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Why 90-day trial periods are so hard for employers to navigate

22 Mar 2024

| Author: Reweti Kohere

With the reintroduction of 90-day trial periods for all businesses, employers are facing significant pitfalls amid mounting case law which is strictly interpreting the boundaries of employment practice.

Meanwhile, lawyers with whom LawNews has spoken say trial periods are cutting across the intentions behind the Employment Relations Act 2000, which grounds the employment relationship in good faith and mutual obligations of trust and confidence, often demonstrated through responsive and communicative consultation. By contrast, trial periods “are more like a termination or dismissal at will”, says Hesketh Henry partner Jodi Sharman.

Just before Christmas, the National-led coalition government passed under urgency the Employment Relations (Trial Periods) Amendment Act 2023, which reinstated 90-day trials for all employers, regardless of their size. While workers who are subject to valid trial periods remain fully-fledged employees in almost all respects, the practice prevents them from disputing their dismissal – a longstanding employee protection.

Consequently, the courts have interpreted trial periods strictly, Sharman says, “because they really do go against the rest of the legislation, the rest of employment law being [about] good faith and having to have a reason and a process for doing something”. Between 2015 and 2023, about 75% of the nearly 180 trial-provision dismissals considered by the Employment Relations Authority failed to be upheld on being challenged.

While changes to the legislation have been made, case law has added “layers of complexity” to trial periods, says Sharman, a member of The Law Association’s Employment Law committee. “For example, my first day of work is Monday.

My start time is 8.30 am. I come into the office at 8.30 am and I sign my employment agreement at 8.31 am. When I signed my employment agreement, I was not a new employee because I had been working for one minute,” she explains. “So that renders the trial period invalid, the courts say.”

 

What is a trial period?

When someone is employed under the trial period, they are an employee from the get-go, with all the rights and obligations guaranteed under the Act except the ability, under s 67B, to raise a personal grievance or legal proceedings for dismissal.

While the employee can still bring a personal grievance or court case for discrimination, sexual harassment or any of the other specified grounds in s 103, the 90-day trial dismissal carveout means that employers need not give, under the good faith provision in s 4, the dismissed employee access to information about the dismissal decision and an opportunity to comment on the information, and reasons for the dismissal under s 120.

Trial periods are not like probationary periods, which are covered by separate provisions in the Act. Probationary periods can exceed 90 days from the start of employment and don’t shield employers against personal grievances. Trial periods must specify a period that can be less than 90 days, but no more. Ninety days is also less than three months, meaning that specifying three months or any longer period invalidates the trial provision.

Where a trial period is valid, employers can terminate an employee’s employment by giving the correct notice at any time from the start of employment to the end of the trial period. The trial period provision contained in the employment agreement must include:

  • a specified period not exceeding 90 days from the start of the employee’s employment;
  • that the employer may dismiss the employee during that period; and
  • that the employee is barred from bringing court action in respect of their dismissal if the employer does dismiss them. Before the employee starts work, the employer must ensure they:
  • receive a copy of the employment agreement containing the written trial period provision;
  • are made aware of the trial period provision contained in the agreement;
  • have a reasonable opportunity to take advice on the agreement and has been advised to do so; and
  • sign the agreement.

 

Mounting case law

Simon Schofield, who teaches employment law at the University of Auckland, says there has been “mounting” case law clarifying what makes a 90-day trial period valid – and invalid.

This stringency can be traced back to the landmark decision of then Chief Judge Graeme Colgan in Smith v Stokes Valley Pharmacy [2010] NZEmpC 111. Confronted for the first time with ss 67A and 67B, Chief Judge Colgan said they should be “interpreted strictly and not liberally because they are an exception to the general employee protective scheme of the Act”.

In Farrand Orchards v Tane [2022] NZEmpC 131, Judge Bruce Corkill dismissed an employer’s challenge to an authority determination that the trial provision it relied on to dismiss the employee wasn’t valid. The authority had been correct in finding the employment agreement wasn’t executed before the employee started work and that there wasn’t enough evidence establishing that the parties agreed to a 90-day trial period.

In Senate Investment Trust Through Crown Lease Trustees v Cooper [2021] NZEmpC 45, Judge Kathryn Beck held the employer’s failure to have the employee sign the employment agreement before he started work was fatal. “An agreement is only a draft or a proposed agreement until it is executed…As the drafter of the agreement, it fell on Senate to follow up the issue prior to allowing Mr Cooper to begin work…It did not do so and, therefore, cannot now rely on the trial period clause contained in it,” the judge said.

And in a challenge to the Employment Court in Kumara Hotel Ltd v McSherry [2018] NZEmpC 19, Chief Judge Christina Inglis upheld the authority’s trial period finding, ruling that the first agreement, which didn’t contain a 90-day trial provision, was fatal to the hotel’s argument that the trial period provision in the second employment agreement protected it from a claim of unjustified dismissal.

 

In good faith

The obligation of good faith remains front and centre in an employment relationship that is subject to a 90-day trial, Sharman says. “Often lawyers get crafty and try to raise a disadvantage personal grievance, which is not a dismissal personal grievance, to try to get around that. Good faith still definitely applies, but there is a carve-out for the trial periods.”

