LawHawk Guide to New Zealand Employment Agreements

For many businesses, their employees are the most important source of competitive advantage. You are only as good as the people you have.

A good employment agreement is the foundation for an effective employment relationship.  By including the right provisions to attract and retain the best employees, and to incentivise them to work in ways that are good for them and the business, you can position your business for the best chances of success.

If you take a cookie cutter approach to your employment agreement, without really thinking about which options might add real value, you could be missing out on a great opportunity to be more successful in your business.

Working with law firm Ford Sumner, we have created an online employment agreement builder that allows you as an employer, to build an employment agreement that is tailored to your business, employees and the type of employment relationship you want to have.  

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This guide is intended to help you think through your options for your employment process, using examples from our own online employment agreement builder.  If you have your own employment agreement form already, you may want to have a copy of it handy as you read, to see how it compares.  Ford Sumner and LawHawk also offer a separate service to review your employment agreement, update it to reflect best practices and legal compliance, and then automate it for your own use with maximum efficiency.

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We also work with Secured Signing to help our customers get their employment documents signed and returned in the most legally compliant and efficient way. 

Whether you decide to prepare your employment agreement through LawHawk or elsewhere, these are the key things we think you should consider.

LawHawk Terms and Conditions

This summary is subject to LawHawk’s Terms and Conditions.

Topics

Making sure you hire the right person

Before writing up the employment agreement, an employer needs to make sure it has the right employee.  Doing this well will come down to things like:

  • Designing the required job and job description, before starting the hiring process
  • Having a strong reputation as a good employer
  • Designing a hiring process to find the best person for that role
  • Having a plan for how the employer will carry out interviewing and reference checking, so that the interviewer doesn’t just hire someone like them, that they like on a personal level

As part of the hiring process, the interviewer will want to make sure that they don’t ask too narrow questions (e.g. just yes/no).  The interviewer wants the prospective employee to tell all about themselves, including any particular things that the employer should know that the prospective employee may not want to volunteer.  It’s not uncommon for people to hold back negative information and if the employer doesn’t ask for it, they may have only themselves to blame later on.

An example of how an employer can protect itself would be to ask the employee to confirm that: 

  • they haven’t misled or supplied false information to the employer in any respect, including in relation to the employee’s qualifications, experience or ability to perform any duties required for the role; and
  • they haven’t deliberately failed to disclose any matter that could have materially influenced the employer’s decision on whether to employ the employee.

The employer can ask them this in both the application process, and also as part of the written employment agreement.  The employment agreement can also confirm the importance of these requirements to the employer, and that the employer is relying on them in deciding to hire the employee.  The employment agreement can also state that if any of the information relied on is incorrect or misleading in any material respect, the employer may terminate the employee’s employment without notice.  That should help to focus the mind!

Should an employer run a pre-employment trial?

Hiring new employees is difficult.  Some people interview really well, and are able to provide great references, but then it turns out that they are not actually that good at the role.

Alternatively, some people who aren’t great at interviews tend to be real stars in the actual work-place.

It may seem that it would be a good idea to get a prospective employee to actually do some work before the employer makes them an offer, so the employer can see how the employee will actually perform on the job. 

Unfortunately, this is a very risky approach, as doing this carries the risk that it make the candidate an actual employee, and therefore to give them all the rights of an employee – including protection against unjustified dismissal.

The better approach to take then is to actually offer them employment, but to make sure the employer includes the 90 day trial (for employers with less than 20 employees) or a probationary period (for larger employers).

An employer cannot use the 90 day trial approach for someone who has already started work or previously been an employee, so if the employer gets them working before giving them the employment agreement, it will be too late!

Legal Requirements for a New Zealand individual employment agreement

Before we go further, it is helpful to note some of the most important legal requirements for a written employment agreement, and what it must contain.

Section 65 of the Employment Relations Act 2000 states:

Form and content of individual employment agreement

(1)      The individual employment agreement of an employee—

(a)      must be in writing; and

(b)      may contain such terms and conditions as the employee and employer think fit.

(2)      However, the individual employment agreement—

(a)      must include—

(i)       the names of the employee and employer concerned; and

(ii)      a description of the work to be performed by the employee; and

(iii)     an indication of where the employee is to perform the work; and

(iv)     any agreed hours of work specified in accordance with section 67C or, if no hours of work are agreed, an indication of the arrangements relating to the times the employee is to work; and

(v)      the wages or salary payable to the employee; and

(vi)     a plain language explanation of the services available for the resolution of employment relationship problems, including a reference to the period of 90 days in section 114 within which a personal grievance must be raised; and

(b)      must not contain anything—

(i)       contrary to law; or

(ii)      inconsistent with this Act.

LawHawk’s online employment agreement builder ensures all the required matters are covered off to a high standard.

How do I make an offer to employ someone?

Welcoming manager

As noted above, you need at least a written employment agreement, but best practices often involve a lot more.

There can be many documents that need to be sent out.  These can include:

  • The employment agreement itself
  • An offer letter
  • A job description (if not part of the actual employment agreement)
  • A code of conduct
  • An acknowledgement of acceptance of the code of conduct
  • Ancillary documents, such as security access agreements, statistical forms (e.g. equal employment information form), personal information forms
  • Orientation/induction information
  • KiwiSaver forms
  • IRD tax code forms

All of the terms of the employment relationship should be provided, in writing, at the same time.  This will ensure there is certainty as to what the offer of employment is, and avoid disputes later on.

In the past, it could be quite an onerous and time consuming process to prepare all of these documents, and to have them customised to the particular employee.  There was a risk that one or more of the documents used could be an old, out of date, version, and it could be difficult to get all the documents properly signed, returned and filed for good record keeping. It is also easy to leave someone else's details in the new agreement. 

These days these issues are less prevalent, as document automation can ensure that the right versions of the documents are always used, and that they are customised as much as necessary for the particular employee.  All of the required documents can be compiled at once.

The document automation can also pre-configure the documents for use within a digital signing workflow, which means they could all be sent out to the prospective employee by email, and can be signed from wherever the employee is, even on their phone.  There is no need for more than one copy of the documents, as both the employer and the employee sign the same digital copy, and as soon as both have signed, each party automatically receives a set of fully signed documents.

Where previously there may have been issues or uncertainty as to whether the employee really did receive and agree to the various ancillary policy and procedure documents, all of that can be removed. It is very easy!

One question that does arise with the use of document automation and digital signatures is the speed at which it enables documents to be prepared and signed.  An employment relationship is intended to be based on an equality of bargaining power, and as a result, the employee should have time to not only read and understand the agreement themselves, but also to take appropriate advice if they need it too.  Just because the documents can be signed within seconds doesn’t mean that they should be!

When sending out the documents – even electronically – it is important that the employer allows enough time (ideally at least 1 week) for the employee to take advice and to come back if there are any issues to negotiate, before signing.  This should ideally be made clear in the offer letter (and any cover email if the documents are sent electronically).

If the employer uses a digital signing system, the employer can also set a deadline for when the documents must be signed by, or the offer will lapse.  This again can be a good way of ensuring certainty and removing scope for later argument.  The digital signing system will be able to automatically send out reminders if it hasn’t been signed, keeping timing on track.  

For the reasons above, the employer should definitely not let the employee start doing any work until they have signed everything that the employer need them to.

If all of this seems a bit too “legalistic” for the way that the employer want the employment relationship to work, you can always wrap other communications around it.  There’s no reason why an employer can’t meet the employee for a coffee to welcome them on board and talk them through the documents, and make sure that the induction programme is all set out for them to make sure they quickly feel part of the team, giving the personal touch while also ensuring that all the legal i’s are dotted and t’s crossed.

Who are the Parties to the Employment Agreement and how should they be described?

As in any contract, it is important to be clear who the parties are.

For the employer, make sure you use the correct full legal name.  For example, “ABC Limited”.  If the employer is a registered legal entity, its full legal name will be recorded on the relevant register (e.g. companies office, charitable trusts, incorporated societies and limited partnerships).  

