The Fuel Espresso case rises again

The most recent issue of NZLawyer contains an article by Blair Scotland and Kelly Scott on overpayments to employees.  In it they quote Hammond J’s remark in Fuel Espresso Ltd v Hsieh [2007] 2 NZLR 651 at [21] that “Agreements are made to be kept.”  This remark seems to have assumed considerable importance in the legal community and is treated as if it indicates a major change not only in the law of restraint of trade but on employment contracts as a whole.  How it has assumed this importance is difficult to understand.  First Fuel Espresso was an interim injunction case heard on 8 March with a decision delivered the next day.  The legal reasoning in the case, to be charitable, is brief and on the question of the reasonableness of restraint clauses largely non-existent.  Indeed the whole issue of reasonableness occupies only two paragraphs as follows.

The balance of convenience

[21] It is very difficult to see how this case can be, as the Judge saw it to be: a “finely balanced” one. The restraint is plainly reasonable. Agreements are made to be kept. Mr Hsieh was employed and trained, but then left in face of a clear contractual provision preventing him from doing what he has done. In the absence of an interim injunction, any relief to Fuel will, in the time-honoured phrase, be nugatory. This is a clear case for an interlocutory injunction.  

[22] It may be that on other, and much more extreme facts, a low salary set against a harsh restraint would be relevant to the exercise of the Court’s discretion, but that sort of fact-pattern does not arise in this case.

On the very particular facts of the case in front of the Court the balance of convenience decision may have been justifiable although the facts are not entirely clear.  Nevertheless it does seem that Mr Hsieh had set up a coffee cart and was attracting some Fuel customers.

However let us put this to one side and concentrate on whether one sentence in a one paragraph statement that fails to discuss, or arguably even appreciate, the basic principles of the relevant law should be regarded as heralding a major change in important areas of employment law and restraint of trade in particular.  What is wrong with this argument is the fundamental error that validity of a restraint clause is determined on the basis that “agreements are made to be kept.”  The correct position is stated clearly by Gault J in  Gallagher Group Ltd v Walley [1999] ERNZ 490 at [20] where, after having noted that the employee had “no complaint .. of the duration of the restrictions to which he had agreed voluntarily” stated:

But all this rather misses the point. Covenants restricting the activities of employees after termination of their employment are, as a matter of legal policy, regarded as unenforceable unless they can be justified as reasonably necessary to protect proprietary interests of the former employer and in the public interest: Mason v Provident Clothing & Supply Co Ltd [1913] AC 724, 733.

In other words agreement is irrelevant-the question is whether as a matter of law a restraint is reasonable, the point seemingly overlooked by Hammond J.  What is clear is that if well-established legal principles had been applied some aspects of the restraint might have been upheld to protect customer connection but this would have required modification of the relevant clause to operations within a reasonable radius of where Mr Hsieh actually worked prior to his resignation.  The clause as written went well beyond this and read:

As a Barista you will have access to how the Employer runs the business and  provides a competitive product. In order to protect the business you may not for three months following the termination of your employment:

Work in a competing espresso bar/café or coffee company within a100 metre radius of an [sic] Fuel operation; and/or

Set up a similar competing business within a 5-kilometre radius of an existing Fuel operation.

This restraint of trade shall apply to all of New Zealand and continue for three months from your last day of duty. You agree that this restraint is reasonable and necessary to protect the Fuel’s business interests.

Mr Hsieh was a barista-he made coffee!  Like probably several hundred other employees in Wellington let alone New Zealand.  Mr Hsieh may well have made very good coffee and have been well trained. But on what possible basis could this justify a prohibition of his working as a barista in much of Wellington, let alone New Zealand!  Apart from a very limited customer connection Fuel Espresso had no conceivable proprietary interest that justified such a restraint. Hammond J’s comment that Mr Hsieh was “was employed and trained,” by Fuel does not demonstrate such an interest.  Training costs may be able to be recovered in some cases but the provision of training does not justify a restraint-a restraint cannot be used to protect an employer from mere competition by a former employee.

