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.

Shining the Light on Naughty Employers: Now There's an Idea!

And indeed the Canadians have already thought of it. David Doorey's Workplace Blog- to which there is a link in the side bar-reports that "The Conservative government in Alberta has followed the Ontario lead by publishing Bad Employers on a government website." These sites only list the worst employers- those who have been prosecuted for labour law violations and have refused to pay resulting fines. The lists also appear to cover only government prosecutions, not for example enforcement actions for unpaid damages (such as unpaid damages in personal grievance cases).

However a start has to be made somewhere and the Department of Labour might consider this a useful addition to the web information it provides!

Employees, Contractors and Sham Contracts

The problem of distinguishing between an employee and other workers who are required to provide personal performance is one that most employment lawyers have been aware of, if not since time immemorial at least shortly thereafter.  In New Zealand the approach to this question is now subject to the statutory direction in s 6 of the ER Act that the Authority or Court must determine the “real nature of the relationship” taking into account all relevant matters that indicate the intention of the parties and that any statement of intention is not to be treated as determinative.  This direction and its effect has been considered in a number of cases including the Supreme Court in Bryson v Three Foot Six Ltd [2005] NZSC 34.

The issue of the employee-contractor distinction was, in mid-2011 also considered by the United Kingdom Supreme Court in Autoclenz Limited v Belcher [2011] UKSC 41.  This case, a unanimous decision of the Court, was notable for its very realistic approach to employment contracts and for its willingness to cut through the legal sleight of hand to determine the true nature of the relationship.

The facts of the case were relatively typical and straightforward.  Autoclenz, who provided car-cleaning services to various companies, decided to change the employment status of its valeters to that of contractor.  This was done by means of a contract that placed great emphasis on the workers being “self-employed independent contractors”, that contractors were free to sub-contract to approved persons and that they were free to refuse to provide their services on any particular occasion. These contracts were offered on a take it or leave it basis, the workers having little or no input into the terms. In practice of course little changed and valeters worked much the same as previously although the nature of paying for the work, liability for taxes etc changed as a result of the change in employment status.

It is not necessary here to provide a detailed legal analysis but rather to highlight some of the more interesting points of the Supreme Court’s decision.

The first is that a clear line was drawn between commercial contracts and employment contracts and the Court was very clear in pointing out that “Nothing in this judgment is intended in any way to alter those principles, which apply to ordinary contracts and, in particular, to commercial contracts.”   In the case of employment contracts, said the Court:

“the circumstances in which contracts relating to work or services are concluded are often very different from those in which commercial contracts between parties of equal bargaining power are agreed. I accept that, frequently, organisations which are offering work or requiring services to be provided by individuals are in a position to dictate the written terms which the other party has to accept. In practice, in this area of the law, it may be more common for a court or tribunal to have to investigate allegations that the written contract does not represent the actual terms agreed  and the court or tribunal must be realistic and worldly wise when it does so. ...”

It was accepted that one of the factors that the worldly-wise courts should take into account was

“The concern to which tribunals must be alive is that armies of lawyers will simply place substitution clauses, or clauses denying any obligation to accept or provide work in employment contracts, as a matter of form, even where such terms do not begin to reflect the real relationship.”

Employment Court judges in New Zealand, to whom the statement is equally applicable, might take heart from the Court’s quote from Sedley L J where he stated the following “with characteristic clarity and brevity”: ‘Employment judges have a good knowledge of the world of work and a sense, derived from experience, of what is real there and what is window-dressing’.”

New Zealand readers, alert to TNT Worldwide Express (NZ) Ltd v Cunningham [1993] 3 NZLR 681 (CA), might note that the Supreme Court expressly doubted the view that contractual documents are to be regarded as expressing the true intentions of the parties unless there was a sham intended to deceive third parties.  Statements of intention, and particularly those effectively dictated by the employer, must give way to the reality of the actual working relationship. The impact of Autoclenz in New Zealand is perhaps limited given the presence of the statutory direction but it does serve as a common law reinforcement of that direction and of the need to discern the reality of the “working” rather than the legal intention. 

The importance of this case is twofold.  First it reinforces the view that what is critical in determining the true nature of an employment relationship is the real, on-the ground, operation of the relationship: the real nature of the relationship to use the New Zealand parlance.

And second, that an employer should not be able to draft your way around this reality.