This clarity can be particularly important where the employer is part of a group of companies, and the employee may be expected to perform duties for more than one entity in the group.

For the employee, who will be an individual, also use the full legal name e.g. “Mark John Smith”.  It’s a good idea to check these details against an official record, which will also help with any background checking the employer wishes to do.

It is a good idea to also enter an address for each party, to help with further identification.

Describing the position and duties of the employee

Every agreement should contain a clause stating the intended position of the employee.  The employer should always make sure to include sufficient information to make the nature and level of the job clear.  Not doing this, or doing the minimum for legal compliance without really thinking it through, just sets up scope for uncertainty and argument in the future.

It is good practice to include these details in a schedule to the agreement, rather than in the body.  This makes it easier for the parties to read the key details and also allows the parties to more easily replace or update the job description itself, should the employee’s position description, KPIs or job title change.

For the reasons above, the description should include enough information to enable the employer and the employee to discuss the quality of the employee’s work during performance reviews, or if employment relations problems emerge.

Depending on the position’s seniority, certain options (which may only be relevant for a senior position) may or may not apply, and will often need to be varied on a case-by-case basis.  For example, a 12 month restraint of trade clause covering a wide geographical area is unlikely to be suitable for a junior position.  However, it could be very applicable for a CEO or senior sales position where the employee could cause a lot of damage to the business when they leave and may want to compete.

For a CEO position, the agreement might set out that the CEO reports to the board, and deal with the CEO’s authority to hire and dismiss other employees, to incur capital and operating expenses, and to delegate their powers to other employees who report to the CEO.

For employees other than CEO, the agreement should set out who the employee will report to.  This should be described as a particular person or role, but leave open for that to be changed to any other person designated from time to time by the employer, to deal with changes in circumstances.

A CEO or other senior manager may also have roles as a director of the employer, or related companies.  If so, the employment agreement should also deal with obligations of the employee to resign from those roles without claim for compensation, on ceasing to be an employee.

The agreement should also contain a clause stating that the employee’s duties may be modified by the employer from time to time, after consulting with the employee.   Even with a lot of care in designing the job description, in today’s dynamic business environment, there is constant change. Any such modification should not substantially change the nature or responsibility of the position without the employee’s agreement (in which case it should be dealt with under the restructuring provisions instead).  

The agreement should usually also contain a clause stating that the employee will also perform all other reasonable duties requested by the employer, and that the employee will also comply with reasonable instructions from the employer. You can’t think of every possible thing in advance.

There are other optional provisions that an employer might want to include.  These include:

  • A statement that the employer will set key objectives for the employee to achieve. These would usually be set in consultation with the employee, and would then be considered by the employer when they are reviewing the employee’s performance.
  • The agreement could also provide for when and how the employer will review the employee’s performance, and how any review will be taken into account in relation to setting the employee’s remuneration.
  • Another common option that can be included is to allow the employer to “second” the employee to a client or a particular project on a temporary basis. In this case, the agreement might require the employee to comply with reasonable requests to carry out that secondment, if it would be in the best interests of the employer and the employee will not be unreasonably disadvantaged or inconvenienced.

Nature and Term of the Employment Agreement

There are many different types of employment agreement.  The most common include:

  • Permanent, where the employee is employed for an indefinite duration. This is most common. 
  • Fixed term, where the employee is employed for a specific time period. This can only be used in certain circumstances.
  • Casual, where the employee does not have guaranteed hours.

Two other variants on the above can be whether the employee is working full-time or part-time. For example, an employee could have a permanent part-time agreement to work 20 hours per week, or it could only be for a fixed term of 6 months.

You cannot have a full-time or part-time casual employee.

The LawHawk online employment agreement builder caters for all these options except for casual agreements, which are very different.

When can you use a Fixed Term Employment Agreement?

Before a fixed term agreement can be agreed on, there must be a genuine business reason for the fixed term.  An example would be where the employee is covering a temporary absence of an existing employee, due to maternity leave.  Another example would be where the employee is hired for a specific project. 

Simply stating that the position is fixed term because the employer is uncertain as to whether there will be continued funding to support the position will be unlikely to be sufficient. It is also not ok to use a fixed term employment agreement because the employer wants to test if the employee is any good or not.

When considering whether the agreement can be described as a fixed term agreement, think about the following:

  • Did the advertisement of the job describe it as a fixed term position?
  • Did the employer explained the employee, before the employee accepted the offer of employment, why the job was for a fixed term and when the job would end?

The end of the fixed term can be described in different ways.  For example, it could be by reference to a specified date (e.g. 30 June 2019), the end of a period of time (e.g. six months from the start date) or the happening of a specified event (e.g. the end of a project, or the sale of the business).

It can also be a good idea to include a statement along the lines that there is no expectation of continued employment beyond the expiry of the fixed term.

What happens if the fixed term expiry date arrives, and the employment doesn’t end?

There could be a couple of reasons for this.  Firstly, the employee may just keep showing up for work when they are not supposed to.  If that is the case, the employer should not just allow the employment to continue or there is a risk that it will turn into a permanent employment arrangement.

If the employer is happy to keep the employee on, whether for a further fixed term or permanently, this should also be documented as a variation to the agreement, for good order and future certainty. This should be done well in advance of the expiry date to avoid any issues.

If the intention is to extend the employment for a further fixed term, then the same process will be required in terms of ensuring that there is a written provision of when the employment will end, and what the reasons for the new fixed term are.

What is the Start Date?

The start date for employment agreement will usually be an actual date, such as 1 August 2019.  However, sometimes it might be more complex.  For example, where a business is being bought and the acquirer is making an offer to existing employees to transfer to the acquirer, it could be the day after completion of the purchase of a business.

Continuity of Employment

An employer might also need to deal with continuity of employment.  By this, we mean that the employee has previously worked in the business.  The business may have been acquired by a new owner and the employee is transferring to the new owner (so a new employment agreement starts), but otherwise it is intended that they will keep their employment continuity.  This will enable them to retain the benefits they have accrued.  A special clause should be included in this case to make that clear.

Trial Periods

Trial periods are only applicable to new employees, and are intended to remove some of the risk to an employer of hiring a new and unproven employee.

In that case, the parties may wish to agree a trial period of up to 90 calendar days, where the employer may terminate the employment relationship within the trial period, and the employee cannot pursue a personal grievance on the grounds of being unjustifiably dismissed.

It is not a complete free pass for the employer, and the employee can still take a personal grievance on grounds as specified in sections 103(1)(b)-(g) of the Employment Relations Act 2000.  This covers things such as harassment or discrimination.  Most employers would only use the ability to dismiss if they really have to in any event, as hiring and on-boarding a new employee is a costly and time consuming process anyway, so is not something done lightly.

A trial period clause should be specified in writing and employment agreement and agreed to in good faith BEFORE a new employee begins work.  If the employee has already started work, or has been previously employed, then the employer cannot use a trial period.  This is why employers shouldn’t try and use a pre-employment work test, in case the candidate becomes an employee under the law, and the employer then can’t use the 90 day trial.

If the employer wants to give notice of dismissal, notice must be given within the trial period.  Usually, a notice period of between three and seven days would apply.

From 6 May 2019 trial periods are only able to be used by employers with less than 20 employees.

Probationary Period

From 6 May 2019, employers with more than 20 employees are not able to use the 90 day trial periods and will have to rely on probationary periods.  These will allow time to assess an employee’s suitability for the role, but the employer will need to follow the usual fair process to manage any performance issues or deficiencies that arise, and end employment.  Also, the employee will not be prevented from raising a personal grievance for unjustified dismissal if they are dismissed while working under a probationary period.

Employer Obligations in the Employment Agreement

It is common for an employment agreement to set out a number of specific employee obligations.

However, it is also possible for the agreement to set out a number of more general employer obligations.  Examples might be to require the employer to act as a good employer in all dealings with the employee; to deal with the employee in good faith in all aspects of the employment relationship; and to make decisions based on genuinely and honestly held views. 

