Do employment relationship problems present high costs for employers?

Both focus groups carried out in the last half of 2006 and case study research carried out in 2007 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 was $40,000 (including legal costs and settlement values) although the focus groups suggested that the amounts of payouts were expected to be closer to $5000. Any perception of high costs from ERPs that are not settled internally is a powerful incentive for employers to either avoid addressing issues or seek quick resolution outside the frameworks provided by the Department of Labour.

The survey of private sector employers found that the median direct cost of all ERPs, including those proceeding to litigation, was about $5000, of which $2800 represented payouts to employees. The remainder included legal representation/advice, investigation costs and any replacement staff used to cover for participants in the ERP. The mean cost was $10,850. The median cost is a measure of central values^[2], and presents the best measure of "typical" values as the means were inflated by a small number of very high values.

Regardless of the actual cost, perceptions of high cost can have an impact on employer responses to performance or conduct issues among their employees. One of the case study employers provided three warnings over a period of several months to an employee who had consumed alcohol on the premises and reported for work when impaired by drugs. The employer took this approach so that he could not be accused of unjustified dismissal. He estimated that the presence of this employee and his effect on workplace morale cost around $10,000 per month in lost productivity - a cost which could have been forgone with a speedier resolution.

This belief that high payouts are likely may also influence the behaviour of some employees, leading them to hold out for unrealistic settlement amounts and unnecessarily protracting employment relationship problems. One advantage of mediation (where most settlements were below $5000 and many below $2000) may be the ability of mediators to inject a degree of realism into claims.

I think it can actually in some ways have a positive effect, because I think they can bring a reality check to the person... you hear people say "I'm gonna take them for thousands... but all of a sudden they do get into a mediation and they get into the reality check ..., what the average settlements are and what their chances are likely to be. (HR Manager)

More information on the costs and benefits of ERPs, and how these vary according to resolution methods is contained in sections 3 and 5.

Is the incidence of employment relationship problems growing?

The private sector survey found that for every hundred employees, businesses experienced 1.5 cases per year of ERPs sufficiently significant to come to the attention of business owners, senior management or HR departments (where these existed). The rate for small employers (1-9 employees) was 2.9 cases per 100 employees, while the rate for large employers (100+ employees) was 1.2 cases per 100 employees.

A 2000 survey of employers reported that 19% of employers (weighted by size) had experienced a "grievance dispute" during the previous 12 months. This is a slightly more restrictive definition than used in this survey of ERPs and compares with 9% for this survey. A survey of employees in 2002 found that about 9 percent of employees had experienced "disputes" (using a slightly wider definition^[3]) over the previous twelve months.

Given the different methods and definitions, the numbers are not strictly comparable, but do not suggest any increase in numbers of ERPs. If anything, they suggest a reduction.

Another method of gauging incidence of ERPs is through analysis of numbers of applications for mediation or for registration of dispute resolutions with the mediation service.

The Department of Labour publishes the number of applications for mediation in its annual report. With the exception of a slightly lower figure in 2001/2002 and higher figure in 2004/2005, this number has consistently been around 9200, with no evidence of a changing trend. This level is in line with the estimated rate of ERPs from the survey and the proportion of ERPs proceeding to mediation.

Is there a "grievance gravy train" led by a proliferation of no win no fee advocates?

In 2006 the Employers and Manufacturers Association (Northern) noted an increase in the number of employment issues going to the Employment Relations Authority and suggested that there was a "grievance gravy train". They suggested that, encouraged by no win no fee advocates, "employees are trying their luck to see if their employer can be tripped up" over dismissals that were justified in substance, but flawed in process. There were even suggestions that some employees may be provoking confrontations in the hope of winning a financial settlement through such advocates.

Private sector employers surveyed stated that no win no fee representatives were involved in 16% of ERPs.^[4] There was no evidence that no win no fee advocates have dramatically changed the landscape or encourage meritless claims. One of the employers interviewed said that advocates were unlikely to put much effort into claims that lacked merit. Other parties interviewed in the case studies believed that no win no fee advocates played an important role in providing access to advice for low income employees. In any case, Department of Labour estimates suggest there are only a small number of no win no fee advocates in the market.

The one noticeable effect of no win no fee advocates on outcomes was to delay resolution somewhat compared to other ERPs involving third parties. ERPs where agents working on a no win no fee basis were involved took up to twice as long as those involving lawyers, but resulted in total cost levels comparable to those for other employee advocates (and lower than those where lawyers were involved).

There was one case in the case studies suggesting that the employee may have attempted to manipulate the system. This employee did not use a no win no fee advocate. However, in almost all of the cases studied, ERPs were distressing for all parties. The level of distress reported by employees suggests that such attempts to manipulate are likely to be only a small minority of ERPs.

What is the impact of stand-down requirements for Work and Income benefits on personal grievance claims?