Readers interested in an analysis of the case might refer to Julie McClelland “A Purposive Approach to Employment Protection or a Missed Opportunity?” (2012) 75(3) MLR 387–436.

Employer access to your Facebook: how lawful are such requests??

Readers have no doubt seen the reports that a number of potential employers seem to be asking potential employees for access to their Facebook pages. Prof David Doorey in his blog on Canadian workplace law has pointed out that such requests may prove something of a legal minefield for employers. David's argument is relevant to New Zealand as well, he essentially argues that such requests will probably fall foul of anti-discrimination law as indicating an intention to discriminate.

In the New Zealand context section 23 of the Human Rights Act provides that:

It shall be unlawful for any person to use or circulate any form of application for employment or to make any inquiry of or about any applicant for employment which indicates, or could reasonably be understood as indicating, an intention to commit a breach of section 22 of this Act [s 22 provides that it is unlawful to refuse or omit to employee an applicant by reason of the prohibited grounds of discrimination]

Most employers are by now well aware they should not ask question about such matters as age, family status, sexual orientation and so on - asking for access to Facebook is essentially a request for such information.

Account might also need to be taken of the privacy principles set out in the Privacy Act. Principle 1 requires that the information be necessary and principle 4 that the means of obtaining the information "must not intrude to an unreasonable extent upon the personal affairs of the individual concerned."

Modern employers seem only to ready to pry into all aspects of the lives of their employees-this might at least inhibit one form of intrusion.

Lord Wedderburn of Charlton: born 13 April 1927; died 9 March 2012

Lord Wedderburn, one of the great British labour law academics, has died aged 84.  Bill Wedderburn would have been well known to all labour lawyers. His work was immensely infuential particularly for those of us who were educated in labour law in the first decade or so when the subject was first formally recognised and taught in law schools.  His book, The Worker and the Law (1965), was a classic of labour law scholarship and one of the foundational texts of the subject. Bill's contribution was not only academic, at a level that most of us can only dream of achieving, but he also made major political and practical contributions to labour law. As with all the greatest labour lawyers his work reflected a strong sense of social justice.

Bill's achievements are best described by others but on a personal note I would mention that I met Bill several times. He was always hospitable and welcoming and prepared to assist to open the odd doorway in Britain.

A full obituary may be read at The Guardian

I've Been Publishing

A must have item for those interested in New Zealand labour and employment law  Reconstructing New Zealand's Labour Law: Consensus or Divergence has been recently published.  It can be purchased from Victoria University Press

New Zealand’s first labour law system, the conciliation and arbitration system was a stable and balanced model that served New Zealand well for most of the twentieth century.  However from the mid-1960s this system slowly collapsed under the weight of political and economic pressures.  In 1991, after a two decades of attempted reform, a new era in labour law was heralded by the Employment Contracts Act 1991.  This Act, strongly influenced by neo-liberal ideology, was unashamedly anti-union and anti-pluralist.  It was intended to deunionise workplaces and replace the arbitration system’s pluralist ethos with the individualised and subordinate employment relationship common law.  A decade later these reforms were in turn modified by the Employment Relations Act 2000 which attempted a return to a more pluralist legal  model centred on a statutory duty of good faith applicable to both individual and collective employment relationships.  A little more than a decade later,

including one term of National government, there appears to be at least some consensus on the broad structure of labour law and therefore a new period of labour law stability may have developed.

The first part of this book traces the evolution of New Zealand labour law from colonisation to the present day and in particular the turbulent period between 1970 and 2000 when our contemporary system of labour law developed.  In the second part it describes that system of law and asks whether a new consensus has developed or whether there is merely a lull before a new storm.

Facebook can also bite employers

It appears that it is not only employees that may find Facebook  causing problems in an employment relationship.  A recent Employment Relations Authority decision (Kloeten v Combined Tanning Supplies Ltd [2012] NZERA Auckland 9) indicated that facebook comments may prove counter-productive when defending an allegation of unjustified dismissal.  In this case  the dismissal (by the employee's aunt) shortly after the employee announced she was about to take maternity leave was held to be unjustified.  The employer had claimed the dismissal was for serious misconduct.  The employer's case was not helped by her Facebook status change to  A catastrophic event … is watching everything you’ve worked for, your entire networth, the thing that defines you as who you are & the hopes & dreams you had … all gone which was posted the same evening as the employee announced she was taking maternity leave.  The alleged misconduct, which the Authority did not accept had ocurred, happened a few days later