The complete guide to constructive dismissal in New Zealand

TL;DR - Employment.govt.nz defines constructive dismissal as when “an employee resigns but the law treats the situation as if the employer dismissed them”.

The 3 general categories of constructive dismissal involve the employer either:

1. Giving an employee a choice between resigning or being dismissed.

2. Acting in a deliberate way (directly or indirectly) to pressure the employee into resigning.

3. Acting so badly (by either breaching the terms of employment or treating the employee so unfairly) that the person feels they have no choice but to resign.

Most employees in this position can take a personal grievance against the employer for unjustified dismissal, which can wind up costing the business money, time, and effort to resolve or defend.

This article takes a look at constructive dismissal (also known as forced resignation), the implications for your business, what to do if a team member feels pressured to resign, and ways to mitigate risk and manage employee issues and dismissals fairly.

What is constructive dismissal in NZ?

Constructive dismissal is not defined in legislation - Section 103 of the Employment Relations Act details the grounds for employees to make a personal grievance claim, but doesn’t use the term “constructive dismissal” - but it has been well established in case law.

Constructive dismissal is the result of an employer’s behaviour making it impossible for an employee to stay at the business and the employee resigning because they felt they had no other choice.

Employees can claim constructive dismissal by raising a personal grievance for unjustified dismissal or unjustified disadvantage (that relates to the dismissal) within 90 days of becoming aware of the issues of their dismissal. They can claim damages for lost salary or wages, loss of dignity, humiliation or injury to feelings.

Note that employees on a trial period or who earn $200,000 or more a year (unless they have opted back in to dismissal protections) cannot raise a personal grievance for unjustified dismissal or unjustified disadvantage that relates to dismissal.

The legal test for constructive dismissal

In the eyes of the law, it doesn’t matter if the employer intended to get rid of the employee or not. The main legal test is whether the employer’s behaviour caused the employee to resign, and that the resignation was reasonably foreseeable.

Typically, cases of constructive dismissal result from problems or actions building up over time, rather than being the result of a single incident or event. So an employee can’t resign and claim constructive dismissal because they don’t want to face fair and proper disciplinary action or performance management, or because their boss has given them a lawful and reasonable request to perform a task that’s outside their usual role.

If the personal grievance reaches the Employment Relations Authority or Employment Court, they will consider the constructive dismissal claim on a case-by-case basis. Initially, the onus is on the employee to establish that their resignation was due to the employer’s behaviour (or lack of action in resolving problems).

If the employee can do this, then the onus shifts to the employer, who must establish their actions were justified by:

1. Proving they had a valid reason (good cause) for the dismissal; and

2. The termination process was fair and reasonable (i.e. they gave the employee warnings, an opportunity to give feedback, an opportunity to improve etc).

The legal threshold for winning a constructive dismissal claim is pretty high, because the employee needs to prove that their resignation was, in fact, a dismissal.

The three types of constructive dismissal

1. Giving an employee a choice between resigning or being dismissed, e.g. either a clear “resign or be fired” instruction, or telling a worker they must accept a pay cut, demotion, or face disciplinary action if they don’t resign.

2. Acting in a deliberate way (directly or indirectly) to pressure the employee into resigning, e.g. undermining the employee, making unreasonable demands, creating increased levels of stress, or removing support to isolate them (also known as “silent firing”).

3. Breaching the terms of employment (by either breaching the employment agreement or legal obligations) so seriously that the person feels they cannot stay in the job, e.g. forcing the employee to do work that is not lawful or reasonable, changing duties or hours without consent, repeatedly paying them incorrectly or late, not properly addressing serious complaints (such as bullying or harassment), providing unsafe working conditions.

What should an employee do if an employee feels pressured to resign?

Obviously, it’s best for employees to be able to raise issues or concerns with their employer or manager before they feel they have no option but to resign. If the employment relationship is healthy and lines of communication are open, it’s highly unlikely that things will get so bad without either party raising it beforehand.

If an employee raises concerns, e.g. unsafe work conditions, claims of bullying or harassment - take them seriously and try to resolve them. Investigating and resolving problems are key parts of good faith obligations and the process for resolving difficulties between the employer and employee must be included in every employment agreement.

On top of meeting legal requirements, working to resolve problems will help an employee feel they have options other than resigning.

If the employment relationship is strained or the problem is longstanding or complex, taking steps to resolve the matter in a mutually-beneficial way could be more difficult. The situation may require mediation.

When mediation might help

Mediation is a process where an independent third party intervenes in a dispute, or challenging employment situation, to help resolve it. Mediation isn’t mandatory, but it is prescribed as the primary mechanism for addressing employment relationship problems in the Employment Relations Act, and is usually covered in an individual’s employment agreement (in the mandatory clause describing how employment problems are handled).

Often in constructive dismissal cases, the relationship between the two parties is strained or contentious, and mediation can help take the heat out of disputes, providing a professional and impartial view, and find a constructive solution. It is a structured, confidential process, but unlike court proceedings, resolutions aren’t binding unless both parties agree.

Read our article on the mediation process for more information.

How employers can avoid constructive dismissal cases

It is not uncommon for an employee facing disciplinary action or a misconduct investigation to resign instead of going through the process. They may then claim constructive dismissal. 

To best avoid claims an employee was constructively dismissed (or put yourself in a strong position to defend any that arise), here are some key tips:

• Be aware that your conduct or attitude could put employees in a position where they feel they have no choice but to resign.

• Be open and clear with your people at all times.

• Establish a solid basis for the employment relationship so employees understand what the business expects and you know what they expect from you, e.g. raising issues in a timely way and working on mutually-beneficial solutions.

• Take employee concerns and complaints seriously and address them when they arise rather than allowing them to escalate.

• Have a robust performance review and management process for all employees.

• Have a clear, legally-sound process for handling disputes and disciplinary action, and make sure you follow it.

• Always follow the correct procedure when ending employment, whether that is led by the employee or by the employer, and conduct exit interviews that give employees a chance to ask questions.

• Be consistent in disciplinary and termination procedures (focus on the issue not the person), and avoid spur-of-the-moment decisions when emotions are running high.
  Document all issues, decisions, and processes.

Constructive dismissal FAQs

How hard is it to prove constructive dismissal?

Establishing constructive dismissal is difficult, because the legal burden of proof falls on the employee in the first instance (rather than the employer having to justify their actions, as in a regular termination). The employee has to prove that the employer's severe breach of contract or good faith left them with no other reasonable choice but to resign.

Is constructive dismissal the same as unjustified dismissal?

Constructive dismissal is typically a type of unjustified dismissal claim.

In certain circumstances, an employee might raise a claim for unjustifiable disadvantage, e.g. if they raised a concern with the employer that wasn’t dealt with to their satisfaction and they felt they had no choice but to quit.

How long does an employee have to raise a constructive dismissal claim?

Employees who believe they have been constructively dismissed can raise a personal grievance for unjustified dismissal or unjustified disadvantage within 90 days of the issue arising or coming to their attention - typically the last day of employment in dismissal cases.

What can an employee claim for in a constructive dismissal case?

Remedies for personal grievance claims include reimbursement for lost salary or unpaid wages, compensation for hurt, humiliation, or distress, and possible reinstatement to a role.

Can an employee claim constructive dismissal during a disciplinary process?

No. An employee can’t resign and claim constructive dismissal because they don’t want to face disciplinary action (or performance management), so long as the employer follows fair and proper process throughout.