Arguably these are already covered by the existing employment laws, and so care should be taken as to including additional obligations.  Is it intended to just restate the law but give explicit comfort to the employee, or to add something additional?

The statutory obligations on employers also differ according to whether or not the work of the new employee is covered by a collective agreement to which the employer is a party.  If so, the employer should consider whether additional terms and conditions of employment, that are not inconsistent with the collective agreement, should be the subject of agreement between the employer and the employee. The focus of this document is on individual employment agreements, rather than collectives.

Employee Obligations in the Employment Agreement

There are many obligations that can be imposed on the employee, depending on the nature of the role.

Some of these are relatively standard, such as an obligation to comply with all reasonable and lawful instructions of the employer. The employee might also be required to perform their duties with all reasonable skill and diligence.

Others may be more context specific. For example:

  • Depending on the nature of the employee’s role, the employer might want to set out an obligation to promote and protect the employer’s interests. For example, this could include an obligation to pass on all relevant business information and opportunities the employee becomes aware of.
  • It could be helpful to require the employee to act exclusively towards their duty to the employer during the hours of work. So, for example, they can’t be running a side business on Shopify at the same time.
  • For customer facing roles, the employer may want to specify dress standards. Recognising how fluid the business environment is these days (not to mention fashion trends), these might be best described by requiring compliance with the employer’s standards “from time to time”.  If dress standards are related to health and safety, then this should be mentioned.  Recently there has been a focus on the inter-relationship between cultural tattoos and presentation standards.
  • Another obligation that is very useful to include is a requirement for the employee to notify the employer promptly if they are charged with any criminal offence.
  • If the employer requires the wearing of uniform, then this should also be set out, including who carries the costs of paying for the uniform, and cleaning and care of it.
  • It may be appropriate to include provisions regarding any vehicles that the employee is required to use or provide in their employment, including how the maintenance and running costs of the vehicle will be paid for.
  • Similarly, if the employee is required to supply their own tools of trade, then this could be set out, along with responsibility for insurance, maintenance and replacement of those tools.
  • For certain types of roles, the employer may also want to set restrictions on the employee’s ability to give any interviews, or make any comment in the media, without the employer’s approval.

The above are only examples and it really does depend on the nature of the employer’s business, and the role that the employee will play in it. There is no benefit in including provisions that are clearly not relevant to the particular relationship, and it actually makes it harder to work out what the really important obligations are. 

Place of Work

All employment agreements must include an indication of where the employee is to perform the work. Issues such as travel time, or the availability of public transport, can affect an employee’s ability to undertake the work.

There are many different ways that the location can be specified:

  • Often, a single fixed location will be specified. However, in other cases, there may be a number of defined locations that should be specified, as reasonably required by or agreed with the employer from time to time.
  • It may be necessary to be even more fixable, and to specify a usual primary location, but to allow for any other reasonable location that is specified by or agreed with the employer from time to time.

It is becoming more common for employees to work from home, at least some of the time, and in some cases the employer may not have any fixed place of work at all.

It is also a good idea to specify whether or not the employee can be required to travel from time to time, if that is necessary for the employee to perform their duties.  The employer may, for example, specify whether or not the employee can be required to travel only within New Zealand, or within New Zealand and overseas.  The employee may wish to specify whether there is any maximum continuous period that the employee cannot be required to be away from home for.

Regardless of what is specified for the business location when the agreement is entered into, it is always a good idea to allow flexibility for the employer to change the place of work if the employer relocates its business.  To be fair to the employee, this right for the employer to make changes in this simple way may be limited to the extent that the new place of work must be within a reasonable travel distance of the employee’s current place of work. Fundamentally changing the location (e.g. from Wellington to Auckland) is likely to result in a restructuring and possible redundancy scenario.

Hours of work

All employment agreements are required to describe the employee’s hours of work.  “Hours of Work” includes any or all of the following:

  • The number of guaranteed hours of work
  • The days of the week on which work is to be performed
  • The start and finish times of work
  • Any flexibility in the matters referred to above.

There are many different ways in which the hours of work can be structured.

The most common are full-time and part-time. However, other options include:

  • Shift work
  • Rostered hours
  • Flexible, or glide, time.

A further option to consider is whether or not there should be entitlements to extra pay for overtime work.

Full time

Starting with full-time employment arrangements, the employer will need to describe the number of hours work per week.  The employer should describe what days are to be worked, and what the hours of full-time work will be on each day.

Guaranteed Hours and Availability Provisions

It may be necessary to describe what the employee’s guaranteed hours are for a set period, for example, a week.

If the employee is going to be required to make himself or herself available to perform work – e.g. to be on call – then the employer will need to describe what the availability payment will be for being available to work the extra hours.  This may be an additional payment, or where the employee is on salary, the employer could state that the employee’s salary will include compensation for the employee making himself or herself available for work.  See section 67C of the Employment Relations Act.

67D of the Employment Relations Act also contains provisions about availability, and requires that an availability provision may only:

  • be included in an employment agreement that specifies agreed hours of work and that includes guaranteed hours of work among those agreed hours; and
  • relate to a period for which an employee is required to be available that is in addition to those guaranteed hours of work.

An availability provision must not be included in an employment agreement unless:

  • the employer has genuine reasons based on reasonable grounds for including the availability provision and the number of hours of work specified in that provision; and
  • the availability provision provides for the payment of reasonable compensation to the employee for making himself or herself available to perform work under the provision.

Otherwise the availability provision is not enforceable against the employee.

In considering whether there are genuine reasons based on reasonable grounds for including an availability provision, an employer must have regard to all relevant matters, including the following:

  • whether it is practicable for the employer to meet business demands for the work to be performed by the employee without including an availability provision;
  • the number of hours for which the employee would be required to be available; and
  • the proportion of the hours required to be available to the agreed hours of work i.e. the employment agreement shouldn’t have only a few hours of guaranteed work and many hours where the employee is required to be available, “just in case”.

Compensation payable under an availability provision must be determined having regard to all relevant matters, including the following:

  • the number of hours for which the employee is required to be available;
  • the proportion of the hours required to be available to the agreed hours of work;
  • the nature of any restrictions resulting from the availability provision;
  • the rate of payment under the employment agreement for the work for which the employee is available;
  • if the employee is remunerated by way of salary, the amount of the salary.

Overtime

It is usual to include wording in the clause that the employee may also be required to work at times outside the normal hours of work, and in addition to their guaranteed hours.  This may or may not include being required to work on public holidays.

If the employee is entitled to overtime pay, the employment agreement will also need specify the overtime rates that will apply.  The employer and employee may also wish to include a provision which will allow the employee to take time off in lieu, as an alternative to paid overtime.

Variation of Hours

The employer should consider including a clause setting out the process for variation of the employee’s hours.  This could for example allow variation by mutual agreement, or by the employer following consultation. 

The clause should note that when seeking to vary the employee’s hours, the employer will need to act reasonably and take account of the employee’s personal circumstances and commitments.  It is possible that the clause could include an overriding requirement that the employee’s minimum hours of work will not be reduced below a specified minimum.

Shift Work

Where the employee is employed on a shift work arrangement, the employment agreement will need to set out the shift work arrangements. 

There will also have to be a mechanism under which the employer will give reasonable notice of cancellation of a shift, and what reasonable compensation will apply if the employer isn’t able to give the required notice to cancel a shift. See section 67G of the Employment Relations Act for more information.  This includes a requirement that the employer must not cancel a shift unless the employment agreement specifies:

  • A reasonable period of notice that must be given before the cancellation of the shift; and
  • Reasonable compensation that must be paid to the employee if the employer cancels a shift without giving the specified notice.

If these provisions are not included in the employment agreement, the employer may not be able to cancel the shift without paying the employee what they would have otherwise earned if they had worked the shift.

