Updated: 27 August 2024
Terminating an employee's employment agreement is not a one-size-fits-all process. But in a world where being a good human matters more than ever, it pays to get it right - for the sake of your employee’s wellbeing, your company’s reputation, and to minimise your exposure to legal action.
Terminating an agreement can seem like a minefield for an employer, but fortunately the law is very clear around process and procedure, which makes life easier for everyone.
At MyHR, we’re regularly asked for advice and guidance on all facets of employer-led termination, so we thought we’d share some of our insights and experience.
This article covers dismissal on notice, summary dismissal (which is sometimes called ‘instant dismissal’ but is anything but instant), probationary periods, the pitfalls of performance-based redundancy, and constructive dismissal.
A redundancy-free zone
Always remember that redundancy and termination are two different things. Many employers misguidedly use redundancy as a short-cut to ending an employment relationship with an employee whose performance is in question, to avoid following the correct termination procedure.
This thinking is flawed, as short-cutting the law exposes you to legal risk.
There is an emerging trend of the Employment Relations Authority awarding large settlements to employees because businesses have chosen to make them redundant rather than following correct termination procedures.
These hefty pay-outs are accompanied by steep legal fees and the expense of taking time out to manage the case, so what was initially viewed as a short-cut becomes a really costly exercise.
The law is very clear around this subject, so the best course of action is to follow the correct termination process for each and every case.
Learn more about when and when not to restructure.
A word on substantive justification and fair process
There are two aspects of employer-led termination that the law is very clear on: substantive justification and fair process.
Put simply, substantive justification means “good reason” and you cannot terminate an employee’s agreement without it. It may be that your employee has damaged the trust of your organisation, or the reputation of your business. It may be that their poor performance has become a pattern. Whatever the reason for dismissing someone, it must be justifiable and fair.
Fair process is the second point and it’s weighted just as heavily as substantive justification in the eyes of the law.
In some jurisdictions (Australia for example), if the substantive justification is strong enough, the process doesn’t have to be as rigorous. However, this is not the case in New Zealand, where a business can be found to have conducted an unfair dismissal for not following processes, even if the behaviour of the individual was very clear-cut.
This is why we recommend you keep BOTH of these principles front of mind during any termination process.
Instant dismissal
Summary dismissal is the most emotionally-charged form of termination. It’s sometimes called instant dismissal, but the truth is, there’s nothing instant about it. There is still a process that you must follow.
Usually, summary dismissal occurs as a result of serious misconduct (sometimes called gross misconduct). This is where the trust implicit within the employment relationship has been seriously undermined in some way, e.g. due to theft, harassment, or breaching of drug & alcohol policy.
The most important thing to remember here is that there is literally no scenario in which telling the employee “you’re fired!” is an option - no matter how serious or clean-cut the case. New Zealand law doesn’t allow it.
So no matter how extensive the grounds for summary dismissal are, you must always conduct an investigation in order to reach an outcome of dismissal. You must provide evidence that a breach (or series of breaches) has occurred.
Once you have investigated, you need to share the findings with the employee, propose the outcome (potentially dismissal), give them a chance to respond, consider what they have had to say and then potentially investigate further.
Things can get tricky where there are complaints about individuals, for example, a harassment complaint. It’s important to note that anyone who’s implicated in any complaint of this nature cannot be involved in running the investigation.
This can be particularly hard for small or medium-sized businesses, but it is a mandatory requirement. So if you don’t have an organisation that’s big enough to support this, you may need to engage external support.
Two other important points to remember: summary dismissal does not require prior warning and employees being summarily dismissed are not entitled to their contractual notice period.
Dismissal on notice
Dismissal on notice relies on a series of warnings: formal, final, and termination.
The three-strike process is relatively common in New Zealand, although the law does not actually specify how many warnings a business should provide, it just requires that the warnings are fair and reasonable.
This is different from summary dismissal, which requires no prior warning. Employees are also entitled to their contractual notice period and a pay-out of any annual leave accrual.
It’s worth noting that dismissal on notice warnings can compound for different reasons. There is a misconception that the warnings must always be about the same issue, which is false.
You can issue a formal warning about one thing, and a final written warning for a completely unrelated issue. As long as you are able to demonstrate the compounding effects of poor performance or poor behaviour by the employee, they all count towards that potential dismissal outcome.
It is key that you provide a clear performance plan to outline what the employee needs to do to improve. You should ensure you offer support and training to allow them to rectify the situation.
If things don’t improve and you reach the point of termination, this is dismissal on notice, so the employee is entitled to their full notice period.
Remember that it can be difficult having an employee around who knows they’ve just been dismissed, so it’s often easier just to meet your contractual obligation by paying out the notice period.
Alternatively, you can compel the employee to work and if they then choose not to, you are not contractually obliged to pay out their notice. We advise against this approach as it can often backfire and you end up with a disgruntled employee showing up at work every day.
Another important thing to watch out for is that you pause to give the employee time to consider the fairness of the termination terms and for you to consider their response. Even if a disciplinary meeting results in termination, and the employee expresses their disagreement on the spot, you must pause to consider their position before confirming an outcome.
Find out more about your rights during the notice period.
Constructive dismissal
If a termination process is already underway and an employee offers their resignation, we recommend you exercise caution. While the temptation is to jump at the opportunity to simplify the process, the employee may be attempting to instigate a constructive dismissal claim.
Constructive dismissal is when a business makes life so hard for an employee that they have no other option than to resign.
Beware of also running a disciplinary process that feels predetermined to the employee. In this case, they may resign and claim constructive dismissal.
We recommend not accepting the resignation initially and explaining that you would prefer to conduct a full and fair process, in which they will be given the opportunity to respond and you will take the time to consider their position and any suggestions they may have to avoid termination.
This lets them know that resignation is not their only option and reduces the risk of a constructive dismissal claim.
Learn more about constructive dismissal.
Trial and probationary period terminations
90-day trial periods and probationary periods are slightly different things, but both give employers the chance to assess a new employee's suitability for a role within a defined period.
90-day trial periods offer some protection from personal grievance claims related to dismissal that probation periods don't provide.
If an employee on a valid trial or probationary period doesn’t perform to expected standards, you can move to terminate their employment because there is a trial or probationary clause in place. Warnings aren’t required.
During a 90-day trial period, you don’t need to provide a reason for the termination, but good faith obligations still apply, so you should meet with the employee to explain why they haven’t met expectations and be prepared to listen to their version of events.
With a probationary period, the obligations to consult with your employee are more stringent. A way of looking at it (although not a very positive one) is that you’re hiring the person almost at the point of a written warning. So if they don’t meet your expectations, you can engage in a consultation process that results in termination of employment because there is a probationary clause in place.
In both cases, you need to make it clear if there are any issues that may lead to dismissal if the person doesn't improve. You must also be able to demonstrate that you have provided adequate training and support to help the employee do their job well during the trial or probationary period. This includes communicating the standard of performance and behaviour expected, so if there was a conduct issue, they are aware of what was unacceptable.
Make sure the trial or probationary period clause in the employment agreement is robust and always follow fair and reasonable process - this will help if you’re challenged. Ensure employees on trial or probation sign your policies and codes of conduct and you provide them with solid induction and onboarding.
Learn more about getting the best out of 90-day trial periods.
Medical termination
Medical termination (also known as termination for medical incapacity) is the option to end a person’s employment because they are unfit to work or incapacitated, and they will either never be able to return to work, it's unsure whether they will return to work or in what capacity, or their absence will be too long for the business to reasonably support.
Read our in-depth look at termination for medical incapacity.
