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Lean-Massey, Simon --- "Employment Agreements: Special Contracts Deserving of Special Treatment?" [2008] CanterLawRw 4; (2008) 14 Canterbury Law Review 101



A purely economic view of capitalism emphasises an individual's ability to enter into private contracts, market forces of supply and demand determining the details rather than a paternalistic state. Individuals should be free to choose whether to contract and the state should regulate only to the extent that is necessary to maintain property rights. Proponents of what Trebilcock terms the 'private ordering paradigm'1 hold that individuals are the best judges of how and where to invest their capital2 - individualism over communalism. Each ideology has fundamentally different views as to the limits of justifiable interference with the autonomy of the individual; freedom of contract espoused by laissez-faire administration competing with wealth redistribution by an interventionist state.

Typically, states interfere with economic freedom in order to either create or maintain competition in situations of economic disparity or monopoly. Arguably, the restriction of monopolies has decreased relevance where the commodities produced are luxury items or where innovation occurs (it is inevitable that the producer of a truly unique product will temporarily corner the market). Consumers' vulnerability to a monopolistic supplier will be relative to how essential the particular commodity is. If private company A was the sole producer of luxury watches it would obviously be less of a threat to the general consumer than if private company B was the only supplier of electricity. Different factors affect demand for each product or service: desire and necessity. Therefore, one argument is that the essential nature of a commodity justifies state interference on the premise that distribution is too important to be left to the private ordering paradigm. In other words, the private contract concerns subject matter that gives the exchange a public character.

In this paper, the writer examines the justification for interference with freedom of employment agreements. Part I outlines features of employment agreements that distinguish them from other species of contract while Part II discusses the general principle of freedom of contract and broad economic perspective. In Part III the writer suggests that the public law and sociological aspects of employment contracts justifies intervention. Part IV comprises an analysis of recent New Zealand labour relations culminating in a critique of the Employment Relations Act 2000.



In the nineteenth century, Purdy observes, the common law tended to view employment contracts as indistinguishable from other commercial contracts, thereby regarding labour contracts as an exchange between buyer and seller, each having legal personality and equal legal status.3 The fundamental dispute between right and left (the writer uses these terms to simplify the delineation between neo-classical economists and those of the Marxian tradition) regarding employment contracts is whether there exists an imbalance in bargaining power in this buyer-seller relationship.4 Further, the traditional common law approach ignores the fact that the seller (employee) is an organic being whereas the buyer (employer) is often merely an economic entity.5 This is central to Marx's analysis of commodities and money:

[H]owever varied the useful kinds of labour ... it is a physiological fact, that they are functions of the human organism ... essentially the expenditure ofhuman brain, nerves, muscles, etc.6

These two inconsistencies led leftists to conclude that an employer enjoys greater economic resources and, therefore, dominance in the relationship justifying legislative protection. The judgment of Higgins J in the Harvester case7 typifies this view:

The provision for fair and reasonable remuneration is obviously designed for the benefit of the employees ... and it must be meant to secure to them something which they cannot get by the ordinary system of individual bargaining with employer…The remuneration could safely have been left to the usual, but unequal, contest, the 'higgling of the market' for labour, with a pressure for bread on one side, and the pressure for profits on the other. The standard of 'fair and reasonable' must, therefore, be somethingelse.8

Riley also refers economic pressures on workers, stating that 'the choice between work and starvation is no choice at all'.9 The preceding passages illustrate not only the belief that the employee is disadvantaged in individual bargaining,10 presumably incapable of securing a 'fair deal' unaided, but that the consequences of an adverse result for each party are fundamentally different; the employer risks diminished profits unless alternative labour can be secured whereas the employee risks losing a basic subsistence.11 John Laws distinguishes the power of each party as well as the nature of employment contracts generally:

Employers and employees do not generally meet at a bargaining table, like two businessmen of equal power deciding what deal to strike. Nor is the contract like most that are made in a shop, a travel agency, or an insurance office. The prospective employee cannot, in many cases, take it or leave it. The offer of a job may be his only chance of a decentlivelihood.12

Thomas J cited this passage with approval in his separate judgment in Aoraki Corporation Ltd v McGavin,13 where he stated that employment contracts are not susceptible to analysis simply under general contract law:

[M]y dictum in Principal of Auckland College of Education v Hagg ... to the effect that the requirement of fair dealing is implied into employment contracts, not because they are in a special category, but because such a term meets the criteria for the implication of terms under the general law and that employment contracts are not covered by a special or separate law of contract,was misleading, and I resile from it.14

A similar sentiment is expressed by Lord Wedderburn:

For the common law assumes that it is dealing with a contract made between two equals, but in reality, save in exceptional circumstances, the worker brings no equality of bargaining power to the labour market and to this transaction central to his life whereby the employer buys his labourpower.15

Atiyah also doubts whether there is contractual freedom where one party uses a standard form contract.16 Riley argues that, by using a standard form contract, the party is essentially creating a take it or leave it situation and that the freedom to bargain is illusory.17


As above, a key leftist argument is not only that the exchange is between unequal entities but also that it represents an exchange of fundamentally different 'currencies'.18 Economic models break production elements down into commodities with differing use and exchange values, the premise being that all elements are reducible to some kind of common unit of utility or relative worth.19 However, unlike other commodities, labour is inseparable from the labourer;20 it is not something that one can give without personal investment. Political economist, Dr John Kells Ingram, expressed this position succinctly when he addressed the British Trades Union Congress in 1880:

Labour is spoken of as if it were an independent entity, separable from the personality of a workman. It is treated as a commodity, like corn or cotton-the human agent, his human needs, human nature, and human feelings, being kept almost completely out of view. By viewing labour as a commodity, we at once get rid of the moral basis on which the relation of employer and employed should stand, and make the so-called law of the market the sole regulator of thatrelation.21

This echoes Marx's description of 'commodity fetishism', which he saw as false objectification and separateness:

It is, however, just this ultimate money-form of the world of commodities that actually conceals, instead of disclosing, the social character of private labour, and the social relations between the individualproducers.22

