Back to the future with probationary periods - update 2019

16 May 2019

David Browne2Of the tools available to employers for use when dealing with challenging staff situations none has been as valuable or as effective as the 90 Day Trial Period.  The ability to exit “unsuitable” recently hired staff within their first 90 days of employment was first introduced by National in 2009 and at the time it was seen by small businesses as a necessary correction to the Employment Relations Act 2000 which some employers said had handed too much control over to employees.  A subsequent update in 2009 allowed all employers, not just small businesses access to 90 Day Trial Periods.

Criticism leveled at the 90 Day Trial Period said it would give employers the ability to “fire at will”.  It was not surprising when the new Labour led coalition immediately, within its first 100 Days of power signaled it would introduce some changes to the Employment Relations Act 2000.  The Employment Relations Amendment Bill which has since become law had its stated purpose to:

“… restore key minimum standards and protections for employees, and to implement a suite of changes to promote and strengthen collective bargaining and union rights in the workplace.  The changes are intended to introduce greater fairness in the workplace between employees and employers, in order to promote productive employment relationships.”

Among other things the new law brought changes to meal and rest breaks, made reinstatement the primary remedy in personal grievances and also changed sections 67A and 67B of the Act which are the 90 Day Trial Period provision.

The change to the 90 Day Trial Period was to be accomplished by inserting the definition of “small-to-medium-sized employer” in section 67A which means, “an employer who employs fewer than 20 employees at the beginning of the day on which the employment agreement is entered into”.

Unpacking that definition amongst the existing elements of the section means employers with 19 or less employees are still be able to continue to use a 90 Day Trial Period when hiring new staff, employers with 20 or more employees are not.

The question some employers have been asking is what constitutes an employee in these circumstances?  For example, will casual staff be counted, what about fixed term or part time staff or does the new definition of small-to-medium-sized employer mean that any employee will do?  Unfortunately, the answer to that question is they all count towards the maximum.  Having said that there is a grace period of 4 months to cover the situation where a business with 20 or more staff employs someone new just as the new law came into force on 6 May 2019.

It is important for affected employers with 20 or more staff to get their head around the shift brought about by the law change and picture life without 90 Day Trial Periods.

Probationary Period vs 90 Day Trial Period

At first glance while a Probationary Period may look like a 90 Day Trial; they are different in a number of key ways.  First up while the 90 Day Trial Period is set out at sections 67A and 67B of the Employment Relations Act 2000 and defines what it is and what means, there is no such explanation found in the Act pertaining to a Probationary Period.  Also as most employers will know a 90 Day Trial Period is grievance free and the law of unjustified termination does not apply.  The Probationary Period on the other hand is subject to the law relating to unjustified dismissal.  In practice this means an employer seeking to exit an employee under a Probationary Period will be held to account for the Test of Justification under s103A of the Employment Relations Act 2000 asking essentially what could a fair and reasonable employer have done in the circumstances.

Probationary Periods

Before there were 90 Day Trial Periods and for that matter even before the Employment Relations Act 2000 came into being there were Probationary Periods.  While the predecessor to the Employment Relations Act 2000 did not specifically mention probationary periods a 1994 case on the topic confirms their use under the Employment Contracts Act 1991.  The case made it all the way to the Court of Appeal which illustrates perhaps both its importance and the value of the court’s decision.  The matter involved a pilot working at Nelson Air Limited.  Employment was terminated at the end of six-month long probationary period on the grounds that he was not suitable for continued employment.  In finding that the employer had treated the employee unfairly the Court of Appeal said:

“Every probationer may be taken to realise that being on trial he or she will be under close and critical assessment and that permanent employment will be assured only if the employer’s standards are met.  The employer for its part may not be simply a critical observer, but must be ready to point out shortcomings, to advise about any necessary improvement and to warn of the likely consequences if its expectations are not met.  Because the objective is always that the trial will be a success, not a failure, both parties must contribute to its attainment.  If it becomes apparent to the employer, judging fairly and reasonably, that the trial is not a success, the employee is entitled to fair warning before the end of the probationary period that the employment will then be coming to an end.”