Schofield adds that good faith in s 4 of the Act requires, among other things, that the parties be “active and constructive” in establishing and maintaining a productive employment relationship, in which they are responsive and communicative.

“As Chief Judge Colgan has pointed out, good faith obligations are ‘significant and enforceable by trial-period employees’. Therefore, a 90-day trial period should not be used to see whether an employee can sink or swim. It requires, in my view, that such employees should be provided with training, supervision and support. At its core, good faith requires cooperation and honesty.”

At the amendment bill’s second reading, Workplace Relations and Safety Minister Brooke van Velden said, “It can take only one employee who has a poor attitude or doesn’t have the right skills to actually do the job to a good standard to take down a productive team”. Later, the minister said that having a worker who was a “poor match” within a business wasn’t allowing somebody else who could “be a better fit” the opportunity of employment.

Schofield, also a member of The Law Association’s Employment Law committee, says the minister’s phrases “euphemistically” describe circumstances in which it is appropriate to terminate an employee’s employment under a 90- day trial period. But the phrases are “highly subjective” and are “meaningless without context”.

“The challenge is that without more detail or specifics, no employer would ordinarily be able to pass the test of justification in s 103A of the Employment Relations Act 2000 by terminating an employee’s employment on such a speculative basis, in the absence of a 90-day trial period provision,” he says, adding that it highlights many of the criticisms of the practice “because they can lead to poor human resources practices. Such phrases also cut across the good faith obligations in s 4 of the Employment Relations Act 2000.”

 

‘So jarring’

Sharman says a trial period removes the risk of hiring someone when an employer wouldn’t otherwise have done so “because you’ve got the get-out-ofjail-free card. You can dismiss them if they don’t fit or don’t work out and you don’t have to go through having the legal process before you dismiss them.” In the absence of a trial period, however, an employer would find it difficult to give an employee a warning for not fitting in.

“You can just see it now. What would you raise with the employee in a formal way? ‘We’ve got concerns that you’re just not fitting in’? The employee will say ‘What do you mean?’ and the employer will say ‘Well, it’s just a vibe, pretty much’. You wouldn’t be able to justify a warning or definitely not dismissal without any substance behind it,” she says. “Whereas with a trial period, you can literally say ‘Jodi, I’m so sorry, but we’re dismissing you under the 90-day trial period. We wish you all the best for the future. Please work out your notice and your last day will be on Monday’. That’s all you have to do.”

Sharman says employers are so used to following a process when they raise concerns with employees that to dismiss those workers subject to a 90-day trial without giving a reason “feels so at odds with all the rest of employment law, which is all about good faith and hearing people’s views before making decisions. It’s so jarring, this part of the Act.”

When trial periods first came into force, the employment law specialist remembers clients “were like ‘I can’t do it. It feels so unnatural just to go to someone, give them a letter and say “you’re terminated”’…It feels nerve-wracking for us too, to advise someone ‘Just give them a letter and say they’re fired’.”

 

Pitfalls

Ninety-day trials were initially made law by the previous Nationalled government in 2009. Labour campaigned in 2017 to remove them, but in coalition with New Zealand First, restricted the scheme to businesses with 19 or fewer employees.

Like a lot of employment laws, 90-day trials are a perennial political football. “Everyone’s employment agreements are like, ‘it’s in, it’s out, it’s changed’ over the years,” says Sharman. The only certainty with 90-day trials has been the constant change.

Sharman often hears from clients frustrated by the uncertainty, but cautions them to keep up-to-date.

There are so many pitfalls that it is difficult to keep count, says Schofield. But one recent case has raised eyebrows. In YQO v MYN [2024] NZERA 108, after YQO’s employment began, she allegedly overheard a conversation between two senior employees of MYN that she believed pointed to serious wrongdoing concerning sales figures. On three occasions, YQO claimed to have raised her concerns with a director of MYN. Subsequently, she was given notice of termination under the trial period clause in her employment agreement.

In determining that the grounds for removing the matter to the Employment Court had not been made out, the Employment Relations Authority said it was “well versed on applying the law in respect of trial periods and the ambit of good faith duties between the parties”.

Schofield says there’s a lot to unpack in the case. For starters, what is the relationship between 90-day trial periods and the Protected Disclosures (Protection of Whistleblowers) Act 2022? And can an employee be terminated under a 90-day trial period for lawfully whistleblowing?

Where an employee is subject to a trial period, the right to raise a personal grievance for retaliation under s 103(1)(k) of the Act is preserved by s 67B(3). However, questions over causation exist, he says. “Did the employer dismiss the employee because of the protected disclosure? How do you assess this when the employer can refuse to give a reason for the dismissal? How does that sit with the obligation of good faith?”

“Aligned with these questions is how does a finding of a personal grievance for s 103(1)(k) retaliation affect remedies? Should the fact that there would otherwise be an inevitable termination under a valid 90-day trial period be taken into account? If so, how do you do that when most employers, who have had their 90-day trial periods challenged before the Employment Relations Authority, have been unsuccessful?” ■

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