Trebilcock notes the extensive criticism of the neo-classical view found in the writing of Sraffa who identifies what he claims to be a characteristic vice of economists to think 'that all can be reduced to the extreme simplicity of the money measure: also, that production is a purely technical question + that economic problems arise only in distribution'.23 Trebilcock notes similar criticism of the process by which neo-classical economists disguise what are social relationships between people as economic ones between commodities.24 Margaret Wilson's promotion of the Employment Relations Bill echoed this humanist emphasis, claiming that the Bill was drafted:

[B]ased on the understanding that employment is a human relationship involving issues of mutual trust, confidence and fair dealing, and is not simply a contractual, economic exchange. This basis requires specific recognition in any regulation of the relationship — something not satisfactorily achieved bygeneral contract law.25

Therefore, at a certain level of abstraction, employment imposes a social cost on employees and a financial one on employers; one's time and personal effort directly exchanged for capital. However, the employee receives both psychic and pecuniary return as part of the overall 'job reward'.26

Work and Identity

In 1952 Hughes wrote:

[W]ork experience is so fateful a part of every man's life, that we cannot make much headway as students of society and social psychology without using work asone of our main laboratories.27

Undeniably, most work environments possess a social aspect, both in terms of interrelation with colleagues and clients, and in terms of esteem generated by the work itself. Furthermore, words such as career28 and vocation imply something beyond mere employment. An element of personal definition is attributed to the employment, both by the specific employee and by society generally. When asked to talk about themselves people commonly refer to their occupation as some sort of identifying characteristic. Beck states that:

If we know our interlocutor's occupation then we think we know him or her (emphasis in original). The occupation serves as a mutual identification pattern, with the help of which we can assess personal needs and abilities as well as economic and socialposition.29

Rightly or wrongly, society has reciprocal preconceptions about the type and/or worth of people undertaking particular occupations, eg, tow-truck drivers, parking wardens, nurses, prostitutes. Specific occupations attract certain personality-types30 and the nature and conditions of an occupation influences the personality of the workers in those occupations.31 Marx alludes to this at a macro level in his theory of the social production of knowledge32 and in his writings on philosophy and society. Marx claims that:

As individuals express their lives, so they are. [This] coincides with their production, both with what they produce and with how they produce. The nature of individuals thus depends or the material conditions determining theirproduction.33

In support of his thesis that we are defined by what we do, Gini cites the statement of Pope John Paul II that 'through work man not only transforms his nature, adapting it to his own needs, but he also achieves fulfilment as a human being and indeed in a sense becomes "more a human being"'.34 Gini also cites Elia Kazan's claim that '[p]eople are what they do, and what people do affects every aspect of who they are. For good or ill, we are known and we know ourselves by the work we do'.35 Individuals may also refer to personal tastes or interests but not many would refer to the service stations or supermarkets they frequent, much less which bank holds a mortgage over their property or the identity of their landlord. Indeed, it is hard to conceive of any contractual association that so obviously affects perception of an individual as that of employment.36

The second aspect of the psychic return comprises both the holding of a particular position and the reward of carrying out the actual responsibilities of that position. This involves considering factors such as job security, autonomy, opportunity for advancement, work-leisure balance, intellectual stimulation, dignity, and sense of achievement engendered in the work.37 Unsurprisingly, there is a correlation between the level of job satisfaction and remuneration, however, the increased satisfaction is largely due to supra-financial aspects of the employment.38

Arguably, this supports a market model as stimulating work often accompanies challenging employment; a more stimulating and better-paid job will often involve specialist skills. Therefore, employees seeking positions with lower prestige and job reward (financial and social) will be in a correspondingly inferior bargaining position to those with specialist skills; their decision as to whether or not to seek a particular position determined by reference to limited alternatives. The inferiority lies not in the ability to obtain employment per se, but in the lack of ability to obtain employment capable of generating an equivalent level of status and fulfilment. Human capital theory treats economic disparity as inevitable — a worker's investment in education and training being an investment in the capital value of their labour.39 The better-skilled employee has greater options and is more likely to consider job satisfaction as a variable when considering whether to apply for a position. By extension, the protection offered by industrial legislation and collective bargaining is arguably of decreasing relevance for those who possess specialist skills but may still be relevant for those who have common skills temporarily in demand.


Neo-classical Economics

Broadly, economic theory tends to divide into two differing approaches. The first is that of the neo-classical economists who champion the private exchange model. As Purdy observes, this approach has dominated the classical Marxist view,40 which adheres to, what he calls, the 'reproduction' model.41 Essentially, there is a divergence between individualism and some limited form of communalism.

Neo-classical economists give primacy to private exchange and the freedom of contract. The origins can be found in the writing of Smith, but the ideology is also largely derivative of a Millian form of utilitarianism; a strong dislike of state coercion on any basis other than preventing harm to others and a belief that every individual should have the freedom to pursue personal fulfilment in whatever way suits them best. Essentially, private exchange is a voluntary contract between rational self-interested buyers and sellers of commodities in which each is motivated by maximising their utility - the theory of the 'economic man'.42 It is private in the sense that each party should be free to trade their commodity in whichever manner they see fit. Scholars such as Friedman view this 'private ordering' as an ultimate social goal, not just economic.43 Neo-classical economists oppose interference with this private exchange by any external body. They are particularly sceptical of any welfare economics approach propounded by a central authority seeking to manipulate the market for wealth redistribution.

The economic argument is often that less industrial regulation promotes economic efficiency and that this leads to a better economic return for all. Local economists refer to the freedom that their United States counterparts have to make at-will contracts and the efficiency that this affords. One only needs to see the disparity in the economic gains made by the various income quintiles in the U.S. (Figure 1) to see the 'trickledown theory' is fallacious.


Figure 1 - US Income Differential 44

Figure 1 represents the income range of each quintile with the exception of the top band, which represents the 95th percentile; the lower income limit of the top 5%.

