Policies, Procedures and the Exercise of Discretion

21 Aug 19

In an article published on Legalwise earlier this month, Employment Partner John Farrow discusses the full Employment Court decision of Matthews v Bay of Plenty District Health Board that traverses a number of issues, including discretionary gratuities and the legal status of policies.

The Law is clear that reference to a policy in an employment agreement causes the terms of that policy to be a binding part of the agreement. It is common practice for employers to reference separate policies and procedures or workplace manuals in employment agreements. Clauses usually require an employee to be familiar with the provisions of any relevant policy and procedure and to comply with them. Some clauses specify that failure to comply with relevant policies and procedures may result in disciplinary action. Some clauses make it clear that the employer may, from time to time, amend the policies and procedures.

The conventional wisdom is that it is preferable to include provisions that are likely to change over time within a policy or a procedure.  The reason for this is that the terms of an employment agreement cannot be varied without the consent of both parties whereas the terms of a policy can be amended by the employer following good faith consultation with the employee.

This Decision, however, informs the application of that conventional wisdom.

Facts of the case

Dr Matthews was employment by the Bay of Plenty District Health Board (and its predecessors) for 26 years.

Initially, Dr Matthews’ employment conditions were mainly fixed by the Ministry of Health. However, some were not as they were regulated by Statutes and Regulations. The provision of a Retiring Gratuity was previously governed by Statute.

Subsequently, Dr Matthews’ terms and conditions were covered by awards. Over the period to which the awards applied, bargaining between the parties led to an understanding that awards would provide minimum conditions of employment underpinned by individual employment agreements.

The 1991 award contained a retiring gratuity with language which was identical to that used in the retiring gratuity provisions of the earlier awards.

Dr Matthews later transferred within the Area Health Board from Rotorua to Tauranga Hospital. This was a part-time position which meant he needed to maintain a private practice in order to work full-time.

In 1993 Dr Matthews signed an individual employment agreement which was stated to be underpinned by the 1991 award. Clause 7 dealt with retirement. It included the provision:

“7.3 on retirement the employee may receive a gratuity payment in accordance with the Board’s Gratuity Policy.”

Clause 17 provided that the District General Manager and the employee “acknowledged the relationship between the employment agreement and the New Zealand Area Health Boards’ Senior Medical Officers’ Award“. It also recorded that the agreement “constituted the full and entire agreement and could not be varied unless in writing.”

In 1993 a series of Statutes reconfigured the health sector. The health sector moved to a more commercial model which resulted in significant variation to employment conditions for employees. Less emphasis was placed on the terms defined in the Awards and more emphasis on the individual employment agreements.

Dr Matthews signed various documents including the Western Bay Health Employment Partnership Package. This contained no reference to a retiring gratuity. He did not sign a standard individual agreement because his individual agreement continued to apply. That document contained no provision for retiring gratuities.

The Western Bay Health Limited (which included the Tauranga Hospital) did not have a written policy on retiring gratuities.  However the Chief Executive developed a practice as to how they would be dealt with.  That practice included payment, but only on an ex-gratia and fully discretionary basis, as determined on a case-by-case basis.

In subsequent years multi-employer collective agreements were entered into. These continued the application of pre-existing individual employment agreements. The gratuity provision stated that current grand-parented entitlements would continue to apply or would be grand-parented to employees.

In 2013 Dr Matthews gave notice of his retirement from the Bay of Plenty DHB. At the same time he requested a copy of the DHB’s gratuity policy. At that time the DHB had two relevant policies. Dr Matthews was provided with the ex-gratia payment gratuity policy and applied outlining his work record. The DHB confirmed that an ex-gratia payment of $2,000 would be paid in recognition of Dr Matthews’ service.

Which Retiring Gratuity applied?

The DHB argued that ‘the Board’s Gratuity Policy’ was that which would apply at the date of termination. Dr Matthews argued that the Policy of the Board, as referred to in clause 7.3, was that which applied on 1 January 1993. The Court resolved the issue by considering the background knowledge “which could reasonably be regarded as having been available to the parties in the situation they were in during the time of the contract “.