This week I began teaching first year law students case analysis and precedent-this case might be mentioned but it will not be as an exemplar of either judicial reasoning or of the doctrine of precedent.

Workers as Commodities.

In 1944 the International Labour Organisation, at its meeting in Philadelphia, declared that "labour is not a commodity" a declaration intended to reassert the ILO membership's commitment to the achievement of social justice .

In Sunday's New Zealand Herald Damien Grant asserted that "Economically, the unskilled are irrelevant. They are a commodity." Roger Kerr's comment to the Dublin Economic Workshop in 1999 made a similar point although in a considerably more moderate form: "while people are not commodities or articles of commerce, the labour services they provide using their mental and physical capacities most certainly are." Kerr's comment, especially in its wider context, makes it clear that his comment extended to all workers who are sellers of labour services, unlike the position taken by Grant that "Only talent matters" with the implication, unlike Kerr, that "talented" workers, whatever these may be, are in some way not commodities but rise above the common herd!

I do not intend to comment in any detail on the obnoxiousness of Grant's comments but they should not go unremarked.

The view that labour is a commodity, and the related claim that there is no inequality of bargaining power, may make sense in the abstruse mathematical models of neoliberal economists, and it can be argued that it is economically illiterate to make such comments. This is true, however, only if the discussion is confined to economic models, models whose relationship to the real world is tenuous at best. There is much to be said for the comment that economics was invented to make weather forecasting look credible. In other words such statements are essentially assertions, made within the realm of economic theory, and should be confined to that sphere. Outside a strict economic context Grant's statement translates as "unskilled workers ought to be commodities".

The statement that "labour is not a commodity" is not an economic statement-it is a normative statement designed to express a particular set of political and social values that I need not elaborate on. They are well known in any democratic society. In essence it encapsulates the values that all workers are entitled to expect to work in decent conditions and to receive a reward for that work that provides a reasonable standard of living relative to the economic condition of the society within which they live. It is also a rejection of extreme market ideology of neoliberal economists. Genuine science observes and attempts to explain the world. Economics develops models and wants to make the world conform to them, a characteristic it shares with religion.

The fundamental problem with comments such as that made by Grant is that they take statements that may have some validity in a closed and limited model, and attempt to present them as a universal truth rather than as the ideological position they are. Grant is attempting to win an ideological-political argument that seeks a particular distribution of wealth and influence in society-a normative position that he seeks to disguise as an inevitable truth.

The rest of us may have trouble with defining exactly what our normative position is but at least we are not pretending to do otherwise.

Employment Law and the Election

Apparently today is the first day of the three month 'regulated period' during which political parties are required to spend their own money on electioneering. With a little imagination that makes today a good day to begin commenting on the implications of the election for the future of employment law.

Three years ago all seemed reasonably quiet on the employment front. National's minimal employment policy fitted onto a single, generously spaced, A4 page. Business New Zealand were making much of how change was not required and a period of legal stability was required. Labour had, on employment policy as much else, run out of steam. I was even rash enough to suggest that some broad degree of consensus might have emerged on the structure of employment law. This opinion was based on the fact that the ERA had changed little and that the ECA labour market reforms remained firmly in place. Indeed, from an industrial relations perspective, the ECA changes had been further entrenched.

Rash I might have been, but not stupid. As a good lawyer and an academic I was careful to qualify this view with a few "perhaps" and "it may be"s and so on. While my prediction did look justifiable for a while, it soon became apparent that I had allowed my natural optimism to override my cynical common sense. One likes to think law reform is based on evidence and reasoned opinion. I had of course temporarily overlooked that this is politics where evidence and common sense always take second place to ideology, the prejudice of a party's supporters and short term expediency. Hence of course the 90 day trial periods were quickly extended to all workplaces and s103A amended to favour employers in personal grievance cases to an even greater degree than was previously the case. In what can only have been a purely instinctual kneejerk response, union access to employees was limited.