The neo-classicist's belief is partly founded on a belief in the universal treatment of individuals: the only way in which the state can do this is by securing equal liberty for all through uniform application.45 Any attempt to enhance the welfare of a specific section of society necessarily results in rules that treat people unequally. At the extremes of libertarianism are atomists such as Hayek46 who value individualism above all else and deny that collective analysis can furnish anything other than a collection of multiple individual choices. In this sense, atomists view trends discerned from collective analysis as being irrelevant to the individual.

Free and Voluntary Exchange

Positive economics uses a number of methodologies in order to predict individuals' behaviour within markets and bargaining situations. Game theory is but one example but, in essence, the methodologies assume that individuals will engage in profit or utility maximising behaviour. Consequently, economic 'efficiency' theories such as that of Pareto and Kaldor-Hicks examine the outcomes based on self-interested behaviour. Pareto theory is normative in the sense that it is used to examine how interactions can be conducted in order to render efficient, optimal, or superior positions based on the pre-interaction position of each party.47 A Pareto approach would be to ask how a party's position can be improved without detrimentally affecting another's position. Kaldor-Hicks theory, on the other hand, takes a benefit/detriment approach asking instead whether collective benefit outweighs detriment and allows for adequate compensation.48 In this sense, the Kaldor-Hicks theory anticipates effects beyond that of contracting parties and arguably contemplates a form of welfare economics. Trebilcock notes this criticism of the theory on the basis that it involves decisions about the welfare of those external to the contract.49 The subjective belief of the free rational individual determines whether the contract is beneficial to them and not an external body. However, as Radin observes,50 if the limit to freedom is as extreme as Mill's,51 then one can mount arguments for all manner of bargains prohibited by law. Indeed, libertarians could argue that legal prohibition predominantly imposes legally paternalistic or moralistic values in a manner that interferes with an individual's right to choose how to maximise their own utility. Chin Liew Ten argues that there is an inconsistency between Mill's concept of utilitarianism and his call for minimal intervention.52 If one should pursue greatest utility then surely laws that seek to promote an individual's utility by proscribing self-harming behaviour would assist in this ideal. Trebilcock uses prostitution53 and the inter vivos sale of human organs54 as examples of contracts, which, although apparently freely entered, are 'inconsistent with the notion of human flourishing'.55

Economic arguments for absolute freedom of contract bear a striking resemblance to legal arguments for moral-independence of legislation. A further criticism of the efficiency theories, and indeed libertarian theories in general, is that the unequal opportunities and status with which individuals begin life mean that a government that intervenes only to secure 'freedom' may be simply entrenching inequality.

Hyman and Brough note that 'economists are far less ready than other social scientists to assert that their theoretical formulations relate to events in the real world'.56 However, they also cite Wootton's response that 'the fact that they [economic theories] are used as a point of departure has ... profoundly affected the conception of the real world that has resulted from their use'.57 This is evident when examining the policies espoused by political followers of neo-classical theories. They seek to give real-world effect to apparently theoretical ruminations about a perfectly competitive market. Far from denying inequality within a prefect market economy, economic theory seeks to explain the reasons for inequality. In its simplest form, the ultimate justifications are supply and demand, and cost equilibrium.


Legislative Intervention

The series of Factories Acts, culminating in the Factory Act 1878 (UK), are some of the earliest examples of legislative control of working conditions and trace a gradual curbing of worker exploitation, particularly that of children. The 1878 Act coincided with the rise of unionism58 in much of Europe and the post-Victorian economic decline that saw a new altruistic concern for the poor and a suspicion that laissez-faire policy could not deliver concurrent social and economic development. However, the Master and Servants Act 1823 (UK) emphasised the contractual obedience owed by employee to employer, restricted workers' ability to unionise,59 and provided legal remedy for disputes, overwhelmingly utilised by employers to discipline employees.60 New Zealand's industrial relations have been dominated by statutory regulation dating back to the Industrial Conciliation and Arbitration Act 1894 (NZ). Protection from exploitation and minimum conditions were centrally prescribed on an industry-by-industry basis even to the extent that Government set minimum wage awards beyond which workers could negotiate second tier agreements. The Act gave unions a monopoly in regards to recourse to legislation and collective bargaining and, from 1936, union membership was compulsory.61 In his discussion of power in the exchange paradigm, Purdy observes that power equates to one's ability to distort economic outcomes away from those that would normally occur in competitive conditions.62 Power, says Purdy, is linked to scarcity and the power enjoyed by unions is the labour counterpart of a monopolistic firm.63 In New Zealand, the union's monopoly on bargaining power led to incredibly divisive labour confrontations,64 unions locked in an ideological battle with employers that cemented distrust and division along party lines.

Public Law Aspect of Employment Agreements

Theoretical and judicial treatment of industrial relations also blurs distinctions between public and private law; intervention justified on the basis that the public interest requires judicial scrutiny of decisions affecting the livelihood of citizens. Klare states that leading theorists tend to base their theories on an analogy between governance of the workplace and governance of society.65 This is arguably a more insightful observation regarding attitudes in the United States given that country's maintenance of at-will employment.66 However, in New Zealand, transposition of political ideology onto the employment relationship is unsurprising given the history of state regulation of the workplace. Thomas J articulates this in McGavin 67 where he stated that '[u]nlike commercial or ordinary contracts, contracts of employment possess characteristics intrinsic to public law. In no other area of the law is the divide between private and public law less marked'.68

As early as 1876 the US Supreme Court held that states had the right to regulate private industry where the public claims an interest.69 The approach of United States' courts appears to justify judicial interference where an employer's actions contravene the public interest: 'We hold that a termination by the employer of a contract of employment at will which is motivated by bad faith or malice or based on retaliation is not [in] the best interest of the economic system or the public good'.70 However, the Howard v Dorr Woolen

Company71 case restricted this interpretation to cases involving dismissals in breach of public policy. Lord Reid restated the English position as it stood in 1971 in Malloch v Aberdeen Corporation:72

At common law a master is not bound to hear his servant before he dismisses him. He can act unreasonably or capriciously if he so chooses but the dismissal is valid. The servant has no remedy unless the dismissal is in breach of contract and then the servant's only remedy is damages for breach ofcontract.

