Appendix 2: Further Detail on Issues

Issues previously raised by government

Representation fees

1. When the Lawyers and Conveyancers Act 2006 comes into force, lawyers will be able to charge conditional fees (conditional on a successful outcome) that include a premium to compensate for not being paid until resolution of the case or for not being paid at all.  Where employment advocates charge on a “no win, no fee” basis, in some circumstances (particularly straightforward cases or where settlements are large) their fees may be higher for the same work than a lawyer would have charged.  The reverse can also apply, in that lawyers’ fees can be higher.  Further, for more complex cases lawyers’ fees may correspond more closely to those of “no win, no fee” advocates, or be higher. More detail on this is provided in Appendix 1.
2. As representation costs, from both advocates and lawyers, can be high, option 2 in Appendix 3 suggests the provision of educational material that includes information on likely representation costs throughout the employment relationship problem resolution process.
3. The Department understands that there are approximately 200 employment advocates nationwide, and estimates that approximately 30 of them are “no win, no fee” advocates.  The regulation of advocates and their fees is addressed as an option in Appendix 3.

“No win, no fee” arrangements

4. The Transport and Industrial Relations Committee noted in its 27 October 2006 report on the Employment Relations (Probationary Employment) Amendment Bill that it would welcome research into whether “no win, no fee” representation arrangements have caused an increase in personal grievance claims, and effects of these arrangements on the type of resolutions being achieved.
5. The Department’s analysis and research found there were about 1.5 employment relationship problems per 100 FTEs in the last year. While there are no previous comparable surveys, a survey of employees in 2002 found that about nine percent had experienced such a problem over the previous 12 months.  Given different methods and definitions, the results are not strictly comparable but do not suggest an increase in employment relationship problems. 
6. There was no evidence that “no win, no fee” advocates have dramatically changed the landscape or encouraged meritless claims. Numbers of applications for mediation since 2000 have remained reasonably static and do not show evidence of a changing trend. The Department is considering further research and regular surveys, e.g. three yearly, on the incidence, costs and benefits of resolving employment relationship problems.
7. The Department’s survey of mediations showed that there is no correlation between whether the applicant used a representative, or the type of representative used, and the likelihood of reaching a settlement.

Issues previously raised by employers

Employers tend to believe the employment relationship problem resolution system is biased against them

8. The case study and focus group projects suggest that both employers and employees tend to focus on the obstacles they experience in resolving an employment relationship problem. Both parties believe “the system” favours the other:
   • employers tend to believe employees can take advantage of employers’ difficulties in complying with the dismissal process and that inadequate processes would expose them to large liabilities
   • employees tend to believe that the employer knows the process, has more resources and holds all the cards.
9. Employers sometimes assert that process can be considered to be more important than substance. The analysis and research in Appendix 1 does not address this issue. However, matters of process and substance are often related.  For example, if an employee “wins” because the Authority finds the employer failed to investigate alleged misconduct, the employer may interpret this as “process over substance”, whereas the employee may believe their claim on the substance prevailed.  In some cases the procedure can be so flawed that it makes it difficult to substantively justify the decision. 
10. The Authority can reduce remedies to be provided to an employee.  In the Department’s review of 33 determinations in the Authority over a five week period, the Authority found in two determinations that the dismissals were unjustified in terms of process, but made no award to the employees because of their contributory behaviour.  The Authority reduced remedies on this basis in 24% of the determinations reviewed (being 8 determinations). 
11. The Authority and the Employment Court can take the size of the employer into account when examining all the circumstances of the case.  A small employer is not expected to have the same set of procedures as a public sector employer or larger private sector employer.^[6]

Employers tend to believe it is expensive to resolve employment relationship problems

12. While employment relationship problems can be resolved without the use of representatives, if one party decides to involve a representative, the other party is incentivised to do the same to avoid perceived disadvantage.
13. The focus group and the case study projects indicated that there is a prevailing belief that employment issues that lead to personal grievance claims are expensive to settle.  One estimate mentioned by some respondents in the case study project was $40,000 (including legal costs and settlement values).  The focus groups suggested that the amount to settle an employment relationship problem privately (ie. outside of the Department of Labour mediation services and the Authority) was expected to be closer to $5000.  Perceptions that problems are expensive if not settled internally provide powerful incentives for employers to seek quick settlement outside the Department of Labour mediation services and the Authority.
14. The median cost of all employment relationship problems in the Department’s email survey of employers, including those relating to litigation, was $5000, of which $2800 represented payouts to employees. The residual comprised legal fees, costs of investigations and of temporary replacement staff if any.
15. The cash costs (legal fees, compensation and replacement staff) of resolving problems rose steadily with the number of employees in a business, from a median of $3,000 for businesses with 1-9 employees, to $9,700 for businesses with more than 100 employees. The reasons for this may be related to larger businesses having more staff with higher remuneration (since settlement often includes lost wages).  Authority awards for compensation under section 123(c)(i) of the Act for humiliation, loss of dignity and injury to feelings of the employee rose moderately by about five to 15% over the three years 2002 to 2005 after adjusting for inflation.
16. Qualitative findings from the small number of case studies indicated that SMEs in particular tend to rely on their networks for information such as the size of informal settlements. There were examples of SMEs making expensive payout decisions based on flawed information from their informal business networks.
17. Please see Appendix 4 for comments from Business New Zealand and SBAG on this issue.

