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Two Degress of Separation: How Not to Vary and Employment Agreement

Written by Michael O'Brien on March 8th, 2013.

The Employment Relations Authority’s decision in Edwards v Two Degrees Mobile Ltd serves as a reminder to employers of the fundamental requirement to reduce agreements to writing.  It also demonstrates that attempts by employers to unilaterally impose new or amended conditions on employees are unlikely to succeed. 
 
Background
 
Tex Edwards was one of the founders of Two Degrees Mobile.  He had been employed by the company since 2001.
 
Two Degrees grew significantly.  However, in early 2013 it decided it no longer required Mr Edwards’ services, and proposed to disestablish his role.  A proposal was put to Mr Edwards in February 2012.  Over the following two months there were extensive communications in writing and at face-to-face meetings between Mr Edwards, Two Degrees and their respective legal representatives.
 
Two Degrees formally advised Mr Edwards on 27 April 2012 that it had decided to disestablish his role.  As a result of that decision, Mr Edwards raised a personal grievance on 14 May 2012, warning he would seek orders restraining Two Degrees from implementing its decision.
 
The next day, 15 May 2012, Mr Edwards received notice from Two Degrees advising that on the ground of redundancy his employment was terminated on notice of two months, expiring on 15 July 2012.
 
The Authority’s Determination
 
The Authority was required to determine the terms of the employment agreement between Mr Edwards and Two Degrees.  In particular, the Authority had to decide:
 
  • What notice period Two Degrees was required to give to terminate the employment agreement; and
  • What salary Mr Edwards was entitled to receive from mid-2008 to the time of the Authority’s decision.
Termination of Employment – The Notice Period
 
Mr Edwards claimed Two Degrees was required to provide three years’ written notice to him to terminate the employment agreement.  He referred to a document that he said contained the terms and conditions of his employment from July 2002 (although he accepted certain terms and conditions had subsequently been amended).  Clause 13.1 of that document provided that Two Degrees could terminate “by providing 3 years notice in writing” to Mr Edwards. 
 
Two Degrees argued the document referred to was a draft only and was therefore not binding.  Alternatively, Two Degrees argued that if the document was an agreement, it was superseded or replaced by a new agreement entered into by the parties in 2006.  Under the 2006 agreement, the required notice period was two months. 
 
The Authority found the document Mr Edwards referred to did contain the terms and conditions of his employment, including a term that the notice period be three years.  However, the Authority also found that the three year notice period recorded in the first agreement had been replaced by the two month notice period recorded in the subsequent agreement entered into in 2006, which came into effect in March 2007.  The subsequent agreement was recorded in a letter and had been signed by Mr Edwards.  It expressly stated that the terms were to “supersede and replace” all prior employment arrangements between Mr Edwards and Two Degrees. 
 
Mr Edwards’ Salary
 
The 2006 agreement provided that Mr Edwards’ salary was $350,000 per annum.  There was no dispute that Mr Edwards was entitled to a $350,000 per annum salary from 2006 until June 2008. 
 
However, in March 2008 Two Degrees considered “market rates” and determined that a salary of no more than $200,000 per annum was justified for Mr Edwards’ employment.  Two Degrees drafted an agreement providing for that salary and also for a notice period of one month, as well as other terms and conditions.  Two Degrees gave the agreement to Mr Edwards and asked him to either sign it or respond with his comments. 
 
Mr Edwards never signed the agreement despite repeated requests from Two Degrees that he do so.  When pushed for comments, Mr Edwards stated that he was not happy with the agreement and particularly about the reduction in salary. 
 
In June 2008, with the draft agreement unsigned, Two Degrees began paying Mr Edwards the reduced salary of $200,000 per annum provided for in the draft agreement.  In August 2008, after several pay rounds, Mr Edwards’ solicitor advised Two Degrees that Mr Edwards was not prepared to accept the terms of the draft agreement, specifically the reduced salary. 
 
Two Degrees argued that it could be inferred from Mr Edwards’ conduct after the draft agreement was presented (including that Mr Edwards received the substantially reduced salary over a number of pay periods before objecting) that he had assented to the terms of the draft agreement, although he had not signed it. 
 
The Authority held that, when viewed objectively, Mr Edwards had not agreed to the new employment agreement.  It considered the fact Mr Edwards had repeatedly refused to sign the agreement was “significant”, as it conveyed to Two Degrees that Mr Edwards was unhappy with the draft or at least some aspect(s) of it.  The Authority also noted that Mr Edwards had indicated some dissatisfaction with the draft to Two Degrees.   Further, Two Degrees could not infer agreement from Mr Edwards’ acceptance of the reduced salary over a period of time.  
 
In reaching its decision, the Authority emphasised the importance of written agreements in the employment context, in particular:
 
“Written employment agreements are a requirement of law … parties do not intend that they will each be bound by a draft written agreement unless and until it is executed by their signatures.”
 
The Authority also noted the obligation on both the employer and employee to act in good faith.  It said both Mr Edwards and Two Degrees “had good faith obligations … to be discharged with the objective of maintaining a productive employment relationship by identifying any changes needed to the draft”
 
In our view
 
Employment agreements are required by law to be recorded in writing and should be signed by both parties.  The same applies (in most cases) to variations to employment agreements.
 
Consistent with the obligation of good faith, employers must negotiate with their employees to reach an agreement acceptable to both parties.  There is a concurrent obligation on the part of employees to communicate and bargain with their employers. 
 
Where an employee does not agree with a new proposed term and refuses to sign an agreement, employers cannot unilaterally impose the new term on an employee.  Such ‘agreements’ are unlikely to be upheld by the Authority. 
 
If you have any questions about employment agreements, variations to those agreements, or your good faith obligations, please call us on (09) 375 8699 to discuss, or send us an email at employmentnews@heskethhenry.co.nz.
 
 
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