Lord Wilberforce's obiter in Malloch is pertinent, as the deficiencies reflected in Lord Reid's judgment (above) led to the establishment of specialist judicial branches for labour disputes in England:73

[ I]n my opinion, whatever the terminology used, and even though in some inter partes aspects the relationship may be called that of master and servant, there may be essential procedural requirements to be observed, and failure to observe them may result in a dismissal being declared to bevoid.74

As per the discussion in Part II, employment relationships affect social status and wellbeing more profoundly than most other contractual arrangements.75 Although ostensibly indistinguishable in form from other 'relational' contracts, employment agreements embody regulation of matters central to an employee's sense of self. The disparity between the social investment of employer and employee may vary relative to the size of the firm (or according to whether the employer is an owner/operator) however; domestic and international labour regulations76 refer to the need to address the apparent power imbalance in the employer/employee relationship. Despite their common law origins in the law of private contract, governments have overlaid employment contracts with statutory regulation and public law policy. Ideology is reflected in the political treatment of labour relations and leftist governments tend to view such relationships as warranting regulation in the public interest. Working hours and conditions, wages, and job security obviously have an effect on the wellbeing of the specific employee but also on third party dependents.77 The link between socioeconomic status and educational achievement78 and even physical health are well documented.79 Kennedy argues that this justifies wealth redistribution through artificial means.80 What is interesting in terms of a public welfare justification is that studies have found that an individual's health is adversely affected simply by being a member of a society that has greater inequality — statistically an individual's health is affected not only by their personal income but also by the level of income disparity in their community.81 Figure 2 shows trends in New Zealand's income disparity before and during the period of reform. Results from the Kennedy study suggest that 'policies that deal with the growing inequities in income distribution may have an important impact on the health of the population'.82 Right wing economic politics generally favours market forces of supply and demand in determining the appropriate equilibrium. The rise of right wing politics provides a point of departure for Part IV.


Figure 2 - Growth in New Zealand's Income Inequality Relative to Other countries: 1970s - 1990s83


King notes:

The post-1973 decade was one of substantial economic difficulty for most advanced industrial countries including Britain and the United States ... These new conditions provoked a rightward electoral (or policy) shift in the majorityof Western democracies.84

The curious aspect of the rise of the new right was the mix of conservatism and liberalism; the two ideologies appear to differ significantly. Conservative social policy is often proscriptive of self-regarding behaviour on moral grounds85 in an extremely un-utilitarian manner. In addition, traditional conservatives are often communitarians whereas classical liberalism favours individualism. Hoover observes, in relation to the Thatcher and Reagan governments, that liberal economic policy and conservative social policy meshed as far as the liberal distrust of interventionist wealth redistribution favoured the established conservative power bases.86 King also notes that conservative social policy afforded some form of legitimacy to liberal economics:

[C]onservative principles represent secondary arguments available to justify the unpleasant social and political consequences of liberal economic policy. The liberal goal of retrenching social welfare implies a traditional conception of the role of women and the family; conservative arguments about social order and traditional values provide a legitimating ideology for such policyoutcomes.87

The New Zealand Experience

Ironically, the rise of 'new right' economic policy in New Zealand began with the radical reforms of the Lange Labour Government;88 deregulation of financial markets and removal of manufacturing protectionism. Under the Industrial Conciliation and Arbitration Act 1894 (the ICAA) registered unions had enjoyed a monopoly on representation rights. Central to the ICAA were mandatory arbitration provisions and a national award system. National awards kept employees and employers at arms length unless they negotiated second tier agreements. By 1984, compulsory arbitration became 'largely irrelevant as a means of resolving disputes of interest'.89 The Labour Relations Act 1987 retained the award system and compulsory unionism. The Lange Government's most notable labour reform was probably the State Services Act 1988, which ended the delineation between public and private sector industrial relations.

Employment Contracts Act 1991

It was the subsequent National Government who substantially reformed New Zealand's labour market by enacting the Employment Contracts Act 1991 (the ECA). In the long title to the ECA, the stated aim was to promote an efficient labour market and provide for freedom of association, and specifically 'to establish that the question of whether employment contracts are individual or collective or both is itself a matter for negotiation by the parties themselves'.90 There is little doubt that the objective of the ECA was to marginalise unions and collective bargaining. The most dramatic effects were decentralised bargaining and voluntary unionism, which ended blanket industry awards and removed the unions' monopoly on collective bargaining. Although the Act allowed 'employee organisations'91 to collectively bargain, employers were not under any obligation to negotiate with these organisations or to allow the organisations to be parties to any employment agreements; employees and employers were in a direct contractual relationship. However, it would be an oversimplification to assert that the ECA was solely responsible for the decline of unions. The existing union structure was ill equipped to deal with a bargaining system lacking blanket industry coverage and the logistics of bargaining on behalf of the large number of employees in small workplaces who had previously been covered by industry awards. Employers who had become frustrated by a controlled labour market's inflexibility under an increasingly deregulated economy had, in some cases, already refused to bargain with unions under the Labour Relations Act 1987.92

The ECA also constituted the Employment Courts (formerly the Labour Courts) for resolution of personal grievances and implemented a number of minimum code and conditions provisions. Unsurprisingly, the effect of the ECA's marginalisation of unions was to accelerate the decline in union membership (Figure 3). The ECA took a purportedly neutral approach vis a vis collective or individual bargaining and union membership was therefore less obviously advantageous to workers. A further consequence was the removal of the union protection previously afforded part time and casual staff under previous industrial relations legislation. This resulted in a contested level of staff 'casualisation' (Figure 4).


