Counting the cost of not acting in good faith

Failing to act in good faith can lead to hefty penalties for both employers and employees, as illustrated by a string of recent cases.

The Employment Court can issue penalties of up to $10,000 against an individual, and $20,000 against a company, for each breach of good faith.

Members of our Employment team are experts in this area, so please reach out if you would like further information regarding your obligations.

Acting in good faith is a must

The employment relationship is underpinned by a fundamental obligation of both parties to act in “good faith”.  The Employment Relations Act 2000 (Act) explains that this requires:

  1. parties to be “active and constructive” in establishing and maintaining a productive employment relationship, which includes an obligation on the parties to be “responsive and communicative”
  2. an employer who is proposing to make a decision that will, or is likely to, have an adverse effect on the continuation of employees’ employment, to provide potentially affected employees with access to relevant information and an opportunity to comment on that information.

The duty of good faith applies in many circumstances where:

  • Parties are bargaining on terms and conditions of employment.
  • An employer is proposing to restructure or sell its business: the employer is obliged to provide information to employees who are likely to be made redundant as a result.
  • In disciplinary situations that may result in an employee’s dismissal: the employer must provide information relevant to the possible termination of the employee’s employment, plus give the employee an opportunity to comment on the information before the decision is made.
  • In medical incapacity processes that may result in the termination of employment.
  • In performance improvement processes where the employer must communicate performance concerns to its employees and consult with them over any performance management plan.

Breach of good faith can be unintended

The Employment Court has commented on this duty in a recent case, Keighran v Kensington Tavern Ltd[1].

Among other things, the employee claimed the employer failed to investigate his allegations, or to act impartially in respect of those allegations. The owner of the employer company, who received the employee’s allegations, acknowledged she had mishandled a meeting because she was suffering from stress and personal health issues.

The Court found the employer was not acting maliciously or in bad faith. Even so, “An absence of bad faith is not a prerequisite for a finding of breach of good faithThere was clearly an established breach of good faith in the way in which the meeting was conducted, and the decisions that were unilaterally made against Mr Keighran’s interests and which had clearly been a topic of discussion and agreement with others, and which he had no opportunity to comment on in advance.

In this case, the Court did not award a penalty for breach of good faith because Mr Keighran had not sought one. However, if he had, the Court could have issued penalties up to a maximum of $20,000 against the employer.

Costly examples

Penalties for breaches of good faith can be costly, as was the case in:[2]

  • Pyne v Invacare New Zealand Ltd where the Court imposed a $6,000 penalty paid to the Crown.
  • Cavanagh v X Factor Shearing Ltd[3] where the Employment Relations Authority imposed a $10,000 penalty, paid to the Crown (25%) and the employee (75%).
  • Stormont v Peddle Thorp Aitken Ltd where the Court imposed a $7,500 penalty, paid to the Crown (25%) and the employee (75%).

[1] [2024] NZEmpC 28.

[2] [2023] NZEmpC 179.

[3] [2020] NZERA 536.

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