How to negotiate a fair settlement for unjustified dismissal

Question

My company recently dismissed a worker. The worker has brought an unjustified dismissal claim. Although the company believes that it had good reason to dismiss her, procedurally the matter could have been handled better. Because of this, the company has offered her a settlement, but she wants more money than has been offered. How do you determine what is a fair settlement?

Answer

Any settlement offer should reflect:

How much is the Tribunal likely to award? Section 40 of the Employment Contracts Act sets out the remedies that are available. They are reinstatement, reimbursement of lost wages, and compensation.

Lost wages
The Tribunal must award a worker the amount of his or her lost wages or 3 months pay, whichever is less. The Tribunal has discretion to award a worker more than 3 months pay if his or her lost wages are greater than that.

Once a worker finds another job, any pay from that job is deducted from his or her loss calculation. For example if, two months after dismissal, the worker finds a new job on the same pay, his or her claim for lost wages is 2 months pay.

It is not uncommon for workers who have been dismissed to find another job straight away and have no claim for lost wages at all. You therefore need to find out if your former employee has found another job, the date she started work in the new job, and the amount of her earnings.

The Tribunal may refuse to award a worker lost wages if it believes that a worker has failed to mitigate his or her loss. Accordingly, you need to find out what efforts your former employee has made to find another job.

Compensation for humiliation and distress
Under section 40(1)(c)(i) of the Employment Contracts Act, the Tribunal may award a worker compensation for any distress, humiliation, loss of dignity, and injury to feelings caused by their unjustified dismissal. The Tribunal does not make compensation awards automatically, but must be satisfied that the worker has suffered such injury. The worker must therefore produce evidence of his or her suffering.

While the Tribunal has awarded some workers up to $50,000 compensation, such awards are rare. Most awards are in the range of $2000 to $8000.

Compensation for loss of benefits
Under section 40(1)(c)(ii) of the Employment Contracts Act, the Tribunal may award a worker compensation for loss of any monetary or non- monetary benefit. Typical claims under this section include loss of use of a company car, loss of superannuation benefits, and loss of medical insurance etc.

Reductions in awards
The Employment Contracts Act contains a number of sections that empower the Tribunal to reduce the remedies awarded to a worker if the worker is at fault or has contributed to the situation that gave rise to his of her personal grievance. There have even been cases where workers have been found to be unjustifiably dismissed, but have been awarded no remedies at all because of their contributory fault.

The Tribunal may also use its equity and good conscience jurisdiction to reduce the remedies awarded to a worker, if the worker has committed blame worthy conduct that is unconnected to his or her personal grievance. For example, if a worker is dismissed for using bad language and, after his or her dismissal, the employer learns that he or she has been defrauding the company, the Tribunal may refuse to award that worker any remedies.

You therefore need to assess whether the Tribunal is likely to reduce the remedies awarded to your former employee for contributory fault or under its equity and good conscience jurisdiction and, if so, by how much (ie: 20%, 50, 100% etc).

 

Having calculated how much the Tribunal is likely to award your former employee if it finds that she was unjustifiably dismissed, you need to assess your litigation risk. If the matter proceeds to adjudication, are your prospects of success in defending the claim 90%, 50%, or less than 50%. You need to deduct this amount from your calculation. For example if you calculate that the Tribunal is likely to award your former employee $5000 in lost wages and compensation and your litigation risk is 50%, then a suitable offer may be $2,500.

Next you need to assess how much it will cost you in terms of time, money and inconvenience if the matter proceeds to adjudication. For example, you may be prepared to pay a premium to achieve certainty of outcome and avoid incurring additional legal costs. However, you should bear in mind that your former employee may be prepared to accept less to achieve this also.

You also need to be aware that any award for lost wages will be taxed whereas compensation for humiliation and distress is not taxed. It is therefore common for parties to settle person grievances by compromising the worker's claim for lost wages to a greater extent than his or her claim for compensation. This makes settlement more attractive as it gives the worker more money in the hand without costing the employer any more.

Mediation provides an excellent forum for discussing the worker's grievance, assessing the strength of each parties' case, and gathering all of the information that is relevant to determining what is a fair settlement. Accordingly, the value of attending mediation should not be under estimated.

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