The Employment Relations Act is not that clear as to what the period of notice for cancellation should be, or how much compensation is reasonable.

It states that the period of notice must be determined having regard to “all relevant factors”, including

  • the nature of the employer’s business, including the employer’s ability to control or foresee the circumstances that have given rise to the proposed cancellation; and
  • the nature of the employee’s work, including the likely effect of the cancellation on the employee; and
  • the nature of the employee’s employment arrangements, including whether there are agreed hours of work in the employee’s employment agreement and, if so, the number of guaranteed hours of work (if any) included among those agreed hours.

Compensation must be determined having regard to all relevant matters, including the following:

  • the period of notice specified in the employee’s employment agreement
  • the remuneration that the employee would have received for working the shift
  • whether the nature of the work requires the employee to incur any costs in preparing for the shift.

Rostered Hours

Where a roster applies, the employment agreement will need to set out what minimum period of notice employee will be given of a new roster.  The employment agreement will also have to specify how many consecutive days off the employer will give the employee within a reasonable period.

Flexible or Glide Time

Flexible (or Glide) time is a more flexible arrangement which will allow the work to be done within hours that the employee sets themselves, provided that they perform a minimum number of hours that are stipulated. 

The employer may still wish to specify that the employee must be at the place of work during certain core hours, and also to retain some flexibility to modify this arrangement if it is in the best interests of the employer’s operations, after consulting with the employee.

This could be particularly suitable for knowledge workers, who have the ability to work remotely (for example enabling parents to work around child-care responsibilities).

Breaks

Part 6D of The Employment Relations Act specifies that an employee is entitled to paid rest breaks and meal breaks. 

From 6 May 2019, rest and meal breaks will be taken at set times and employee entitlements will be prescribed.

Payment

It is compulsory to include information about pay in the employment agreement – see section 65(2)(a)(v) of the Employment Relations Act 2000.

Primary payment

There are a number of different ways in which payment to the employee can be structured.  The most common primary pay options would be:

  • annual salary
  • hourly rate
  • commission

These can be used in combination, and it makes sense to structure the pay in a way that ensures the greatest alignment between the employer and the employee.

In establishing the levels of payment, all employees must be paid at least the minimum wage. Particular care needs to be taken here with commission arrangements, but potentially also with salary.

The way in which remuneration is paid does not affect the employee’s right to at least time and a half for working on a public holiday.

It is up to the employer and the employee to agree on the pay frequency and mechanics of payment.  Inclusion of these details in a schedule is a good idea, as it means that an amended schedule can be added if any of these details change.  This is easier than having to amend the main agreement itself.

A clause providing for reimbursement of expenses is optional, but useful for avoiding disputes as to the type of expense an employee can be expected to be covered for.

Additional payments

As well as the primary salary or wage, other payment provisions may be included to recognise or incentivise the employee’s performance.  These can include:

  • commission, in addition to base salary or hourly rate (e.g. to incentivise sales)
  • bonuses (which may be left quite loose and/or discretionary so that they can be adapted to suit circumstances over time, or can be quite prescriptive to give more certainty).
  • service payments, where the employee will receive more pay as they achieve more years of continuous service with the employer
  • payments recognising the attainment of qualifications or skills acquired on the job.

The agreement may also include provisions around pay reviews and how frequently they will occur (not necessarily promising that pay will actually increase as a result of the review).

Allowances

There are a range of allowances that may be relevant to different employment relationships. 

Examples of allowances that may be relevant to pay to the employee are for things like tools, clothing, uniform, meals, vehicles, travel etc. For someone working from home, it could also cover phone and internet.

Annual Leave

Vacation

Regardless of whether a holidays clause is included in the employment agreement, at least the minimum provisions of the Holidays Act 2003 will apply.  An employee cannot waive his or her entitlement.

Under the Holidays Act 2003:

  • A full-time employee is entitled to a minimum of four weeks of paid annual leave on the completion of 12 months continuous service
  • The employee remains entitled to the leave until the annual leave is taken or paid as a portion of the entitlement
  • The employee must be allowed to take the annual leave within 12 months of the entitlement arising
  • The employee must be allowed to take the leave in a continuous block of two weeks if they want to do so.

An employer can, of course, grant terms more favourable than the Holidays Act.  For example, they may give the employee five weeks of leave (perhaps conditional on certain requirements, such as a minimum length of continuous employment).  However, the amount of leave may not drop below the minimum.

On commencing employment, or where a work pattern changes during the year (for example, going from part-time to full-time work), the parties should agree how the entitlement is to be provided.  Where a new agreement is reached, it is best practice to record it in writing.

The employer and the employee should agree when leave is to be taken, although the employer’s consent cannot be unreasonably withheld.

Sometimes an employee may not want to take all the leave that is due to them.  There could be various reasons for this. 

  • The employee could really love their work and not want a break (even though they are likely to be more productive after they take one)
  • The employee may think they are indispensable. By not taking leave, they reinforce that situation because nobody else has an opportunity to step into their role
  • The employee may be trying to bank the leave up, so they can take a massive break at some point in the future
  • The employee may be planning to leave, and want to get it all paid out when they go
  • In the worst case, the employee may have been up to no good, and doesn’t want to give anyone else a chance to look at what they have done.

The employer is likely to have opposite interests to those above, and so prefer the employee to take their leave, at a time that will suit the needs of the business.  It’s also generally the case that everyone needs a break and will perform better when they have had one.

If the employee doesn’t want to take leave, the employer can ultimately force them to.  First, however, the parties have to go through a process of trying to reach agreement on when the leave will be taken and at least 14 days’ notice must be given.  The employer doesn’t have to accept the employee’s preference for when the leave will be taken.  If it is at a particularly busy time of the year, for example, it may not suit and the employer doesn’t have to agree to it.

Cashing Up Leave Entitlements

Under section 28A of the Holidays Act, an employee may request a portion (up to 1 week) of the annual leave entitlement to be paid out (also known as “cashing out” or “cashing up”).  An employer must consider the request within a reasonable time and advise in writing whether it is accepted or declined.

An employer can decline an employee’s request, and is not required to provide any reason for declining the request, although generally it is better for the relationship if the employer can provide reasons for decisions.  

Employers should develop a policy setting out the process and how it will apply, as opposed to including it in the written employment agreement (it cannot be a term or condition of employment).

The employer cannot initiate or require the cashing out of leave.

Relationship between annual leave and other leave entitlements

If, during annual leave:

  • there is a public holiday, the employee must have that paid as a public holiday and not annual leave. This requirement also applies to employees whose employment had ended and they are entitled to paid annual leave, during which period a public holiday arises on a day that would otherwise have been a working day for the employee;
  • the employee becomes sick or injured (or has a spouse or dependent who becomes sick or injured), the employer may regard the period of sickness as sick leave, rather than annual leave (and must do so if the sickness occurs before the holiday leave was due to begin);
  • the employee suffers a bereavement, the employer must allow them to take the relevant period as bereavement leave and not as annual leave.

Public Holidays

Pay for work on a public holiday

The employment agreement must contain a clause relating to payment on public holidays.

It can be as simple as stating the pay rate on public holidays (which section 50 of the Holidays Act requires to be at least time and a half), or go so far as to define which particular public holidays the employee is entitled to take time off on.  Section 44 of the Holidays Act entitles employees to 11 public holidays per year.

All employment agreements must provide for the employee to receive at least time and a half for any work they are required to undertake on a public holiday, in compliance with section 50 of the Holidays Act.

The other public holiday provisions of the Holidays Act do not need to be included in the employment agreement, but the employee maintains an entitlement to them that cannot be waived.

Employers and employees are able to agree to transfer the observance of public holidays to another working day to meet the needs of the business or the individual needs of the employee.