Figure 3 - Union Membership93


Figure 4 – Average Weekly Hours94

However, if unions thought that National had acceded entirely to employer desires for a completely deregulated labour market they needed only to look at the views espoused by the employer's organisations to see how much further the pendulum could have swung. In 1999, Roger Kerr delivered a speech in anticipation of the election that would return a Labour-led government. Kerr suggested that instead of reverting to the dark ages of industrial relations:

We should be striving for further improvements in our productivity and employment performance ... [by] addressing unsatisfactory aspects of the Employment Contracts Act and related regulations such as the legislation governing human rights, minimum wages and holidays...95

His comments largely mirror those of Charles Baird. In his critique of the ECA, Baird claimed that New Zealand should have returned to at-will employment rather than having personal grievance provisions for all. Further, Baird claims:

[T]he ECA left untouched three particularly troublesome minimum codes that are contained in other legislation - legally mandated holidays, OSH regulations and, worst of all, legal minimum wages. These are its sins ofomission.96

Citing Hayek's principle of the division of knowledge, Baird reveals his neo-classicist distaste for welfare economics. He continues:

It is not difficult to imagine circumstances under which both workers and their employers would be better off as they see it (emphasis in original) if they were free to make trade-offs between holiday time and wages andsalaries.97

Concerning OSH legislation Baird suggests that 'some workers may be willing to incur a high risk on the job in exchange for an increased compensation that is less than the cost to the employer of eliminating the risk'.98 Baird spent six years on the board of the Mont Pelerin Society, a libertarian think-tank founded by Hayek in cooperation with Popper, Mises, and Friedman. Keith Joseph, Thatcher's secretary of state for industry, attended society meetings regularly and was hugely influential on the Thatcher Government's economic policy. Upon winning the 1978 election, Margaret Thatcher promised '[t]he only thing I'm going to do is make you freer to do things for yourselves'.99 Similarly, Ronald Reagan upon winning presidency: '[i]n our present crisis, government is not the solution; government is the problem'.100 Reagan had also had contact with Hayek.

This sort of rhetoric is troubling for leftists as it brings the theory of liberal economics to bear upon the real world. By aligning themselves with liberal extremism, organisations such as the Business Round Table cement the inherent leftist distrust of employers. However, the political right wing in New Zealand has been moderate in comparison to the right wing views of industry associations. In 2005, the Brash led opposition had John Key as its finance spokesperson and this may have been to divert attention away from Brash's previous economic statements. Brash, as Reserve Bank Governor, had himself delivered a speech at a Hayek Memorial Lecture101 in 1996 where he advocated further reform:

The deregulation [of the labour market] is not complete. The Act [ECA] provides for certain minimum entitlements that must be observed in employment contracts, including a minimum wage, minimum holiday entitlements, parental leave and equal pay for men and women. As well, the Act provides for an Employment Court to settle labour disputes, which may, however, like other disputes, be appealed tothe Appeal Court.102

One could argue, however, that left wing political parties have far more-closely implemented the ideology of their support base. Previously, unions have wielded considerable voting power and Labour-led governments have repaid that loyalty. Although the ECA was arguably pro-employer, the National government did not come close to delivering the completely free economy of liberal worship.

Power Imbalance

Traditional economic models sought to justify the imbalance in bargaining power between employer and employee rather than denying that one existed. However, many modern economists do deny that there is any imbalance.103 In fact, recent commentators, such as Shirtcliffe, even suggest the imbalance favours employees.104 Often the arguments take the form of bald assertions such as Kerr's that 'the notion of unequal bargaining power is simply wrong, as shown by both theory and evidence'105 or Hogbin who states that 'most economists consider it neither inherently imbalanced nor a significant social problem'. However, as with Kerr's claim, the theory is just that, and the evidence relied on remains unspecified. Hogbin backs up his denial of a power imbalance by stating '[It] is difficult, if not impossible, to find reference to a systematic power imbalance in employment relationships in the encyclopaedic Handbook of Labor Economics'.106 However, this merely emphasises that economic arguments are overwhelmingly characterised by total obliviousness to the starting position of the actors. Purdy encapsulates this, stating that 'the exchange paradigm begins with the legal fiction of equality'.107 Principally, the economists' argument lacks any reference to social/psychological aspects of employment. Nor do economic arguments discuss the relative effect on each party in the event of termination except to note that there is a cost to each party if the other terminates; a hypothetical equation approached entirely from a financial perspective, with no recognition of an employee's relative lack of financial fallback.108

Work/Life Balance

Over the last decade, academics have examined work-life balance from both a sociological and economic standpoint. Philippa Yasbek's 2004 study109 is a useful compilation and synthesis of much of this research. In particular, Yasbek examines the economic justification from a firm's perspective, using the exchange model. Unsurprisingly, the benefits to the firm are:

• improved recruitment and retention rates;

• reduced absenteeism;

• reduction in worker stress and improvements in employee satisfaction and loyalty;

• greater flexibility for business operating hours;

• improved productivity; and

• improved corporate image.

The costs are:

• parental leave payments or providing equipment to telecommuters;

• indirect costs associated with temporarily filling the posts of absentees and temporary reductions in productivity arising from disruptions; and

• costs associated with implementing work-life balance policies.

Yasbek concluded that 'firms employing a large proportion of low-skill workers are the least likely to offer work-life balance policies', and that public (non-commercial) and private professions are most likely to offer such policies.110 This is particularly true of firms in which women are well represented in top executive positions.111 Again, this supports the view that there is a sliding scale of employee vulnerability relative to skill level.112 This variability appears prima facie to support a libertarian argument for freedom of contract; one size fits all is inappropriate. However, lower skilled employees are less likely to find employment with firms that perceive work-life as an advantage under the exchange paradigm. If one section of the workforce is to be 'protected' then, ironically, the neo-classical desire for uniform treatment requires that all be afforded protection.

The ECA clearly advanced certain economic goals of efficiency and flexibility and produced apparently positive trends in terms of a dramatic fall in productivity lost to industrial action. In reality, this was achieved by diluting the advantages of collective bargaining leading to a reduction in effective political organisation by employees.