In the case of all three reforms there was no evidence of any 'mischief' that needed reform. Indeed the law was working perfectly satisfactorily in all cases. That is if you believe that employees are citizens and that they should enjoy basic protections in their employment. Sort of like the owners of businesses, only considerably less! Of course, if you take the view that employees are commodities and disposable, the perspective is different. However in a democracy there should be a balance of rights and the ERA had achieved that, but in a manner that was both cautious and conservative. The New Zealand labour market, since 1991,has been, and remains, one of the least regulated among the OECD countries. In 2008 we had the 4th least restrictive level of employment protection, not that one would know it given the cries of woe from business lobbyists.

This election promises to be more interesting. National's far right and ACT clearly wish to return employment law to their rather strange vision of a 19th century utopia, the mainstream of National seem to base its policy on small town Chamber of Commerce anecdotes, and Labour shows signs of recovering the soul it sold in the 1980s!

All in all it should be interesting and further blogs will emerge when policies are announced.

Back to the Bad Old Days?

When discussing industrial relations much is made of the ”bad old days” in the 1970s and 1980s when industrial unrest was at a particularly high level and major projects could suffer long delays as a result. What is often forgotten is the other side of the bad old days – the Muldoon National government's use of legislation to deal with pretty much any dispute that gained political prominence or which could be used for a bit of pre-election union bashing. Labour was not entirely innocent of these tactics either, the Harbour Pilotage Emergency Act 1974 comes to mind. However compared to Muldoon Labour weren’t really in the game. Apart from virtually constant wage regulation there was the legislation on union membership ballots and especially those bits of it intended to make balloting virtually impossible-the excuse used to make the Clerical Workers’ Union compulsorily voluntary just before an election - and the Whangarei Refinery Expansion Projects Disputes Act 1984 to force a return to work in a long running dispute at a major oil refinery construction project. Threats to legislate and threats to declare a state of emergency under the Public Safety Conservation Act 1932 were used by the National Government on several occasions.

One positive thing that can be said for the ECA, and which was also true for the ERA during Labour’s period in government, was that once a legislative model was developed the government stood back and left the parties to sort things out for themselves. The epithet “Sideline Stan” might not have been intended to be complimentary when describing a former minister of labour but it pretty much summed up the approach of governments for two decades. It was an approach that removed special pleading and parties attempting to resort to one-sided political-legislative solutions to get their own way. One might not have liked the law but it operated as the law should operate. Legislative intervention during this period was confined to reforms based on genuine problems and aimed at a general solution – one technical amendment only to the ECA and amendments to the ERA focussed on matters such as clarifying the scope of good faith. Even the more focussed reforms such as transfer of undertakings and rest breaks were of application to broad groups of workers.

The Key National government has abandoned this approach and the law is again prey to special bidding and the interests of National’s mates. Generally this legislation is being passed not because of need but either to solve, largely imaginary, short term issues or for pure political benefit. To wit:

• The Jackson-Warner Brothers appeasement Act: neither needed or desirable. The objectives wanted by these actors (term used deliberately) were easily achievable under existing law.
• The abandoned Bill (although now in the ER Amendment Bill) to remove rest breaks for workers because civil aviation would apparently come to a standstill last year if it wasn’t passed. I have been away so I might have missed the chaos!
  
• Proposed amendments to the PG provisions: not needed as the law is perfectly satisfactory. Seems to have been placed in the ER Bill, following a very dodgy piece of DoL “research”, for no other reason than to pander to the misunderstandings of small employers who can’t be bothered to understand basic employment law.
• Union access provisions: promised by National but drafted to allow delay to access to undermine both union membership and bargaining.

Labour law now seems to be open to the highest bidder and the loudest right-wing voice – and bugger the workers who are now locked out of the process. John Key’s collaborative approach was pretty short-lived.

"I want it all" (with apologies to Queen)

I haven't blogged for a while being in Glasgow but some issues cry out for comment.