Sections 44A and 44B of the Holidays Act provide that an employer and employee may agree in writing that a public holiday (or part of a public holiday) is to be observed by the employee on another identified or identifiable calendar day or 24-hour period which would otherwise be a working day.  A request can be made by either employee or employer and must be considered in good faith by the other party and any agreement must meet the minimum requirements set out in the legislation.  Such an agreement cannot reduce the number of public holidays to which an employee is entitled.  The purpose of the transfer cannot be to avoid paying the employee time and a half for working on a public holiday or providing them with an alternative holiday (although this may be the effect of the transfer).

Sick Leave

Employees who have 6 months service with the same employer are entitled to minimum sick leave provisions under section 63 of the Holidays Act, regardless of whether or not a particular clause is included in the employment agreement. 

The statutory minimum entitlement to paid sick leave in a 12 month period is 5 days. However, an employer may wish to provide additional days.  For example, an employer may wish to provide extra sick leave for stress/mental health days, or as an extra ‘incentive’ for senior employees. 

If the employee is not in continuous employment, special tests regarding eligibility apply. See: https://www.employment.govt.nz/leave-and-holidays/sick-leave/sick-leave-entitlements/

Employers may also wish to provide for unused sick leave to be carried over, perhaps up to a maximum amount. 

The employer should consider whether the employee is entitled to be paid sick leave while receiving ACC. The employer doesn’t have to pay the employee.

Bereavement Leave

Employees who have 6 months service with the same employer are entitled to minimum bereavement leave entitlements.

Bereavements under the Holidays Act fall into two categories:

  • The first is on the death of a spouse, parent, child, sibling, grandparent, grandchild or spouse’s parent. For each such bereavement, an employee must be allowed to take 3 days bereavement leave. 
  • The second category is on the occurrence of the death of any other person if the employer accepts, having regard to relevant factors as set out in the Holidays Act, that the employee has suffered a bereavement. For bereavements in this category, the employer must allow the employee to take 1 day’s bereavement leave.

For each day of bereavement leave taken by the employee that would otherwise be a working day, the employer must pay the employee the employee’s “relevant daily pay”.

Parental Leave

The employer must comply with its statutory obligations, although it may offer more favourable terms if it would like to. There are various ways in which this can be done, which can include:

  • Paying the difference between what the employee gets under the Parental Leave and Employment Act (PLEPA) and their usual remuneration;
  • Offering a bonus payment if the employee returns to work after parental leave and stays for a set period (e.g. 6 months)
  • Giving additional periods of unpaid parental leave on top of the extended leave provided for under the PLEPA
  • If the employee is the spouse or partner of the primary carer, giving them some period of paid parental leave too.

Other Leave Options

The employer may wish to include other leave options in the employment agreement.  These could include:

  • Unpaid leave
  • An annual closedown provision
  • Jury duty (for example, that the employer will pay the employee the difference between the fees paid by the Court and the employee’s pay for up to a maximum period)
  • Volunteers employment protection (leave for training or service in the Territorial and Reserve Forces)
  • Marital leave.

Annual Close Down

An annual close down is an optional clause.  Sections 29 to 35 of the Holidays Act allow the employer to implement one annual closedown a year and require the employee to take unpaid leave if they have no leave entitlement.  

If the employer wants further closedowns during the year they should agree the arrangements for this with the employee.

If a business has a closedown period that includes public holidays (as can happen over the Christmas and New Year period) then the employee is entitled to paid public holidays if they would be otherwise working days for them, taking certain factors into account (such as employment agreements, work patterns, rosters) as if the closedown were not in effect. 

Other Entitlements and Arrangements

There are a range of other entitlements and arrangements that an employer may offer to meet requirements of the role or to reward and incentivise employees.  Some options are listed below.  This is not a comprehensive list.  Possible entitlement options include:

  • Superannuation/KiwiSaver
  • Medical insurance
  • Reimbursement for flu shots
  • Club or gym membership
  • Eye tests
  • Mobile phones or other devices
  • Car parks
  • Use of a car
  • Study support
  • Personal development support
  • Subsidised childcare
  • Contributions towards childcare
  • Equipment
  • Computer

Each of these options will contain other details that will need to be thought through, particularly as to any financial limits that will apply for each benefit or arrangement and as to how they will work best in practice in the particular context of that employer and employee. 

There will also be tax considerations that will need to be worked through.

Superannuation

Key considerations will include whether the employer has their own superannuation scheme, or if they will just contribute to a registered scheme.  The employer may also wish to reserve the right to terminate or vary any superannuation plan, in whole or in part at any time.  They will also need to consider when the employer’s contributions vest.

In practice, KiwiSaver is now a more common approach.

KiwiSaver

It is compulsory to include a KiwiSaver clause. 

In New Zealand, the only statutory entitlement to superannuation arises under the KiwiSaver Act 2006.  Membership of a KiwiSaver scheme is voluntary, although an automatic enrolment scheme applies and employees who do not wish to be part of the scheme must opt out of it.  For those employees who are members of a KiwiSaver scheme, the employer is required to make compulsory employer contributions.

All employees who start “new employment” and are aged 18 or over but are less than the New Zealand superannuation qualification age (currently 65), will be automatically enrolled in the scheme. Automatically enrolled employees are able to opt out between 13 and 55 days after their start date.  Existing employees are not automatically enrolled but, if they are less than the New Zealand superannuation qualification age, they can opt into KiwiSaver.  Employees enrolled in the scheme elect to contribute two, four, or eight per cent of their gross salary or wages to their KiwiSaver account. 

Employers are responsible for giving to new employees, and existing employees who are interested in the scheme, an information pack about KiwiSaver. 

Employers also pass employees’ details to Inland Revenue to enable employees to be enrolled. 

Employers deduct KiwiSaver contributions from employees’ pay before tax. 

Employers are required to make compulsory contributions to their employees’ KiwiSaver schemes (or complying superannuation funds).  Compulsory employer contributions are three per cent of the employee’s gross salary or wages.  Where an employee is a member of both a KiwiSaver scheme and a complying superannuation fund, the employer may reduce the amount it is required to contribute to the KiwiSaver scheme by the amount it contributes to the complying superannuation fund.

A key consideration with Kiwi Saver is whether the employer’s compulsory contribution will be additional to the employee’s other remuneration, or part of it. It is possible to use what is known as a “total remuneration clause” whereby the employer can make it clear that the employee’s remuneration is inclusive of any KiwiSaver compulsory employer contributions, and the amount of those contributions will be deducted from the employee’s total gross remuneration, and not added on top.

Medical Insurance

For medical insurance, a consideration is whether the insurance will be for the benefit of the employee only, or also extend to their family.

Also, to limit the employer’s financial exposure, what is the maximum annual limit of the employer’s contribution?

Cars and Car Parking

A key consideration in a provision dealing with car parking, is whether car parks are available during work hours only, or at any time. 

With regard to cars, it should be considered whether the car can be used for work purposes only, for limited personal use, or for work and personal use.

Study and Personal Development

Study entitlements can be very flexible, and contributing towards study can be a great way of aligning incentives between the employer and employee.  The employee can gain qualifications that will enable them to earn more, while at the same time gaining skills that increase their value to the employer. 

A provision could include a contribution towards course fees, paid time off to attend agreed activities, unpaid time off to attend agreed activities, or some level of assistance with childcare.

Review and Withdrawal of Benefits

It is recommended that a review and withdrawal of benefits clause is included for many of these more optional provisions to allow them to be adjusted to suit changing circumstances.  

Health and Safety

Health and Safety

Employers and employees are covered by the Health and Safety at Work Act 2015 (“HSWA”) (and associated regulations), regardless of its inclusion in the employment agreement.

Including clauses that are specific to hazards in the workplaces in the employment agreement can draw both parties attention to those areas where particular care might be needed.

The HSWA places health and safety duties on Persons Conducting a Business or Undertaking (“PCBU”).  A PCBU is a broad term and can include a company or a natural person.  Note that a natural person includes a sole trader, partner or self–employed person.