The Employment Relations Act 2000

The Employment Relations Act 2000 (the ERA) represented the Labour-led Government's response to the deregulation of the 1990s. Although not completely neutral in its ideology, it represented a moderate move towards neutrality rather than an extreme reaction to the ECA. Then Minister of Labour, Margaret Wilson, stated that the Bill was drafted in the belief 'that it is better to work together cooperatively for the common good in the workplace, than to work in opposition to each other'.113 The Act reinstituted the preference for collective bargaining114 but reduced the minimum required membership of unions from 1000 to 15. The Labour-Alliance Government resisted the urge to reintroduce compulsory unionism115 but recreated conditions more favourable to collective bargaining.

Arguably, the most striking aspects of the ERA are the general duty to act in good faith which overlays the entire Act and, following the 2004 amendment,116 the clarified imposition of obligations of positive behaviour extending beyond the implied term of trust and confidence. The general good faith requirement is a distinguishing feature of employment agreements; in a commercial context, it has been held that even express duties of good faith are too uncertain to be contractually enforceable without further definition.117 Assessing s 4 good faith behaviour permits a subjective assessment of parties' actions118 as opposed to the objective approach to terms implied at law. It implies contemplation of the intention behind parties' actions whereas the implied term is capable of being breached independent of intention. Consequently, either party may make a serious but genuine mistake that destroys trust and confidence but not in such a way as to be demonstrably bad faith. The ERA specifically obligates employers to consult with, and to provide information to, their employees when contemplating decisions that may affect the employees' position.119 It plainly goes beyond a negative obligation to avoid bad faith behaviour. Despite initial howls from employers' groups,120 employers are not obligated to divulge commercially sensitive information, redundancy compensation will not be impliedly required if the contract is silent,121 and consultation is really a natural justice requirement of audi alteram partem, rather than any obligation to negotiate. The scheme of the Act is encouraging of constructive and cooperative relations between employer and employee. It recognises the fact that employment agreements regulate ongoing human relationships and does not pit union against employer, in quite the same pre-1990 adversarial manner. Pre-ECA legislation was, arguably pro-employee, based on the pluralist premise of an adversarial relationship whereas the ECA was broadly pro-employer under the guise of freedom. Pursuant to s 3, the object of the ERA is to promote ongoing relationships and, in an attempt to pre-empt bad faith behaviour, has repair mechanisms such as compulsory mediation designed to discourage recourse to arbitration. The good faith aspect informs all actions by parties in the sense that each must be mindful of how their actions affect or could be perceived to affect the other. Rather than attempting to counter perceived power imbalances122 by resort to monopolistic unions, the Act provides guidelines for productive partnership. Similar to the Fair Trading Act 1986, the emphasis is on behaviour that has, is likely to have, or is designed to have a negative effect on the other. The judicial approach to employment contracts has also undergone a shift since the ERA's enactment.

The formalist interpretation of contracts under the ECA123 has given way to a more thoughtful investigation of the realities of the employment relationship.124

To make union membership more attractive, thereby promoting collective bargaining,125 the ERA restored contractual party status to unions - a crucial aspect that once more puts employers and employees under collective conditions at arms length. Good faith behaviour is required when parties bargain for collective agreements, and this duty applies during pre-contract negotiations. The duty arises only after formation in the case of individual employment agreements;126 the s 68 proscription of 'unfair bargaining' merely codifying existing restriction of unconscionable bargaining as found in the general law of contract. In contrast, s 32 contains detailed requirements of positive behaviour required in negotiating collective agreements. This appears to be ideologically driven, as was the provision in the Employment Relations Bill (subsequently withdrawn) restricting personal grievance claims to employees under collective agreements. It is at odds with the idealism of the cooperative and constructive partnership given that if parties conduct themselves in good faith there is arguably less need for the protection of collectivism.


In this paper, the writer has attempted to outline fundamental distinctions between employment agreements and general contracts. Even if one were to accept that no power imbalance in fact exists, the recognition of the human element in the employment relationship, the public interest in having minimum codes, and employees' need for some sort of job security have all contributed to the perpetuation of labour regulation. It is the writer's contention that these elements justify intervention with freedom of contract.

Current legislation does not prevent employers from terminating employees' contracts for serious misconduct, nor from making the decision that a worker's position is redundant in the event of genuine commercial necessity. An employee error that fundamentally undermines trust and confidence is still grounds for dismissal, although there is a strong emphasis on salvaging the relationship by assisting the employee in improving their performance capabilities. Aside from lacking the power to dispense with the minimum wage, safety and holiday regulations, and a requirement of procedural fairness in disciplining employees, it is difficult to ascertain how employers are constrained other than ideologically. Section 66 prevents employers from hiring on purportedly fixed terms merely in order to avoid an employee's statutory benefits, and s 103A imports public law and tort concepts of fairness and reasonableness as requirements for disciplinary action. Legislation proscribes discrimination, contracting out of safety regulations, and disadvantageous action or dismissal without adequate cause or investigation. The argument is that it prohibits unconscionable behaviour in the public interest. The ERA is a moderate piece of legislation that adopts a hopeful attitude towards the employment relationship. Possibly the final step in legislative reform would be the removal of conditions favouring collective bargaining so that collectivism becomes an expedient option for either party rather than a mechanism of protection.

[*] BMus(Hons), Dip Jazz. Simon is currently a law student completing his LLB(Hons) at Canterbury University, School of Law.

[1] Michael J Trebilcock, The Limits of Freedom of Contract (1993) 1.

[2] Be that real or financial capital.

[3] David Purdy, Social Power and the Labour Market: A Radical Approach to Labour Economics (1988) 4.

[4] See generally, Roger Kerr, 'Lessons from Labour Market Reforms in New Zealand' (Paper presented at the H R Nicholls Society's XXVI Conference, Melbourne, 18 March 2005).

[5] Purdy, above n 3, 4.

[6] Karl Marx, Capital, Volume One, The Process of Production Capital, Chapter 1, Section 4 <> at 10 July 2007.

[7] Ex parte H v McKay (1907) 2 CAR 2-18.

[8] Ibid 3.

[9] Joellen Riley, Employee Protection at Common Law (2005) 37.

[10] See Aditi Bagchi, 'Unions and the Duty of Good Faith in Employment Contracts' [2003] YaleLawJl 1; (2003) 112 Yale Law Journal 1881, 1887.