As a result of the employer’s deficiencies in handling the probationary period and the manner in which employment was ended the pilot became entitled to substantial remedies.

Case law has also filled the gap in the Employment Relations Act 2000 further defining the scope of a Probationary Period.  For example in New Zealand Meat Workers & Related Trades Union Inc v AFFCO New Zealand Ltd [2010] NZEmpC 62, [2010] ERNZ 139, the Employment Court considered probationary periods at length, and having done so Chief Judge Colgan defined a probationary arrangement as:

“… a period that enables the employer to assess an employee’s competence and suitability for a position at a time when such an assessment is able to be made and after an appropriate period for training, guidance and, if necessary, modification or improvement by the employee.”

For those employers who are no longer able to use 90 Day Trial Periods we make the following recommendations based on case law and current legislation.

  1. Place a clause in the employment agreement in order to meet the obligation under s67(1)(a) of the Employment Relations Act 2000 indicating the new employee will be subject to a Probationary Period.  If it the clause is not in the agreement an employer will not be able to rely on it.
  2. Set a reasonable length of time for the Probationary Period based on the circumstances.  While it is common to find Probationary Periods of 3 month duration longer times frames are possible.  An extreme incidence is found in the case of Rochford v Vice-Chancellor, University of Otago [2012] NZERA Wellington 54 where the probation lasted five years.  While the Authority understood and accepted the reasons for the long period and they also accepted the dismissal was substantively justifiable, it did not like the process used and the termination was determined to be procedurally unfair.
  3. Use the Probationary Period clause to explain to the employee their performance and conduct will be assessed according to the requirements of the position with the object being to enable the employer to assess whether the employee has the skills and attributes necessary for satisfactory appointment as permanent staff.
  4. Explain that during the Probationary Period the employer will meet regularly with the employee to inform them of any shortcomings with a view to helping the employee to improve.
  5. Set timeframes for assessment.  For a Probationary Period of 3 months we recommend these be set at one month intervals.
  6. Use the clause to also explain that any concerns which arise with the employee’s performance will be communicated to them and they will be given the opportunity to respond.
  7. State that after considering any responses the employer may either confirm full time appointment to the role, or reasonably extend the probation providing reasons for doing so, or advise the employee they are not suitable for the new role and terminate on giving notice.

Having such a clause in the employment agreement is important and so too is actually following through and consulting with the employee at the times established.  Meetings should also be followed up in writing.  A decision to end the relationship should not be made and acted on without advice and we recommend you contact us well before you reach that point.  The failure to properly follow through has resulted in negative outcomes for the employer, examples include:

  • The Employment Court said in the case of Battin v Western Bay Health Limited [1198] ERNZ 462 (EmpC) the failure of the employer to supervise and review performance may undermine the employee’s trust and confidence in their employer.
  • In Scholefield Airport Gateway Hotel Ltd v Clarke [1998] 3 ERNZ 629 (EmpC), the Employment Court warns that an employee under a Probationary Period must be given the opportunity to correct shortcomings and a dismissal must not be predetermined.

The discussion above demonstrates that a Probationary Period can be a useful tool managing the performance of new staff, helping them to become a productive member of the team.  Unfortunately the discussion also reveals a number of potential pitfalls.  Of course employers are encouraged to also conduct a competent if not robust recruitment process prior to offering a role to a prospective member of staff.

The team at Otago Southland Employers' Association are able to draft an appropriate clause for use in an employment agreement and assist our members manage their risk as they navigate their way back to the future where Probationary Periods once again form a valuable and effective part of the employment relationship.

 

David Browne | Senior Solicitor


 

Legal Team

 

Diana Hudson | Managing Solicitor | 03 456 1804 | 021 816 469 | diana@osea.org.nz

David Browne | Senior Solicitor | 03 456 1812 | 021 225 6938 | david@osea.org.nz

Adam Siwerski | Solicitor | 03 456 1809 | adam@osea.org.nz 

Roger Gudsell | Advocate | 03 455 5165 | roger@osea.org.nz

 

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