Importantly, a PCBU must, as far as reasonably practicable, ensure:

  • The health and safety of workers who work for the PCBU, while they are at work in the business or undertaking
  • The health and safety of workers whose activities in carrying out work are influenced or directed by the PCBU, while they are carrying out the work
  • That the health and safety of other persons is not put at risk from work carried out as part of the conduct of the business or undertaking

This means that, in addition to the inclusion of a clause in the agreement, employers should consider and plan for the health and safety of employees, contractors, customers and people whose health and safety could be affected by the organisation’s work.  This also means engaging with employees on health and safety issues, including discussion as to this clause of the agreement and any related employer policies.  PCBU’s must have practices that provide reasonable opportunities for employees to improve their own health and safety at work, on an ongoing basis.

There are a number of obligations which a PCBU must carry out as far as reasonably practicable. Employers are advised to seek further advice on this matter if they have questions about their obligations.

An employer may want to include specific clauses relating to particular risks or issues:

  • VDU and work station
  • Chemical use
  • Lifting
  • Drug testing
  • Employee Assistance Programme (EAP)
  • Counselling assistance
  • Medical examination
  • Safety gear

Drug Testing

As well as requiring the employee not to be impaired by drugs and alcohol while at work, travelling to work or otherwise representing the employer, the employer may also want to require the ability to conduct non-intrusive drug or alcohol tests as part of ensuring a safe and healthy work environment.

The employment agreement should set out the circumstances in which this can be done, and how the process will work.  This can clearly be an area of some sensitivity.

Medical Examination

The employer may wish to provide that where they have reasonable grounds for concern that the employee's health is affecting their safety at work, or the safety of others in the workplace, they can require the employee to undergo a medical examination.  Again, the employment agreement should set out the circumstances in which this can be done, and how the process can work.  The agreement should note that if the employee refuses to undergo such a test, or to share the results, the employer can draw such inferences as it sees fit.

Other employment obligations

There are a number of other clauses that may be valuable to include in an employment agreement to protect both the employer and the employee.  These include:

  • Confidential information
  • Intellectual property
  • Conflicts of interest and gifts
  • Internet, Email and Social Media
  • Privacy
  • Non-solicitation and restraint of trade
  • Business interruption

Confidential Information

A clause protecting confidential information can be useful in providing an opening to discussing confidentiality during employment interviews or induction, and is preferable to leaving the scope of an implied term to be settled by the Employment Relations Authority or Court once a dispute has arisen. 

Failure to include such a clause does not release the employee from their responsibility to hold information gained in carrying out their employment confidential.  Essentially, if an employee has access to confidential material they can be required to keep that material confidential. This type of clause will survive an employment relationship. 

In terms of whether it’s appropriate to have a detailed confidentiality clause in an agreement (or a confidentiality clause at all), employers should consider the seniority of the employee, and whether they have access to confidential information which requires protection. 

The duty of confidentiality may be expressed in terms that an employee must not disclose or use, during employment or after it has terminated, any information received in confidence during the course of that employment.

Intellectual Property

Clarifying ownership of intellectual property is particularly important where design, invention or strategic advice forms part of the ongoing work of the business.

Employees should be aware of these provisions and employers should take particular care where they are employing (or contracting) someone performing work for more than one organisation.

Conflicts of Interest and Gifts

A conflict of interest clause requires the employee to confirm there are no existing conflicts of interest, and to disclose any that arise to the employer.  If the employer believes that a conflict does (or could) exist, it can direct the employee to take actions to resolve the conflict.

As a separate limb, the employer can require that the employee does not receive or accept gifts or other benefits from anyone carrying on business with the employer.

Care should be taken to clarify the type of conflict of interest that the employer is concerned about. The employer does not have unlimited ability to restrict the activities of an employee, and advice should be sought where the employer considers taking any action against the employee as a result of any declared or undeclared conflict.

Internet, Email and Social Media

Employment relations problems over the use of email, internet and social media are increasing.  Setting clear expectations for use, and applying them consistently is good employment practice.  This should be done by including an appropriate clause in the employment agreement, which can be supplemented by clear policies, to avoid any doubt.

A good clause might confirm that the employee will have access to email and other electronic communications systems, and require that the employee will meet the security, ethical and social standards required by the employer, including all policies issued by the employer from time to time.

It is also important to ensure that the employer has the ability to monitor, access and record all use by employees of such systems.

If a clause is included in an agreement the employer should clearly identify their expectations and policies.  

Privacy

Failure to include a privacy clause does not exclude the employer or employee from the provisions of the Privacy Act 1993, but it can help to make the obligations explicit. 

A privacy clause may also allow that the employer can carry out computer or vehicle surveillance including monitoring emails and internet access and GPS tracking on a continuous and ongoing basis, and that the employee consents to such surveillance.

Non-Solicitation and/or Restraint of Trade

A non-solicitation and/or restraint of trade clause is recommended for inclusion for employment agreements for senior employees.  This should usually be done at the outset of the employment relationship, as then there is little room for argument that the restraint is in consideration for the offer of employment.

If the employer tries to add a restraint to the relationship at a later date, the employer may run into issues of whether the employee has received anything of value for agreeing to it.  If they don’t, it may not be enforceable.  This may require some form of additional payment to be made.

Legal advice should be sought on the inclusion of, and action taken under, a restraint of trade / non-solicitation clause.  In considering using these provisions it is important that the restraint applied is deemed appropriate for the nature of the relationship between the employer, employee, and the employer's clients.  

The scope of the restrictions can be tailored to suit the circumstances, and can include restrictions on:

  • Soliciting and/or hiring other staff of the employer
  • Soliciting and/or dealing with the employer’s customers (generally, or just those that the employee had contact with)
  • Generally competing with the employer.

Non-solicitation clauses often operate as a restricted form of a restraint of trade in restricting an employee’s ability to solicit the employer’s employees or clients for other purposes.  The rationale behind a restraint of trade is protection of the employer’s interest(s). 

To be effective (and upheld by a Court), a restraint clause must:

  • Specify the employer’s interest that requires protection
  • Specify a reasonable time period of application (usually three to six months)
  • Specify the location(s) to which they apply (the larger the location, the less likely they are to be regarded as valid).

The risks of relying on restraints of trade on all but very senior or specialised employees is that they are regarded as contrary to public policy, void and unenforceable, unless the employer suffers damage or the restraint is reasonable in the particular circumstances of the employment relationship. In general, public policy is in favour of competition, and particularly the ability of an employee to be able to get work and make a living.

The employer should only ask for what it thinks is reasonable and required to protect the employer’s business.  Going beyond that risks the whole restraint being unenforceable.

Business Interruption

Another very useful clause to include in an employment agreement, particularly after the Christchurch earthquakes demonstrated their need, is a business interruption clause.

This can provide that if all or part of the employer’s business operations are suspended for reasons beyond the employer’s control, the employer can request the employee to undertake other duties, work from another location, or suspend all or part of the employee’s employment.  The clause can set out what payment arrangements will apply during such a period.  This is not only useful for natural disasters like earthquakes. It could also apply if there is a pandemic, or even if the employer’s business premises burn down.

Employer Policies

An employer should think about supplementing the employment agreement with appropriate work policies. These can cover things like a code of conduct, internet, email and social media usage policy, and a health and safety policy.  There can also be procedures manuals, covering matters such as how disciplinary matters will be handled.

They are not compulsory, but they can help to create certainty and avoid disputes later on.  The advantage of having some of the more specific details of what is expected set out in policies, rather than in the agreement itself, is that it can make them easier to maintain and update over time. The employer can update the policy as required, and the agreement can require compliance with the policies from time to time.

A good clause may say something to the effect that:

  • The employer may from time to time in its discretion, on reasonable notice to the employee
    • implement rules, policies and procedures that the employee must follow; and
    • amend, replace or cancel any such rules, policies or procedures.
  • The employee must ensure they understand and comply with all rules, policies and procedures in place from time to time.

Usually, the employer should consult on the change of policy.

