Trial Periods: Pitfalls to Avoid - Employment Litigation/ Tribunals

All employers can now take advantage of the 90-day trial period law. When the 90-day period is correctly used, an employer may dismiss an employee within or at the end of that period without fear of an unjustified dismissal claim. However, there are some pitfalls to be aware of if you wish to successfully use this tool.

An effective trial period means an employer can terminate the employee on notice within or at the end of the trial period and the dismissal cannot be challenged in the Employment Relations Authority) or the Employment Court. A "trial period employee" may still:

request mediation; and
raise a personal grievance on the grounds of disadvantage, discrimination or sexual or racial harassment (in accordance with the relevant provisions of the Employment Relations Act 2000 (Act).

Trial period clauses must meet strict requirements under the Act. Cases so far show significant potential pitfalls.

THE IMPORTANCE OF GETTING IT RIGHT

It is imperative that an employment agreement containing a trial period clause is signed prior to the employee starting any work.

Timing is everything

In Smith v Stokes Valley Pharmacy (2009) Limited the agreement was signed one day after the employee commenced work. This was fatal to the employer's ability to rely on the trial period as protection.
The business Mrs. Smith was employed by was sold and she successfully interviewed with the new owners. Mrs. Smith received an agreement with a 90-day trial period provision. She started work for the new owners and signed the agreement the day after. Mrs. Smith was later dismissed under the trial period clause.
The Act says that trial period provisions must be agreed upon before employment starts, must be in writing and may only be used for employees not previously employed by the employer. The Employment Court stated that a trial period provision needs to be signed by both parties at the commencement of the employment relationship and not retrospectively.
At the time of signing Mrs. Smith was an existing (not a new) employee. So the trial period was of no effect and the employer should have followed a proper performance management procedure in light of the concerns it had.

Sure, but can I do it after my lunch break?

The strict approach taken by the Employment Court in Stokes Valley Pharmacy was followed by the Employment Relations Authority in February this year in Parkes v Squires Manufacturing Ltd.
The facts are similar to Stokes Valley Pharmacy, and the Authority took an arguably even stricter approach. Sylvia Parkes had not previously been employed by Squires. She did not sign her employment agreement until after lunch on her first day of employment. This short period of work was found to be sufficient to make her an existing employee.
The Authority emphasised the necessity of signing the agreement 'at the commencement of the employment relationship'. As Ms. Parkes was an 'existing employee' the trial period clause could not be relied on.

A need to clear the air?

In Kingi v New Zealand Heat Pump Cleaning Limited, Mr. Kingi was employed by Healthy Homes Ventilation Company Limited from 21 October 2009 to 30 January 2010. In late January 2010 he was offered employment by a new entity, New Zealand Heat Pump Cleaning Limited. Each company's governing director was Mr Wyatt.

Heat Pump Cleaning Ltd and Mr. Kingi entered into a written employment agreement containing a trial period clause signed by Mr.Wyatt on behalf of the employer. Mr. Kingi was subsequently dismissed in reliance on the trial period provision.

Mr. Kingi argued that the trial period was unenforceable because the employer, as evidenced by Mr Wyatt being the governing director for both entities, was the same.

The Authority held that the test was whether two different legal entities employed Mr. Kingi at different times. It held that a common director between two legal entities was commonplace in business affairs. As the strict requirements of the trial period legislation had been complied with, Mr. Kingi's trial period was deemed to be valid.

Use the right words, and co unt carefully

Miscounting the 90 days and trying to give notice of dismissal on day 91 or 92 will be fatal. In Wilson v Promotional Systems Ltd the employer tried to dismiss Ms Wilson on day 91; the Authority held that the termination clearly occurred outside the trial period.

The employment agreement also failed to state that if the employer dismissed her during the trial period the employee could not bring a grievance. This was also a fatal flaw because the Act requires a trial period clause to state this.

Watch out for offers and acceptances before the written employment agreement is prepared

The Authority has sent a case to the Employment Court to have an important question of law determined about whether a trial period in a written employment agreement is effective when the employer has earlier offered employment and the employee has accepted.

In Blackmore v Howick Properties Limited the employer offered the job in October, with a start date in November. The "employee" accepted the offer. After this offer and acceptance but before the start date the employer gave the employee a written employment agreement containing a trial period clause - the employee signed.

The question is now whether the employee was "employed" before the written employment agreement was signed. The Act defines "employee" as including a person intending to be employed, unless the context requires otherwise.

Watch this space for the answer.

Discrimination

An employee dismissed under a trial period clause may still bring a personal grievance on the ground that they were discriminated against during employment.

An example of this would be when an employer employs an employee under an employment agreement containing a 90 day trial period provision. The employment agreement is executed correctly and the employee begins work.

Before the end of the 90 day trial period the employer finds out that the employee is pregnant and dismisses her, purportedly based on the trial period clause. The employee could argue discrimination despite this, and the employer would be liable for discriminatory conduct if the reason for the dismissal was the pregnancy.

What needs to be done?

A trial period can be incorporated into any new employee's employment agreement. For an employee to be 'new' they must not have been previously employed by the employer.

What must be included in a trial period clause?

The trial period must state the following:

that the employee is employed for an initial period of up to maximum of ninety days under a trial period. The duration of the trial period must be stated.
during that period the employee may be dismissed; and
if the employee is dismissed under the clause, the employee is not entitled to bring a personal grievance or other legal proceedings in respect of the dismissal.

What else should be included?

The trial period should specify a shorter notice period than is usual (one week is sufficient). If no notice period is provided, the employer must give the notice period specified in the employment agreement or, if there is none specified, a "reasonable" period of notice.

It is worthwhile to include wording in the trial period clause which enables payment in lieu of notice to be made to allow for the immediate removal of the person from the workplace if necessary.

Dismissal under a trial period clause

The correct length and form (verbal or written) of notice must be given.
When deciding whether to dismiss under a trial period, the employer is not required to provide the employee with access to information relevant to the decision or an opportunity to comment on the information prior to a decision to dismiss being made.
The employer is not required to provide written reasons for the dismissal (as is required for other dismissals) if requested by the employee. Nevertheless, the employer must still deal with the employee in good faith and so is not exempt from being obliged to provide an explanation for the dismissal if asked by the employee when notice is given. Good faith requires parties to an employment relationship to be "responsive and communicative" and refusing to give an explanation for dismissal would be inconsistent with that statutory obligation.

Take home points

Overall, the obligations on an employer in dismissing an employee under a 90 day trial period are strict.
Ensure that an employee is truly "new".
Don't offer employment before you provide a written employment agreement containing a properly drafted trial period clause.
Consider using a shorter notice period in the 90-day trial period clause. Consider including the option of making a payment in lieu of notice.
While you are not required to provide written reasons as to why dismissal has occurred, you must be responsive and communicative if asked. A flat out refusal to explain will be inconsistent with your statutory obligations of good faith.
A correctly executed trial period bars an employee from bringing a personal grievance or other legal proceedings in respect of the dismissal.
The employee can still bring a personal grievance for unjustified disadvantage, or a claim of harassment or discrimination.
The employment agreement must be signed before the employee starts work by both the employee and employer. Get the employment agreement signed, sealed and delivered prior to the new employee starting any duties, or better, before they set foot on your premises!

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.

DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com

Australia: Trial Periods: Pitfalls to Avoid NZ Employment Update