covered (among other things) the following points:
- (a) the employment agreement requires four weeks’ notice;
- (b) the employment itself, that is the attendance at work, ends immediately;
- (c) four weeks’ salary will be paid in lieu of the employee working out his notice.
As such, the Employment Court found that the employer had ‘given notice’ that complied with the employment agreement and section 67B of the Act. The employee was therefore unable to pursue a personal grievance for unjustified dismissal.
The Court of Appeal was then asked to determine the answer to the following question of law:
Whether s 67B(1) of the Employment Relations Act 2000 applied to the termination of the appellant, in circumstances where that termination was advised to him within the trial period, but the employer paid the employee in lieu of work for the notice period, in a manner permitted by his employment agreement?
The Court of Appeal answered yes.
The key point to note here is that the unique circumstances of each case will be very important. The specific wording of the employment agreement will be fundamental, as will the verbal and written communication surrounding the delivery of the notice.
Our view is that it is still going to be safer for the employer to allow the employee to work out the notice period as it will eliminate this argument from the pool of issues which the employee can try to potentially challenge. The next best alternatives are to have the employee agree or elect not to work out the notice period, or to effectively put the employee on garden leave and process the final pay at the end of the notice period (provided this is allowed for under the employment agreement).
Trial period terminations are heavily scrutinised by the Courts and there are a lot of technicalities to get right. Despite the positive findings of this case, we still highly recommend you tread carefully and get in touch for some advice from us before initiating any trial period termination.
Please do not substitute this article for professional advice.