The suggested clause above places the obligation on the employee to understand and comply with all rules, policies, and procedures in place from time to time.  It can be difficult to ensure that employees actually do take the time to read and understand the policies, though with technology this is becoming easier.

One possible option, at the outset of the employment arrangement, is to attach the key policies to the offer, so that they go out at the same time.  Even better, the employer can get the employee to sign or initial each copy so that the employer has proof they were brought to the employee’s attention and agreed to. This is potentially very easy to do now with the use of digital signatures reducing the effort required, while giving a high degree of certainty. 

Contracting Out Situations

If the employee is employed in an industry listed below, a number of specific legislative provisions will apply in the event of some restructuring situations.

  • Cleaning services, food catering services, caretaking, or laundry services for the education sector (being the public and private pre-school, primary, secondary, and tertiary educational institutions)
  • Cleaning services, food catering services, orderly services, or laundry services for the health sector (being any hospital, as defined by the Hospitals Act 1957 and any hospital within the meaning of the Mental Health (Compulsory Assessment and Treatment) Act 1992)
  • Cleaning services, food catering services, orderly services, or laundry services in the age-related residential care sector
  • Cleaning services or food catering services in the public service (as defined in Schedule 1 of the State Sector Act 1988) or local government sector
  • Cleaning services or food catering services in relation to any airport facility or for the aviation sector
  • Cleaning services or food catering services in relation to any other workplace

Restructuring and Redundancy

It is worthwhile to establish how a redundancy or restructure situation will be managed when the employment relationship commences, rather than at a later time (which may be stressful both for the employer and the employee).

While the LawHawk employment agreement contains clauses which we would suggest an employer use, they should be considered on a case by case basis, depending what is appropriate to the workplace.  

A clause should outline the process to be taken where all or part of an employer's business is transferred to a new employer, resulting in the loss or potential loss of an employer's job, including the conditions on which an employee might transfer to a new employer.  Particular consideration should be given to the reasoning for the redundancy.  Although the Courts have held that the adequacy of an employer’s commercial reasons for redundancy is a matter for the employer’s own judgment, a redundancy decision must be considered to stem from a reasonably founded belief, honestly held. 

A key consideration is whether the employer is willing to offer to pay redundancy compensation to the employee and, if so, how that will be calculated.

There is no requirement to include any redundancy compensation.

Whether or not redundancy compensation is payable, the employer should include a “technical redundancy” provision in the employment agreement covering off both that in a “technical redundancy” situation, there is no redundancy compensation payable, and also that the employer is not bound to give the employee any period of notice of the termination of their employment.

The exclusion of a notice period is important where the employer is selling their business. Often these types of transactions are conducted under tight time frames with strong confidentiality.  It is often not possible to give employees, say, 4 weeks prior notice of the intended sale and their transfer of employment.  The employer definitely doesn’t want to have to pay the employee out for that notice period when they are immediately swapping their employment to the new employer on no less favourable terms and conditions.

In a good clause, the employment agreement should state that the employee will not be entitled to redundancy compensation or any period of notice of termination where the employer:

  • transfers the employee to an alternative position with the employer on terms and conditions that are no less favourable to those that applied to the employee immediately prior to the transfer; or
  • sells, transfers, or contracts out the employer’s business or part of the business, and the purchaser, transferee or new contractor offers the employee employment on terms and conditions that:
    • are no less favourable to those that applied to the employee immediately prior to the sale, transfer or contracting out with recognition of service as continuous for the purpose of any service-related benefits, whether or not the employee accepts that offer; or
    • the employee accepts.

Other possible terms that could be included in a redundancy clause include:

  • Provision for the employee to have time off to attend interviews
  • Provision that the employer will provide the employee with a certificate of employment
  • Provision for the employee to undertake outplacement service to assist with transition into a new job
  • Provision for counselling
  • Provision for retraining

Termination of Employment

Cartoon firing

Though it may not be pleasant to think about, it's a good idea to have a termination clause in an agreement for the protection of both the employer and the employee. 

If the employment agreement includes a termination clause it cannot replace or override the requirement of the Employment Relations Act to deal with continuity of employment in restructuring situations that arise due to the transfer of work undertaken by the employee to a new business.

The most common notice period for termination is a month, although this may fluctuate depending on the seniority (or otherwise) of the employee.  Where there is a trial period, a separate (shorter) notice period would apply.

The employer should consider including a clause dealing with what happens if the employee does not give the required amount of notice, and whether they should be required to compensate the employer.  While the employer may be able to sue the employee for losses incurred anyway, making this clear in the employment agreement can aid certainty.

The losses that the employer may suffer could include having to pay a temporary replacement more for filling in during the notice period, or missing out on work that the employer could otherwise have accepted, but couldn’t because the employee wasn’t available to do it.

A clause may provide, for example, that if the employee does not give the required period of notice to the employer, the employer may require the employee to pay an amount (which will need to be specified in the employment agreement, perhaps being an amount equal to the employee’s remuneration for that period), and the employee authorises the employer to deduct any such amount from the employee’s final pay (including holiday pay).  For this to be effective, the amount being entered would need to be a genuine pre-estimate of the losses that the employer is likely to suffer.

The employer should also consider including a clause that allows the employer to pay the employee in lieu of notice and/or place them on garden leave. 

Optional Termination Provisions

The employment agreement can include a number of other termination provisions.  For example:

  • Termination for serious misconduct.
  • Suspension
  • Termination on medical grounds.
  • Abandonment of employment.
  • Record of service

Termination for Serious Misconduct 

Termination for serious misconduct is an essential clause. Such a clause should list actions which could be considered to be serious misconduct, warranting dismissal (after an investigation), as opposed to warnings. 

Grounds for serious misconduct and examples could include:

  • Fraud, dishonesty or theft
  • Harassment of a colleague or a customer
  • Serious or repeated failure to follow reasonable instructions
  • Serious negligence
  • Deliberate destruction of any property belonging to the employer
  • Actions which seriously damage the employer’s reputation
  • Breach of confidentiality
  • Failure to comply with the employer’s health and safety requirements
  • Taking sick or bereavement leave without good reason
  • Ceasing to be eligible to work
  • Conviction for a violent or dishonest offence or any other serious offence
  • Failure to meet required regulatory requirements
  • Failing or refusing to comply with any drug or alcohol test

Employers should consider whether this list needs to be amended to suit their individual business prior to providing it to the employee.

Suspension

Generally, suspension is only possible if specifically allowed by the employment agreement, and including a right to suspend in the employment agreement is definitely a good idea as it removes grounds for uncertainty and dispute.  But the contractual right to suspend is not unqualified. 

The justification for suspension will depend upon the circumstances of the parties and the employment and the fairness and reasonableness of the action at the time and in those circumstances.  There must be a real business need to suspend an employee. 

In any case, an employer must have good reason to believe that the employee’s continued presence in the workplace will or may give rise to some other significant issue.  Examples of where the employee may need to be removed from the workplace could include risks to health and safety, material risks to the business, or the need to carry out an investigation without risk of the investigation being compromised by the employee.

As well as a good reason for suspension, there must also be a fair process. An employer must deal with its employee in good faith.  Specifically, if an employer who is considering a decision that could have an adverse effect on an employee’s continued employment must provide the employee with access to relevant information, and an opportunity to comment on the information before a decision is made.

A decision to suspend an employee will only be justifiable if the employee is told that suspension is being considered, the reasons why, and then given a proper opportunity to be heard on that issue before a decision is made.  It is possible that the employee may be able to suggest other ways of dealing with the issues that do not require a suspension.

A related question is whether any suspension has to be on pay.  Generally the assumption is that the suspension will be on pay.  However, a good suspension clause will provide that if the employee does not co-operate with the investigation or assessment, causing it to be frustrated or delayed or if the suspension continues beyond a specified period (e.g. two weeks) due to circumstances outside the employer’s control (such as an external investigation into the employee’s conduct), the employer may notify the employee that any suspension will continue on an unpaid basis.