"I want it all" pretty much sums up the attitude of New Zealand "icon" Peter Jackson. Happy to make films here if he get massive tax breaks unavailable to other businesses and labour law is changed to allow US-style employment at will. Paul Roth's comments about banana republics will have considerable truth if the government caves into these demands. Even for a National government one might have thought it would be a step to far to deny workers the rights in core ILO conventions to which New Zealand is a party-apparently not!

It is perhaps to be expected that many people are not fully conversant with New Zealand's labour law but to see a statement such as the following in a major newspaper beggars belief (well not really given the Herald's usual anti-worker stance)

"Some film workers work as contractors, meaning they can have significant tax breaks and can set their own terms and conditions".

Tax breaks maybe - although how significant is debatable- but "can set their own conditions": Joe or Jane Blogs who hold the microphone normally walk into Warner Bros and tell them what conditions they will work under - YEH RIGHT. Joe and Jane do not set their own conditions, they take what they are given and like it or lump it. Employees may have limited bargaining power but statutory protections such as good faith requirements do place some requirements on employers to negotiate. And if later Joe and Jane don't like it, or the movie moguls don't like them they are down the road. No personal grievance rights, no good faith, no explanation required, nothing. You're a commodity in this world mate and we don't need you/found a cheaper one.

The difference between contractors who work for predominately one employer and employees is pure legal form and has nothing to do with economic reality. It is a device to avoid the obligations of being an employer. That is why the Authority and courts are told to look at the real relationship.

And lets try and be a bit realistic-apart from avoiding personal grievance obligations, minimum holidays and the minimum wage and the dangers of collective bargaining (ie by workers-no problem with capital being collectivised in a company) anything you can do with a contractor can be done with employees - flexible hours, part-time, fixed term or whatever, on call employment and so on.

And perhaps more to the point as Paul Roth pointed out yesterday, if the contract makes it clear that you have agreed to be contractor it is unlikely that the Authority or Court will find that you are not- the law doesn't need changing. Peter Jackson and Warner Bros need to hire a lawyer and get them to write a clear contract - just like other businesses do.

John Key should try acting as Prime Minister and restore some national (small 'n') pride. With a big 'N' it is going down the drain - "Mexicans with cellphones" is insulting to both Mexicans and New Zealanders.

The sad thing is that a significant number of workers' jobs depend on the outcome of this dispute-yep workers, be they employees or contractors. These workers have been sitting around in limbo for many months as the moguls decide whether or not to film, whether or not to come to New Zealand etc. They deserve better and it is understandable they look to blame the union who seems to have upset an apple cart. However nothing of any significance has changed in labour law since the days of Lord of the Rings except to worker's detriment, 90 day trial periods and all that. They would do better and look at where the real problem lies-and it is not Australia or at the CTU.

New bottle-same tired old message

While there will always be differences between National and Labour on employment law those differences have narrowed over the last half decade as National and its employer backers came to realise that not too much had changed since the Employment Contracts Act reshaped industrial relations in the early 1990s. Union membership density dropped to around 20% and has remained there, industrial stoppages rarely exceed 50 a year and collective bargaining now covers only about 10 percent or less of private sector workers. The coverage of collective bargaining dropped further under Labour in spite of the introduction of good faith bargining. The fairly restrained stance taken by National to labour relations since the elections reflects, as much as anything, that there are not many unions around worth bashing anymore. It might also have been thought to recognise that there is now a reasonable balance in the law between the need flexibility and protecting an employee's investment in their job - on which see my post "Serfdom and Employment".