The Court found that there was no evidence to suggest that the Board had adopted a different policy before Dr Matthews entered into his employment agreement with the DHB on 1 January 1993. In particular, there was no evidence to indicate that the practice adopted by the Chief Executive, regarding gratuity payments, had been promulgated by the DHB or that it could in some other way be regarded as constituting the DHB’s policy. The Court found that that ‘Board’s Policy’ as referred to in clause 7.3 was a long-standing arrangement by which the Board had been bound. There was no alteration of policy until well after Dr Matthews entered into his employment agreement. The Chief Executive did not introduce a policy to make ex-gratia payments until 1995. This strongly suggested that the DHB had not adopted a policy to replace the 1991 Award prior to 1993 when Dr Matthews signed his employment agreement.

The employment agreement provided that ‘no modification, variation or waiver could be effective or binding on either party, unless in writing and signed by both parties’. There was no evidence that Dr Matthews expressly agreed to a variation of clause 7.3.

Crucially, the Court found that the underpinning agreement which replaced the 1991 Award did not affect the position as to Dr Matthews’ retiring gratuity provisions since the effect of clause 7.3 was to enshrine the 1991 Award as the applicable gratuity provision. The retiring gratuity provisions of the Dr Matthews’ employment agreement accordingly continued.

Was the retirement gratuity discretionary?

The relevant provision read:

The General Manager may pay a retiring gratuity to staff retiring from the Board who have had no less than ten years’ service with the employing Board, with that Board and one or more other Boards and with one or more of the following services:  the Public Service, the Post Office, New Zealand Railways or any University in New Zealand.

The DHB argued that the word “may” meant the power bestowed by the clause was fully discretionary. The clause considered by the Court in NZ Nurses’ Organisation v Waikato District Health Board was similarly worded. In that case, the scope of any discretion was not before the Court however here the discretionary language was squarely before the Court.

The Supreme Court in B v Waitemata District Health Board found that the word “may” is usually permissive or empowering. However in some situations, read in context, “may” means “must”. The Supreme Court referenced the Australian decision of Finance Facilities Pty Limited v The Commissioner of Taxation of the Commonwealth of Australia. In that decision Windeyer J stated:

Used of a person having an official position, it is a word of permission, an authority to do something which otherwise he could not lawfully do.”

In the present case, the Court found that the use of the word “may” did not bestow an unfettered discretion. The power was prescribed by the provisions which followed in that clause. The full clause set out an elaborate set of precise provisions as well as carefully framed calculation methodology. The interpretation of the empowering provision in clause 8 is informed by its purpose. The focus of the clause related to qualifying long-service.

The Court also stated that the obligation to act in good faith applies to the exercise of powers such as those found in clause 8. The obligation to exercise a discretion in good faith was also reinforced for common-law purposes in the Finance Facilities decision. Ultimately the Court found that the DHB erred, not through want of good faith but because the legal position was not correctly understood.

Did Dr Matthews retire or resign?

The DHB argued that Dr Matthews resigned as he did not cease professional work because he maintained his private practice and therefore any policy referring to retirement did not apply. Dr Matthews argued that the focus was on ‘retiring from the Board rather than ‘retiring from the Board’. 

In the NZNO case, there was argument about the distinction between ‘retirement’ and ‘resignation’. However, in the present case, clause 8 of the 1991 Award dealt with the two different concepts in distinct sub-clauses. In the case of retirement, the employee was entitled to payment. In the case of resignation, the employee was entitled to half that normal payment.

In the NZNO case, the Court was dealing with a departing employee who replaced full-time work she had formerly undertaken with the Waikato District Health Board, with other work. In Dr Matthews’ case, it was clear that he continued his former private practice but did not increase the extent of that practice. Clause 8 clearly allowed for that particular situation.


Ultimately the Court found that the DHB had erred by not applying the correct policy. The ‘leaving – gratuities payment’ policy required the DHB to pay a gratuity where allowed for in the employee’s employment agreement. The DHB should have applied Dr Matthews’ position under the provisions of his employment agreement and the 1991 Award.

The facts of Dr Matthews’ case are specific to his employment agreement and the relevant Award. However, the finding of the Court that clauses in Dr Matthews’ employment agreement enshrined the applicable gratuity provision provides food for thought. This finding is especially relevant when drafting clauses in employment agreements which reference policies, procedures and the like.