[11] See Adam Smith, The Wealth of Nations (1950) 66: A landlord, a farmer, a master manufacturer, a merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.

[12] J Laws, 'Public law and employment law: Abuse of power' [1997] Public Law 455, 455-456; Peter Herriot, The Employment Relationship (2001) 45.

[13] [1998] NZCA 88; [1998] 3 NZLR 276.

[14] Ibid 306.

[15] Wedderburn, Lord, The Worker and Law (1986) 5.

[16] P S Atiyah, An Introduction to the Law of Contract (1995) 15.

[17] Riley, above n 9, 42.

[18] See especially, Paul O'Higgins, 'Labour is Not a Commodity - An Irish Contribution to International Labour Law' Industrial Law Joumal 1997 (3), 225.

[19] Marx, above n 6.

[20] Purdy, above n 3, 16.

[21] O'Higgins, above n 18, 9.

[22] Marx, above n 6.

[23] Trebilcock, above n 1, 24.

[24] Ibid.

[25] Margaret Wilson, Prophecies and profits 2 August 2000, < ViewDocument.aspx?DocumentID=8074> at 12 July 2007.

[26] Anne Kalleberg; Aage Sorensen, 'The Sociology of Labour Markets' (1979) 5 Annual Review of Sociology 351, 361; Purdy, above n 3, 6.

[27] Everett Hughes, Foreward to special issues on Work, (1957) 57 (5) American Journal of Sociology 426.

[28] See Michael Rose, 'Career Perceptions and Career Pursuit in the UK, 1986-2002' in Paul Stewart (ed), Employment, Trade Union Renewal and the Future of Work (2005) 253-258 for evidence of an increased proportion of employees seeing themselves as having a career, not just a job.

[29] Ulrich Beck, Risk Society (1992) 139-140.

[30] See especially, Johns Hopkins University, Human Resources Career Management Program <> at 28 July 2007.

[31] See generally, Al Gini, 'Work, identity and self: How we are formed by the work we do' (1998) 17(7) Journal of Business Ethics 707.

[32] Purdy, above n 3, 187.

[33] Marx, above n 6.

[34] Gini, above n 31, 708.

[35] Ibid.

[36] While a certain individuals may choose to indicate purchasing preferences through material displays, those displays are arguably an attempt to indicate one's financial resources, dependent on earning capacity.

[37] See generally, Arne L Kalleberg, 'Work Values and Job Rewards: A Theory of Job Satisfaction' (1977) 42 American Sociological Review 124.

[38] Richard Hyman and Ian Brough, Social Values and Industrial Relations: A Study of Fairness and Equality (1975) 140.

[39] A similar approach can be found in Adam Smith's theory of equalising advantages: Adam Smith, The Wealth of Nations, Chapter 10, part I < smWN.html> at 11 May 2008.

[40] Purdy, above n 3, 3.

[41] Ibid 16. According to Purdy, the reproduction paradigm views society not as a collection of individuals but as a 'multiplicity of relationships'.

[42] John Kells Ingram, A History of Political Economy (1888) 212.

[43] Trebilcock, above n 1, 8.

[44] Source: United States Census Bureau < h01ar.html> at 11 July 2007.

[45] See generally, Bernard Manin; Elly Stein; Jane Mansbridge 'On Legitimacy and Political Deliberation' (1987) 15(3) Political Theory 338.

[46] F A Hayek, Individualism and Economic Order.

[47] Trebilcock, above n 1, 7.

[48] Ibid.

[49] Trebilcock, above n 1, 8.

[50] Margaret Jane Radin, 'Market Inalienability' (1986-7) 100 Harvard Law Review 1849, 1854.

[51] The idea that one is not free to give up freedom by becoming a slave.

[52] Chin Liew Ten, Utilitarian Defence of Absolute Prohibition (2001) Victorianweb <http://> at 7 July 2007.

[53] Trebilcock, above n 1, 38.

[54] Ibid 33-35.

[55] Ibid 38.

[56] Hyman and Brough, above n 38, 125.

[57] Ibid.

[58] Once the Trade Union Acts 1871 (UK) and 1876 had legalised unions for limited purposes.

[59] Until the Combination Acts of 1824 (UK) and 1825 it was a criminal conspiracy for workers to combine for the purpose of attempting to secure higher wages.

[60] Penal sanction for employee's breach of employment contracts was eliminated by the Employers and Workmen Act 1875 (UK).

[61] See generally, Mathieson's Industrial Law in New Zealand (1970).

[62] Purdy, above n 3, 45.

[63] Ibid.

[64] In particular the strike of the watersiders and Government response in 1951.

[65] Karl Klare, 'Public/Private Distinction in Labor Law' (1982) 130(6) University of Pennsylvania Law Review 1358-1422, 1359.

[66] W Bentley MacLeod observes that '[a]n individual who has 20 years of service may be fired immediately in the United States, but must be given 21 months of notice in Belgium', Regulation or Markets? The Case of Employment Contracts (2005) 51 CESifo Economic Studies 1.

[67] Aoraki Corporation Ltd v McGavin [1998] NZCA 88; [1998] 3 NZLR 276

[68] Ibid 305.

[69] Munn v State of Illinois [1876] USSC 149; 94 U.S. 113 (1876).

[70] Monge v Beebe Rubber Co 114 N.H. at 133, 316 A.2d, 551.

[71] 120 N.H. 295, 297, 414 A.2d 1273, 1274 (1980).

[72] [1971] 2 All ER 1278, 1282.

[73] Per Lord Hoffman in Johnson (AP) v Unisys Limited [2001] UKHL 13; [2001] 2 All ER 801, 820.

[74] Ibid 1294.

[75] See Michael Keith, Employment Contracts v Commercial Contracts: Are the Differences Real? Central Institute of Technology Occasional Paper, 1998.

[76] Particularly ILO Convention 87: Freedom of Association and Protection of the Right to Organize, 1948, ILO C087 (entered into force 4 July 1950) and ILO Convention 98: Right to Organize and Bargain Collectively, 1949, ILO C098 (entered into force 18 July 1951) which protect the right to bargain collectively.