Issues emerging from the Department’s analysis and research

Access to justice

18. In this paper “access to justice” refers to the affordability of advice or representation to assist with resolving an employment relationship problem.  If someone with an employment relationship problem would like to get advice from or instruct a representative but cannot afford to, their access to justice is considered to be impaired.  Accessing justice need not involve representation.  However, it seems that for many employees, particularly vulnerable or low income employees, an inability to afford representation means efforts to resolve an employment relationship problem are abandoned.
19. Legal Services Agency research in 2006 shows that actual or perceived fears of cost stopped 22% of people with an employment relationship problem from engaging a lawyer.  Perceptions (rather than the reality) of costs may deter some employees from efforts at resolution.
20. Greater access to justice may be achieved if lawyers more often offered conditional fee arrangements.  Current law offers little incentive for lawyers to enter into such arrangements, but the Lawyers and Conveyancers Act 2006, intended to come into effect on 1 July 2008, will expressly allow lawyers to use certain conditional fee arrangements.  This may increase the use of conditional fee arrangements by lawyers and increase the range of options available to low income or cash-strapped employees in resolving employment relationship problems, thereby increasing access to justice for these groups.
21. Legal aid, which pays a “listed provider’s” fees (ie a lawyer or employment advocate approved by the Legal Services Agency), is available for Department of Labour mediation and at the Authority.  Legal aid will be granted if the client is financially eligible and his or her case satisfies the “merits” criteria in the Legal Services Act 2000.  Significantly more people became eligible under the new legal aid financial eligibility thresholds on 1 March 2007.  Further detail on Legal aid can be found in Appendix 1.  The availability of “no win, no fee” arrangements may increase access to justice for those who do not qualify for legal aid.
22. As with any legal processes, costs awarded by the Authority or the Courts do not cover the full costs incurred.
23. Please see Appendix 4 for comments from Business New Zealand, the New Zealand Council of Trade Unions and SBAG on this issue.

Impact of delays

24. The Department’s analysis and research showed that the median length of time from when a problem first comes to the respondent’s attention until it was resolved was three months for SMEs and two months for larger businesses.  The survey data showed that the quickest settlement was obtained via in-house resolution (median of one month), followed by use of external parties (two months).  Resolution via Department of Labour mediation took a median five months (which includes any time spent trying to resolve the problem before contacting the Department’s mediators). 
25. The time to mediation could be reduced if parties sought mediation as soon as it becomes evident that an employment relationship problem cannot be resolved in-house, assuming the mediation service is well resourced.  Delays in going to mediation may have costs implications (in terms of lost wages, legal fees and social costs) on the parties and may increase the risk of the parties becoming entrenched in their positions.  SBAG commented that other costs caused by delays include low productivity in the workplace, good staff leaving in the interim and issues arising from other employees trying to deal with the situation themselves.
26. Members of the Authority currently deliver determinations between two weeks and some months after the hearing.  These delays may have cost implications (in terms of lost wages, legal fees, and social costs) on the parties.

Impact of employment relationship problems on SMEs

27. The Department’s email survey of employers found that SMEs with 1- 9 employees experienced 2.9 cases per 100 employees while large employers experienced 1.2 cases. However, because small businesses employ fewer staff, they were much less likely to have actually experienced a problem in the previous year (6%) than large businesses (53%).  SMEs by their nature tend to be pragmatic, and have fewer formal processes. The burden of resolving a problem is likely to be much heavier for a SME given their comparative lack of:
    • experience in responding to employment relationship problems, since only 6% of small businesses had experienced an employment relationship problem in the preceding year;
    • having employment processes and procedures in place;
    • information about employment relationship problem resolution processes;
    • awareness of the resolution options available; and
    • certainty about the financial and time commitment associated with the formal process.
28. For these reasons SMEs may find it harder to comply with the procedural requirements in addressing employment relationship problems, which in turn is likely to count against them if the problem reaches the Authority or the Courts. A longer median time until problem resolution found in SMEs may reflect a lack of experience and resources.
29. To summarise, quantitative and qualitative findings suggest that employment relationship problems appear to impact more heavily on SMEs than on larger businesses.
30. Please see Appendix 4 for comments from the Small Business Advisory Group on this issue.

---

Footnotes:

^[6] Comments made by Employment Court Judge Coral Shaw and Peter Kiely (partner in the law firm Kiely, Thompson, Caisley; and Adjunct Professor of Employment Law, Victoria University of Wellington) during the Victoria University of Wellington: Industrial Relations Centre seminar on “Employment Agreements: Bargaining Trends & Employment Law Update 2006/2007” on 15 August 2007