How to act with good faith towards your employees

Good faith is not about going to Church every Sunday. No, it is about how you treat your employees and here is the bad news: what amounts to good faith changed in December 2004 when the Employment Relations (Amendment) Act 2004 became law. Prior to that good faith was some airy fairy concept dreamt up by Parliamentary legislators to even up the playing field between employers and employees and by employment lawyers to give weight to otherwise tenuous personal grievance claims (or is that just me being cynical?!). Now the obligation of good faith imposes greater obligations on the employer as we shall discover. Do you know what the impact will be on your business?

What good faith used to be

Before I tell you what good faith means, let me first take you back in time so my explanation makes sense. Before 2000, there was no concept of good faith. Then people talked in terms of trust and confidence. The law has always recognised the relationship of employer and employee as a special one unlike other commercial relationships. Just like the relationship of lawyer and client involves an element of trust and confidence between the two, so did the relationship of employer and employee. But what did this mean in practical terms?


Let’s take the relationship of lawyer and client as an example. If I am negotiating a settlement for a client I have an obligation to act in my client’s best interests (irrespective of my personal interests) and to report every settlement offer made regardless of whether I think it is acceptable. My client on the other had has a duty to be full and frank with his or her instructions and not to mislead me. So in a relationship governed by trust and confidence there must be an open flow of information between the parties. To withhold information which may be assistance to the other undermines that relationship. In other commercial relationships the same doesn't apply e.g. a customer has no duty to tell its suppliers than it is shopping around!

Why the Courts struggled with trust and confidence

However, in the employment context the courts have struggled the determine what is so special about the employment relationship. Prior to the 1990s the courts interpreted this relationship as a joint obligation to treat each other fairly. However, nobody really said what this meant in practical terms. In the 1990s attempts were made to clarify what it meant. In an attempt not to be too liberal the courts stated that the joint obligation of trust and confidence meant that neither party was to behave towards the other in a manner which was harsh or oppressive. To many that wasn't the same as acting fairly as it imposed a less stringent standard on employers. It came as no surprise that the Labour government changed this test when it introduced the Employment Relations Act in 2000...

Out with trust and confidence and in with good faith

In 2000 the Labour government introduced a new concept called “good faith” which said that both parties to the employment relationship must treat each other in good faith and specifically must not do anything which may mislead the other. Whilst this definition gave some guidance as to what the new concept meant it didn’t go as far as saying that there must be a free flow of information between the parties: not to mislead is not to say you must pass on information which is relevant. Whatever the intention of Parliament in 2000, the courts said that the new good faith requirements were nothing more than a return to the previously understood concept of trust and confidence adopted before the 1990s (i.e. that the parties should act fairly towards each other). So until recently nothing had changed other than that there had been a step backwards in the 1990s and a return to the status quo in 2000.

The main problem with good faith

One of the difficulties with both the trust and confidence model and the pre 2004 good faith model has been defining in practical terms what acting fairly means. People’s concept of what amounts to “fair” differ depending on which side of the fence one is sitting. An employer is motivated by commercial factors, the need to keep the business running efficiently at minimum cost and thereby making profit. An employee is motivated by how much he or she earns and whether he or she will keep their job. These two opposing stand points inevitably create friction in times of difficulty and it is not difficult to imagine situations in which what appears fair to one, will not be fair to the other. How far does one party have to be fair to the other to his or her own detriment? This is exactly where the law is needed to provide guidance and where the old definitions of trust and confidence and good faith have really done little to provide clarity. Until now... The 2004 Act clarifies the position (a little) The 2004 Act has created a further gloss on the definition of good faith. Now the parties must be "active and constructive" and "responsive and communicative" in their relationship towards each other. This general definition is moving closer to the concept of a free flow of information between the parties. What is of more significance though is the part of the new law which says that employees now have a right to access information which is relevant to the continuation of their employment. The reason this is significant is because for the first time the legislation specifically addresses access to information. Traditionally, employees have not been entitled to business information. However now, where it effects their future employment, they do have such right. At the same time it recognises that employees are not entitled to all information – only that which is relevant to their employment and which is confidential.

But, shouldn't good faith cut both ways?

Good faith is of course a mutual obligation on both the employer and the employee. However, the main focus of the 2004 changes is to emphasise the information to which the employee is entitled. This seems a little one sided to me. In a relationship of trust and confidence or good faith there should be an equal emphasis on the information the employee should pass to the employer. It is not an uncommon situation for an employee to spend months looking for a new job whilst the employer is blissfully unaware of the employee's intention to suddenly jump ship with the minimum contractual notice period or with no notice at all. In the same way that there is an obligation for an employer to consult with an employee over proposed redundancies, shouldn't an employee also consult with an employer if he or she is thinking of leaving: often the employer is the last to know.

What will be the effect of the changes?

The changes are likely to see more pressure being put on employers to be open and honest with their employees, especially in situations where jobs are in jeopardy e.g. redundancy. There is definitely a shift of the pendulum in favour of employees with no corresponding obligation on employees to be open and honest with their employers. However, the employer's right to withhold confidential information remains a check on an employee's rights and maybe more powerful than first thought: since employers hold such information in the first place they are the initial arbiters of what is confidential and what is not; such information may never see the light of day. On the other side of the coin employees can always deny an intention to leave their present employment until the decision is actually made by which time it is too late for the employer to do anything about it. This raises the real issue: developing a relationship of good faith or trust and confidence is not about legislating changes, it is about the parties themselves developing that trust through an open and honest relationship.
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