[77] Purdy, above n 3, 7.

[78] For a discussion of the intergenerational correlation between the education of parents and children see Christian Belzil; Jörgen Hansen, 'Structural Estimates of the Intergenerational Education Correlation' Discussion Paper Series Institute for the Study of Labor December 2003 IZA DP No. 973.

[79] SH Preston, 'The changing relation between mortality and level of economic development' Population Study 1975; 29:231-48; L Pritchett, LH Summers, 'Wealthier is healthier' (1996) 31 Journal of Human Resources 841-68.

[80] See especially, Kennedy et al, 'Income distribution and mortality: cross sectional ecological study of the Robin Hood index in the United States' (1996) 312 British Medical Journal 1004-1007.

[81] RG Wilkinson, Unhealthy societies: the afflictions of inequality (1996) 53.

[82] Kennedy, above n 77, 1004.

[83] Source: Statistics NZ (1999) New Zealand Now - Incomes Wellington, NZ.

[84] Desmond S King, 'New Right Ideology, Welfare State Form, and Citizenship: A Comment on Conservative Capitalism' (1988) 30 Comparative Studies in Society and History, 792, 793.

[85] For example, homosexuality and abortion.

[86] Kenneth R Hoover, 'The Rise of Conservative Capitalism: Ideological Tensions within the Reagan and Thatcher Governments' (1987) 29 Comparative Studies in Society and History, 245.

[87] King, above n 81, 797.

[88] See David Henderson, 'Economic Reform in New Zealand in an International Perspective,' New Zealand Business Round Table (speech delivered at Wellington Chamber of Commerce Breakfast Address, Wellington, 28 November 1995).

[89] Gordon Anderson et al (eds), Employment Law Guide (7th ed, 2005) 10.

[90] Para (e) long title to the Employment Contracts Act 1991.

[91] The word 'union' did not appear in the Employment Contracts Act 1991.

[92] For example, the Clerical Workers Union.

[93] Department of Labour figures for March 1989-90 and 2001-03; Industrial Relations Centre, Victoria University of Wellington figures for December 1991 to December 2000, <> at 11 May 2008.

[94] Statistics New Zealand, < 84bf91b1a7b5d7204c256809000460a4/4c2567ef00247c6acc256ee70071da4f?OpenDocument> at 11 July, 2007.

[95] Roger Kerr, Executive Director New Zealand Business Roundtable, 'The Employment Contracts Act and the 1999 Election' (speech delivered at Wellington Regional Chamber of Commerce, Wellington, 2 July 1999) <>.

[96] Charles Baird, 'Deregulation of the New Zealand Labour Market: Things Done and Left Undone', 6 (speech delivered at 'Moving Forward' Conference on the Employment Contracts Act 1991, Auckland, 15 May 1996) at 11 May 2008.

[97] Ibid 7.

[98] Ibid.

[99] Howard Gardner, Margaret Thatcher: A Clear Sense of Identity Leading Minds: An Anatomy of Leadership, 225.

[100] Ronald Reagan, Inaugural Address, (speech delivered Washington, 20 January, 1981) <> at 9 July 2007.

[101] In which he described the New Zealand reforms as having a 'distinctly Hayekian flavour'.

[102] Donald T Brash, 'New Zealand's remarkable reforms' (paper presented at the Fifth Annual Hayek Memorial Lecture Institute of Economic Affairs, London, 4 June 1996) <http://www.> at 9 July, 2007.

[103] See especially, Richard Epstein, 'Is There Unequal Bargaining Power in the Labour Market?' (2005) New Zealand Business Round Table 2.

[104] Ibid vii.

[105] Kerr, above n 4, 18.

[106] Geoff Hogbin, 'Power in Employment Relationships: is there an imbalance?' (2006) New Zealand Business Round Table 3.

[107] Purdy, above n 3, 5.

[108] Smith, above n 11, 66.

[109] Philippa Yasbek, The business case for firm-level work-life balance policies: a review of the literature, Labour Market Policy Group, Department of Labour, January 2004 <>

[110] Ibid 4.

[111] Ibid.

[112] See Sandra Williams; Gerald Ferris, 'The Changing Nature of the Employment Relationship: Reclaiming Values in the Workplace' (2000) 20 Journal of Organizational Excellence 25 for a discussion of the evolving attitude regarding U.S. corporate practice.

[113] Hon Margaret Wilson, Minister of Labour, 'Editorial: Good Faith Bargaining' [2000] Employment Law Bulletin 47.

[114] Although collective bargaining has not re-emerged as the dominant form of contract, per Erling Rasmussen; Felicity Lamm, From collectivism to individualism in New Zealand employment relations <> at 11 July, 2007.

[115] Despite Roger Kerr's comments that the effect of the ERA would effectively bring back compulsory unionism, above n 4, 14.

[116] The good faith aspect of the amendment was in direct response to the Court of Appeal judgment in Coutts Cars v Baguley [2001] NZCA 382; [2002] 2 NZLR 533.

[117] Wellington City Council v Body Corporate 51702 (Wellington) [2002] NZCA 191; [2002] 3 NZLR 486.

[118] Although there is scope for objective assessment akin to the Fair Trading Act 1986 approach.

[119] Consultation relates only to implementation of the employer's decision, not the decision itself - ERA, s 4(4)(c).

[120] Kerr, above n 90.

[121] Aoraki Corporation v McGavin [1998] 3NZLR 276.

[122] Section 3(a)(ii) of the ERA explicitly recognises such an imbalance.

[123] See especially, Telecom South Ltd v Post Office Union (Inc) [1992] 1 NZLR 275, 285 (Richardson J).

[124] In particular the application of s 6 of the ECA in distinguishing contracts 'of service' and 'for services'.

[125] Also explicit in s 3, ERA.

[126] This cuts both ways as exemplified in Murray v AG [2002] NZEmpC 106; [2002] 1 ERNZ 184.

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