Settlement agreements pragmatic alternative to litigation

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The old adage that only the lawyers win when a matter goes to court, is not entirely without foundation.

Particularly, in employment law cases, the cost of pursuing or defending a matter, often dwarfs what the actual matter is worth in financial terms. For that reason, parties in an employment dispute should always give serious consideration to avoiding litigation and settling matters privately.

Professionally, I am involved in around 15-30 private settlements per annum. The majority are in the health and education industries. Whether it is the personality types attracted to those industries, the nature of the environment, the large employee base or a combination of all these factors, health and education, anecdotally, appear to be more prone to personal grievances than other sectors.

Confidential settlements occur for a number of reasons and I would say pragmatism usually trumps ‘secretly shuffling employees off’, as some employees may believe.

When an employee raises a personal grievance, the parties can either agree to a settlement privately or at mediation, or put the matter before the Employment Relations Authority. This is the time for the employer to put on their “business hat”, and set aside personal feelings of indignation and outrage.

If the matter does not settle and proceeds to litigation, both parties are running a risk, although for the employer, that risk is higher.

Why? Because when an employee progresses their personal grievances to the Authority they may get remedies (a gain) or nothing (their current position). When employers defend a personal grievance in the the Authority, their best outcome is paying nothing (their current position, with no gain) and their worst outcome may be paying an employee Authority-ordered remedies, usually lost remuneration and compensation.

In addition to the winning/losing risk, is the matter of costs. The general rule is that “costs follow the event”, meaning the successful party can claim a contribution to its legal costs from the unsuccessful party. The Authority operates on a tariff-based system with a one-day hearing set at $4500, with each subsequent day of hearing set at $3500. In other words, the starting point for costs for a two-day hearing would be $8000 to the successful party. This starting point may be increased or decreased if one of the parties has behaved in a manner that unnecessarily increased the costs of the other.

The problem is, running a case in the Authority can be as complex or legally time-consuming as in any other court, and it is unlikely that the legal work required for a two-day hearing is going to come in under $10,000 to $15,000. Often, costs can run substantially higher, depending on the amount of evidence and number of witnesses.

This means that neither party is likely to receive all their costs back if they succeed, but at least for the employee, they can top up this ‘deficit’ out of the remedies they received. As the best-case scenario for an employer is their pre-litigation position, they will unquestionably come out second best in this system, as they still need to bear the costs not covered by the tariff calculation but have no ‘remedy well’ to draw from.
The matter of costs becomes even more complex if Calderbank offers have been exchanged between the parties. Calderbank letters are settlement offers which are headed up “Without prejudice save as to costs.” The “without prejudice” part means a document cannot be filed or referred to in the Authority/Court and the “save as to costs” part means, it can be filed with the Authority/Court, but only after the main matter has been heard and decided, and a successful party files a costs’ application.

Calderbank offers can have a significant effect on the awarding of costs, and in some cases, even reverse the position with the successful party needing to contribute to the unsuccessful party’s costs.

It works like this; let’s say an employer offers an employee a settlement offer that totals $15,000. The employee rejects the offer, thinking they can get more remedies by going to the Authority. The employee is successful in the Authority, but the remedies ordered total only $12,000. This means the original $15,000 offer was a reasonable offer that the employee would have been better off accepting, and the matter should not have proceeded to litigation. The Authority may then order that instead of the successful employee receiving costs from the employer, the employee must contribute to the employer’s costs.

Again, an employer can often be at the losing end of this bargain, as costs are not supposed to cause undue hardship and many employees can legitimately argue that they are impecunious since losing their job. Only an employer able to show their company is in serious financial trouble, can argue costs will cause undue hardship.

In conclusion, litigation is a high-risk venture for both parties, the outcome is never certain, and the costs can be substantial. It is hardly surprising that pragmatic employers attempt to settle matters privately. This does not necessarily imply an admission they screwed up or that the offer is ‘hush money’, and some sectors are going to be more frequently hit than others.

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Erin Burke

Employment Lawyer and Director at Practica Legal Email: erin@practicalegal.co.nz phone: 027 459 3375

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