Nevertheless there will always remain an element in National, especially in its small business and ACT end, that regards workers as something less than full citizens - as Roger Kerr once put it “While people are not commodities ..the labour services they provide … most certainly are”, a theoretical separation likely to appeal only to Chicago economists and Cartesian dualists. The categorisation of employees as commodities does however help to depersonalise employees - they cease to be citizens in the fullest sense and can be treated as ideally cheap and disposable: certainly they should not have legal rights to protect their employment status or to recognise their investment in it. One might have hoped that this attitude to workers, while unlikely to have fully vanished, might at least have given way to a more balanced approach. Productive economies in developed countries require a more stakeholder approach to employees, one which recognises the significant educational and training investment built up by employees and which protects both that investment and the economic security of employees from arbitrary employer actions - indeed that attitude seemed to have been ocurring over the last decade or so:-

And then along comes Dr Brash peddling the old snake-oil made from the corpse of new-right deregulation and the neoliberal economics that brought us the current financial crisis. All we need to do to bring our standard of living up to Australia's is to bash the workers-again. Dr Brash marvelous medicine is essentially the new right's unfinished business of the 1990s: get rid of the floor of employment rights, introduce employment-at-will (or as close to it as you can get away with) and slash the welfare state.

John Key has rightly rejected this prescription and in an MMP environment it is almost certainly not politically viable. The last time reforms of this type ocurred, under both Labour and National, they were driven through Parliament under the FPP system:- which we will have a chance to return to in a few years. While the Prime Minister may have reburied the new-right corpse for the present it should be kept in mind that zombies usually reappear and that their defeat is always messy.

In case you didn't read the whole report and get that sense of deja vu:
“Labour market:
a. Labour law should be amended to strengthen the freedom of negotiation between workers and their employers, including, for example, streamlining provisions governing dismissal of workers, and putting less emphasis on procedural matters.
b. Statutory provisions allowing enforceable mutually-agreed probationary periods for new employees should be extended, from the current maximum of 90 days for those working for small firms to a maximum of 12 months for employees of firms of any size.
c. For employees earning in excess of $100,000 per annum, employment relations should be governed by the standard provisions of contract law rather than by the Employment Relations Act.
d. The youth minimum wage should be reinstated as a matter of urgency, and minimum wage rates should be reduced to the same ratio to average wages that prevailed in 1999.”

Serfdom and employment

A correspondent in the most recent edition of The Economist suggests that corporations are, for workers, the successor to their feudal lord: “The lord provides protection and defence so the workers can produce without fear of raiders taking their life’s bread. In exchange, the lord gets a percentage of the production. Today’s companies provide that same trade-off, giving their workers job security in exchange for the profit from their productivity.”

The spectre of feudalism and its successor, the law of master and servant, does indeed remain strong and especially within the common law. The modern contract of employment is a contract in form only; in reality the courts developed it as a device to protect the proprietary interests of employers and to subordinate employees to that interest. As Deakin and Wilkinson point out in The Law of the Labour Market, the contract of employment is the product of “the assimilation by the common law of a hierarchical, disciplinary model of service.” This obligation of service in true feudal fashion includes not only the workplace but extends to the personal sphere: the spirit of the nineteenth century decision upholding the dismissal of a young woman for visiting, in her own time, her dying mother without permission lives on in decisions that support dismissals for non-work conduct disliked by employers which has little more than an imaginary or fleeting connection with employment.

What the common law has signally failed to do is to recognise that employees also have an equally valid economic and proprietary interest in employment: the economic security of themselves and their dependents, the economic and psychological investment in a job, and increasingly the value of the employee’s educational, reputational and intellectual capital, often developed at considerable personal financial cost. In a speech given to the Institute of Directors in 2006 Andrew Little of the EPMU commented that “Unless employees are to be regarded as subjects – and employers to take on the role of feudal lords – then the law must afford … employees rights against irrational and arbitrary decision-making.” The reason is of course is that employees are entitled to expect that their tangible and intangible investment in employment be protected against such decision-making.

Modern personal grievance law provides some protection but it does so from the common law’s perspective that an employee has no legitimate protectable interest, at most a right, imposed by statute and reluctantly conceded by the common law, to be afforded a degree of natural justice. The courts insist that employees owe a very high duty of fidelity (a term redolent of feudalism) to their employer, they have yet to concede that this should be reciprocated. Power in both feudalism and labour law traditionally flows one way only – to the extent this flow is impeded it is the result of rights hard won, both politically and industrially, by those subject to that power.