Some employers suggested that a proportion of personal grievances are taken mainly to receive income support. The Ministry of Social Development imposes stand down periods before people can claim unemployment benefits. If an employee is dismissed with cause or resigns voluntarily a 13 week stand down period applies before they become eligible for the unemployment benefit. However, if the employee challenges a dismissal or loss of employment by taking a personal grievance, this 13 week stand down period does not apply (though other stand down periods may apply depending on the employee's other personal circumstances). This provision was considered to provide an incentive for dismissed employees to take a personal grievance.

Ministry of Social Development figures show that the number of benefits granted under this provision have rarely exceeded 5 per month over the last three years with none at all being granted between January and April 2007. Since 2004, both the total number of benefits granted and the proportion of all benefits granted under this provision have exhibited a downward trend. This is illustrated in the table below.

The perception that unemployment benefit rules are a major contributor would, therefore, appear to be unfounded at present.

Are there systematic biases in the employment relationship problem resolution system favouring employees/employers?

The case studies and focus group research suggest that both employers and employees tend to focus on the obstacles they experience or expect in achieving their goals during ERP resolutions. Many employers feared that a judgement of inadequate processes would expose them to large liabilities. On the other hand employees saw the (presumed) greater experience and resources and inherent positional advantages of employers as tilting the balance the other way. Hence each believed that the system favoured the other party.

That's my really, really big concern about the employment contracts [sic]. I understand it's covering both parties, but I really feel that it's gone overboard the other way. It just makes it so hard for us... They know that ... they can go so far. They work the system to their advantage all the time. (Employer)

I think that the process as it stands at the moment is quite unfair on employees and that the employer has all of the cards in their favour... So, if they see somebody they perceive to be a problem employee, there's no problem to them just using inappropriate practices to bully a person out or get rid of them. (Employee)

Data from the case studies shows that ERPs were traumatic for both employers/managers and employees, which suggests that most employees would be unlikely to take grievances unless they felt it really necessary.

The mediation survey and study of Authority determinations indicated that employees initiate most of the formal procedures. This arises from the fact that it is normally the employee who wants a change to the existing situation. Only if they or their representatives believe that they have a good chance of winning are they likely to advance to Employment Relations Authority. For this reason, the finding from the review of Authority determinations that more than half of all substantive Authority hearings find at least partially in favour of employees does not indicate that the Authority proceedings are unreasonably slanted.

Employers often assert that process is more important than substance. However, in hearings on employment disputes, matters of substance and process are not always easy (or appropriate) to disentangle. For example, if an employee "wins" because the Authority finds that the employer failed to investigate alleged misconduct, the employer is likely to see this as "process trumping substance" while the employee may believe that their claim on the substance would have prevailed had an investigation taken place.

Although the Act does not explicitly distinguish between substantive and procedural unfairness, the Authority can and does modify awards according to its assessment of the merits. For example, the review of Authority determinations found two examples where the Authority found that dismissals were unacceptable in process terms, but awarded nothing to the employees because of their contributory behaviour. In around one quarter of all cases analysed the Authority reduced or rejected awards on the basis of contributory conduct.

Do small businesses have a harder time dealing with employment relationship problems?

Small businesses in the survey and case studies appeared to experience ERPs and personal grievance procedures quite differently from the larger employers.

Smaller businesses were less likely than larger businesses to experience a problem (6% of small businesses had experienced a problem during the survey period, as opposed to 53% of large businesses). This is not surprising, given that large businesses employ more staff. However, the incidence rate per 100 employees per year was higher for small businesses (2.9) than for large businesses (1.2), indicating that employees are more likely to experience an ERP if they work for a small business than a large one.

The median direct cost of ERPs for small businesses was between $3,000 and $3,900 (depending on the size of the business), compared to $9,700 for the largest businesses - indicating that small businesses did not face higher absolute costs than their larger counterparts. Even so, costs in the range of $3000-4000 could still have a large relative impact on a small business.

Small businesses had a markedly more negative view of the impact of ERP provisions than large ones. It is likely that small businesses will generally have fewer HR resources and expertise than larger businesses (who can afford to employ specialists). Small businesses are also unlikely to be experienced in dealing with ERPs as they may have one only every four or five years. As a result, their information about ERPs is more likely to come from media reports, or through business networks, which may amplify "horror stories". Consequently, small businesses may expect the costs of resolution to be high and fear that their processes would be found to be inadequate.

Interestingly, businesses employing between 10 and 19 full time equivalents were the least satisfied with resolution processes and outcomes and the most likely to provide negative comments about the Act in the "open" question of the survey. In fact, the profile of ERPs for employers of 10-19FTEs is closer to large businesses than it is to businesses employing 1-9FTEs, but it is likely that the financial and management resources available to large businesses to deal with these problems are not available to them. These (10-19FTEs) businesses therefore may be "squeezed" between much higher incidence of problems and higher cost than smaller businesses and a relative lack of resources to deal with them, which may explain their greater dissatisfaction with current employment problem resolution processes

Another difference between the experience of smaller businesses and larger businesses, which emerged from the mediation survey, was that ERPs emerged earlier in the employment relationship than was the case for larger businesses. We were not able to find the reasons for this difference from this research and this is an issue which could conceivably be addressed in future research.

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