Suspension is a serious step, and an employer must consider the consequences for the employee and the employer of suspending or not suspending. 

Abandonment of Employment

It is common, and good practice, for an employment agreement to contain an “abandonment” clause providing that after an unexplained absence from work for a specified period (usually three consecutive working days) an employee will be deemed, at the end of that period, to have abandoned their employment and so have terminated their employment without notice.

The test of an employer’s action in finding that an employee has terminated their employment is whether the action was justified.  Whether an action is justified is determined on an objective basis by examining whether the employer’s action was one that a fair and reasonable employer could have taken in all the circumstances.

An employer does have an obligation to make inquiries before drawing an inference that an employee has abandoned their employment.  This is reinforced by the statutory obligations of good faith.  Those obligations apply to both parties and require each to be responsive and communicative. An employer should ensure that it has the relevant details of the employee and next of kin to enable it to make enquiries.

Abandonment must therefore be clear.  Any indication that an employer was aware (or should have been aware) of the reasons for an employee’s absence will count against an acceptance that the employee terminated the employment, for example:

  • Absence due to work injury which the employer knew about
  • Absence with the employer’s consent due to illness or distress
  • Employee told to look for work elsewhere

Termination on Medical Grounds

An employer may wish to include a clause providing for termination of employment on medical grounds.  This could provide, for example, that if the employee is absent from work for a total of X days in any 12 month period on medical grounds that the employer can require the employee to undergo a medical examination at the employer’s cost. 

If the employer concludes that the employee is unfit to perform duties under the employment agreement, the employer may terminate the employee’s employment by giving a set period of notice.

A medical incapacity clause can be useful in terms of drawing a line in the sand in the event that an employee is on extended sick leave/remains unfit for work.  While the employee has significant issues of their own to deal with, the employer still has work that needs to get done for its customers, and it may not be possible for the employer to fill that role on a temporary basis or to get other people to cover it in the medium to longer term.

Again the situation can be helped greatly if the employment agreement contains clear provisions for how this will be handled.  A good clause will allow the employer to require the employee to undergo a medical examination by a registered health professional nominated by the employer, at the employer's cost, and to contact the health professional to discuss the results. The employer can then take the results into account. If the employee refuses to undergo a requested examination, or to share the results, the agreement should provide that the employer can draw such inferences as it sees fit.

Ultimately this is likely to be a very difficult situation, for both the employee and the employer.  Working through it is likely to require a lot of communication, and professional advice.

Garden Leave and paying out notice periods

A Garden Leave clause is ‘optional’ but highly recommended.  An employer can rely on such a clause to place an employee on alternative duties for the duration of the notice period, or require them not to attend work for the notice period.  Garden leave can be very flexible in terms of the extent to which the employee is restricted.  It could require them to do no work at all, or to continue doing their work but doing it from home (and not the workplace) so that they don’t disrupt staff or clients.

Alternatively, where the employer does not wish to have an employee work out their notice period, the employer can pay the employee the wages/salary and other benefits in lieu of notice, that being what the employee would have received if they had worked through their notice period, in return for an immediate departure.

A garden leave clause can be preferable to immediately paying out the employee’s notice period. Because the employee continues to be an employee, even though they may not be allowed to carry out any of their normal duties, they remain bound by their overall duties as an employee.  For example, if they are planning on going to work for a competitor, they can’t do anything contrary to the employer’s interests (such as starting to prepare for their new job) during the period of the garden leave.  

To be able to place an employee on garden leave, the employer must have their agreement.  Because it may be harder to get agreement at the time the employment relationship is ending, the best way to ensure this is to include a clause in the employment agreement allowing for it.

It is not 100% clear what the impact of garden leave is on a restraint of trade provision.  It might seem logical that the restraint of trade period would apply on top of the period of garden leave. This would be great for the employer, as it would further lengthen the period of time in which the employee could not do any damage to the employer’s business by preventing them from competing with the employer.  However, it seems that the Employment Court will take any period of garden leave into account when considering the reasonableness and duration of any restraint of trade, and so it may not be that simple.  If this is important to the employer, the employer should take specific legal advice.

Obligations of Employee on Termination

An employer may also wish to include a clause setting out the obligations of an employee upon termination of their employment.  This could cover things such as the return of the employer’s information or property, ceasing to use any passwords and codes for the employer’s systems, and providing a signed confirmation that the employee has fully complied with its obligations in this regard.

Deductions from remuneration

Can an employer deduct money from their employee’s salary or wages to recover what is owed to them?

There could be various reasons why the employee owes the employer, including overpayments that have been made (including for leave taken in advance) and for the value of any property of the employer that the employee has damaged or not returned.

The first requirement is that the employer must have the employee’s consent to do this. Section 5 of the Wages Protection Act 1983 allows that consent can be provided in a general deductions clause in the employment agreement.  If the employer and employee are in dispute, it’s unlikely that the employee is going to consent at the time, so the best thing to do is to include it in the employment agreement at the outset. This should be a standard clause.

Secondly, if relying on the general deductions clause, the employer will need to consult with the employee before they can make the deduction (section 5(1A) of the Wages Protection Act). This doesn’t mean that the employee needs to agree to it – but the employer needs to genuinely listen to them and take the employee’s views into account. 

The deduction must also not be unreasonable (section 5A of the Wages Protection Act).

Resolving Employment Relationship Problems

It is mandatory for the employment agreement to contain a clause on resolving employment relationship problems, including a reference to the 90 day period for raising a personal grievance.

All employment agreements are required to contain an explanation of the steps that should be taken to deal with employment relations problems that arise.

Clauses such as those above are central to providing a process in the event an employment relationship problem arises.

Variation of an employment agreement

The one certainty about an employment arrangement is that it will need to change over time.  The business world has never been more dynamic, and businesses need to be constantly adapting. Because businesses rely on their employees, this means that the roles of the employees will also need to change over time.

Plus, employees will grow and develop new skills and be capable of more things over time.  It is likely to make sense to change the employee’s job description in response.  As they progress they may start to take on more responsibility for managing other employees, for example.

Sometimes there will also be changes in law that require changes to the employment agreement.

Some changes will be able to be made without changing the actual employment agreement. The agreement may contemplate, for example, that the employer has the right to change the employee’s work location or job description from time to time.  That doesn’t need a formal change to the employment agreement.

In other cases, the specifics may be set out in a policy document that the employee has to comply with as amended and updated from time to time, so that you can just change the policy document.

However, other changes may be outside of what was contemplated by that flexibility and so may need an actual change to the employment agreement.  

Usually this will be agreed between the employer and the employee, but sometimes the employer may need to require certain changes.

The first step is to identify what the current agreement says, and to work out what the changes are that are required, and whether they require the employee’s agreement and/or any formal amendment of the agreement (rather than notification of the change). 

Then, if change is required, also check what the agreement says about how changes can be made.  If it already sets out requirements for this process, those must be followed.

Then talk to the affected employee about the suggested changes, and why they are required, to see if they agree (or if other changes are also needed).

Once both the employer and employee are clear about what the required changes are, these should be put in writing.  This doesn’t require documenting an entirely new employment agreement – it can be a simple letter.  However, it should be clearly written and both parties should sign it so there is a clear record of the agreed variation.  If the employment agreement has been designed to include most of the key details in a schedule, this can make the variation even simpler to effect as everything that is likely to change is already in one place (and you may be able to make a number of changes at once by just replacing the schedule).

If the employer uses a digital signing solution to manage the signing process, it can provide some advantages:

  • It ensures that the variation agreement is delivered to both the employee and the employer’s signatory
  • There is a dashboard where the employer can see which agreements have still to be signed
  • The employer can specify a signing order so that one person is only asked to sign when the other has
  • The employer can set a deadline for when signing needs to be complete, with automatic reminders
  • When signing is complete, both the employer and the employee will automatically get a copy of the signed agreement – so no need to have more than one duplicate
  • The signatures and all the steps in the signing process are fully verifiable and transparent.