Cross-Border Employment Relationships: What Law Applies?

When an employee is based in New Zealand but is employed offshore, will the laws of New Zealand or the laws of the country of the employer apply to the employment relationship? A recent Court of Appeal decision in New Zealand Basing Ltd v Brown has clarified that there is a well settled choice of law process.

Background

Through a wholly owned Hong Kong subsidiary called New Zealand Basing Ltd (‘NZBL’), Cathay Pacific entered into contracts of employment with the respondents, two New Zealand-based pilots. Two terms contained within their employment agreements are particularly relevant. One provided that Hong Kong law would apply to the pilots’ conditions of service. The other obliged them to retire from service with Cathay Pacific on reaching the age of 55 years (which is lawful in Hong Kong).

In 2009 NZBL revised their contractual arrangements to recognise that they would now be governed by the employment law of the employee’s base jurisdiction. They offered all of their pilots the opportunity to enter into a new contract of employment on this basis. The pilots were offered new contracts which materially departed from their current contracts in two related aspects: the age of retirement would increase from 55 years to 65 years but a lower pay scale would apply in the interim. The pilots chose not to transfer over to the new contract because they said they understood that NZBL would soon increase the retirement age to 65 years under their current contracts (probably by the end of 2009) and they were reluctant to lose the benefits otherwise available under their existing contracts, such as a favourable income tax rate.

The pilots both reached the age of 55 years in 2015 and as per their contracts, NZBL required them to retire. The pilots then issued proceedings against NZBL claiming that the laws of New Zealand applied and that it was discriminatory to retire them on the grounds of age.

The Employment Court

The Employment Court declared that the age discrimination provisions of the Employment Relations Act 2000 (‘ERA’) applied to the pilot’s employment with NZBL. They also declared that it would be discriminatory under the Human Rights Act 1993 to require them to retire from employment on the ground of age. The Court stated that it has the ability to refuse to apply a foreign law if the outcome would be contrary to New Zealand’s public policy, or contrary to justice or morality. Based on this, the Court also held that in the event that their findings were incorrect, section 238 of the ERA overrode the parties’ choice on the basis that it states the Act cannot be “contracted out” of.

Court of Appeal

NZBL appealed on two questions of law:

  1. If the ERA applies, does it override the parties’ agreement that the law of Hong Kong applies to their contract of employment?
  2. If the ERA does not apply, would the application of the law of Hong Kong to the contract of employment be contrary to public policy?

Section 238

In answering the first question, the Court of Appeal laid out the principles relating to what they describe as a well settled choice of law process. They stated that the Employment Court erroneously treated the prohibition on contracting out of the ERA contained in section 238 of the Act as the starting point and as deserving a broad interpretation that would preclude private bargaining parties from electing to govern their relationship by a connected foreign system. The Court confirmed that the correct starting point is to determine which of the two available legal systems applied to the employment relationship. Once the Court has determined that the applicable law is a foreign system, only then can an overriding mandatory statute be asserted. In this case, the parties had expressly agreed to be bound by Hong Kong law.

Germany, Bavaria, Munich, Pilot and co-pilot piloting aeroplane from airplane cockpit

The Court of Appeal then confirmed that the purpose and intention behind section 238 is to ensure that employment agreements formed in New Zealand and performed in New Zealand comply with the minimum legislative requirements. Thus in a conflict of laws setting, section 238 will only apply where the employee has elected a foreign system of law with little or no connection to the parties and the employment relationship. In the present case, there were ample connections to Hong Kong law and the pilots received an income tax advantage and other employment benefits as a result of that law applying. Further, the Court confirmed that section 238 does not apply to displace or override settled rules of private international law. It does not of itself justify the replacement of carefully drafted transnational bargains with New Zealand’s employment regime, even if a court considers the domestic protections more advanced or attractive than those under the foreign law contract.

The Employment Court had therefore erred in finding that section 238 of the ERA overrode the parties agreement that Hong Kong law would apply to their contract of employment. The law of Hong Kong was the proper law of the contracts and was not affected by New Zealand’s employment legislation.

 

Public Policy Exception

In relation to the second question of law, the Court of Appeal clarified that when determining whether the public policy exception should apply, the question to ask is whether recognition of the foreign law would “shock the conscience of a reasonable New Zealander, be contrary to a New Zealander’s view of basic morality, or violate an essential principle of justice or moral interests. In this case, the Court considered that the pilots were seeking to benefit from a selective notion of public policy. They were seeking to retain the advantages of a favourable income tax rate by virtue of Hong Kong’s taxation legislation, while arguing that Hong Kong law should be disregarded for the purposes of a claim of unfair dismissal (specifically, a requirement that they retire at age 55). Further, the contract entitled the pilots to receive personal accident insurance, statutory holidays and a sickness allowance under Hong Kong law. The Court of Appeal emphasised that the package of rights and obligations contained in the contract must be considered as a whole and it would be artificial to ignore the collateral benefits enjoyed by the pilots as a result of the choice to have the contract governed by Hong Kong law.

In this case, the pilots fell well short of satisfying the high threshold required for the public policy exception. The Court stated that the right to be free from age discrimination is not an absolute value, but is a flexible concept that depended on a range of factors. The Court found that the absence of a protection under Hong Kong law against enforcement of a contractual obligation to retire at 55 years of age would not shock the conscience of a reasonable New Zealander or violate an essential principle of our justice or moral interests. Additionally, due to the significant benefits received by the pilots under the election of Hong Kong law, there was no proper foundation for applying the public policy exception to defeat the private bargaining intention of the parties.

Comment

This case provides greater comfort for employers who, for various reasons, may wish for a foreign system of law to apply to an employment relationship based in New Zealand. Care should still however be taken when selecting a governing law to make sure that any outside jurisdiction does have a real and material connection to the employment relationship. Otherwise, if challenged, this election may fall at the first hurdle.

 

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