Part 2: The employment termination arrangements

2.1
Under the Local Government Act 2002, a local authority chief executive can be appointed for a term of up to five years. The five-year term can be extended for up to two more years, subject to a satisfactory performance review within six months of the first term expiring.³ Unlike employment agreements for permanent positions, fixed-term employment agreements do not always include redundancy provisions.

The employment agreements

2.2
All but one of the eight employment agreements contained redundancy provisions and associated notice of termination requirements. Several provided that no redundancy payments would be made in the event of amalgamation or restructuring if the chief executive obtained an equivalent role with the new entity.

2.3
Six of the chief executives do not have a role in the new Auckland Council structure. The chief executives of the Auckland City Council and the North Shore City Council have accepted temporary roles.

2.4
The Transitional Provisions Act provides that employees who do not have a role with the Auckland Council are entitled to compensation for termination of their employment in accordance with their employment agreements.⁴ They are not entitled to any other payments or benefits because their position has ceased to exist.⁵

2.5
We considered the termination arrangements against these requirements.

2.6
We briefly outline the contractual arrangements for the chief executives in paragraphs 2.7-2.12.

Fixed-term employment agreements expiring after 31 October 2010

2.7
Five of the chief executives were appointed on fixed-term employment agreements that had not expired at 31 October 2010 and contained redundancy provisions. The five employment agreements provide that the respective chief executive is entitled to:

• three months’ notice and six months’ remuneration;
• three months’ notice, and the lesser of payment to the end of the fixed term or six months’ remuneration;
• three months’ notice, and the lesser of payment to the end of the fixed term or nine months’ remuneration;
• six months’ notice, and the lesser of payment to the end of the fixed term or compensation of six weeks’ remuneration for the first year of service and two weeks for each subsequent year; and
• three months’ notice, and the lesser of payment to the end of the fixed term or 26 weeks’ remuneration for the first year of service and two weeks for each subsequent year.⁶

2.8
One of the chief executives has accepted a temporary position until 30 April 2011 as the interim chief executive of a council-controlled organisation of the Auckland Council. His redundancy entitlement is currently deferred until the end of that fixed-term role.

Fixed-term employment agreements ending on 31 October 2010

2.9
Two of the chief executives were on fixed-term employment agreements ending on 31 October 2010. Both chief executives were appointed in 2005 on five-year fixed terms that had expired. In both cases, the local authorities extended the terms of the chief executives to expire just before the dissolution date of 1 November 2010.

2.10
In one instance, the local authority resolved that the chief executive would be paid three months of his total remuneration at the completion of his extended term, subject to his meeting agreed performance expectations.

2.11
In the other instance, the chief executive agreed to extend his term to 31 October 2010 in return for retention and performance payments and a temporary role with the Auckland Council until the end of 2010.

Fixed-term employment agreement with no redundancy provision

2.12
One chief executive was employed on a fixed-term employment agreement expiring on 31 March 2011. The agreement did not provide for early termination of his employment on the grounds of redundancy. The local authority obtained legal advice on the chief executive’s entitlements, given that his employment would end before the end of his agreed fixed term. The advice was that the chief executive was entitled to be paid to the end of his fixed-term employment agreement.

Cost to the local authorities

2.13
We calculate the cost to the dissolving local authorities of employment termination arrangements for the chief executives is $1,405,315.⁷ This figure excludes payments that would ordinarily arise when employees end their employment, such as payments for annual leave entitlements. It also excludes the potential payment to the chief executive whose entitlement is currently deferred. If that payment is made, the cost will be $1,655,844.

Disclosure requirements

2.14
Financial reporting standards require local authorities to disclose termination benefits paid to key management personnel.⁸ This means that compensation payments to senior staff , including chief executives, will need to be disclosed in the final annual reports of the eight local authorities.

2.15
In the interests of transparency, and because there has been inaccurate speculation about the size of some of the payments, we consider it appropriate to disclose the amounts paid.

2.16
Figure 1 shows the payments made by each local authority, the components of the payments, and the year the chief executive started in that role.⁹

Figure 1
Summary of termination payments for chief executives of the eight dissolving Auckland local authorities

The payments

2.17
As noted in paragraph 2.4, where a person does not have a role in the new Auckland Council, the Transitional Provisions Act permits payments of compensation for termination in accordance with their employment agreement (contractual compensation) but not other payments in relation to the end of their employment. We consider that three payments were not contractual entitlements. These payments were an ex gratia payment to the chief executive of Franklin District Council for covering the roles of senior staff who had left, and two payments to the chief executive of Rodney District Council for missed professional development opportunities and career transition.

Cashed-up payments

2.18
We asked Rodney District Council about the reasons for the payments to the chief executive of $35,000 in lieu of untaken professional development and $7,000 for not having an opportunity to receive career transition advice. We were concerned that these payments breached the Transitional Provisions Act. The effect of sections 103 and 104 of that Act is that the only compensation lawfully payable to an employee because their position with a local authority has ceased to exist is contractual compensation.

2.19
The Mayor and chief executive have explained the reasons for the payments. The chief executive’s employment agreement provided that the Council would fund professional development opportunities at its discretion, and Council policy provided that up to 5% of an employee’s total remuneration could be spent on such opportunities in any year. This is the basis for the payment of $35,000 to the chief executive. The Mayor told us that she had instructed the chief executive that he could not take up professional development opportunities during his time at the Council because he needed to be present, initially to restructure the Council and then to prepare for the transition to Auckland Council. The chief executive has noted that this agreement predates the Transitional Provisions Act, and that the arrangements were conceived in the context of his employment agreement. He notes too that he took no part in constructing his termination entitlements.

2.20
The Mayor did not seek Council approval for these payments, and told us that she has responsibility for the chief executive. We accept that the agreement to defer professional development opportunities occurred before the Transitional Provisions Act, but have not seen any evidence of an agreement to compensate the chief executive at the end of his employment for the deferral.

2.21
The $7,000 payment was to compensate the chief executive for not having the opportunity to receive career transition advice. The chief executive explained that other council employees were given the opportunity to obtain career transition advice at the Council’s expense and that he deferred his use of this service at the request of the Mayor to ensure a smooth transition. It is not unusual for an employer to meet career transition costs incurred by employees who are being made redundant. Such assistance is usually designed to meet a need for career advice, and help in preparing a curriculum vitae and with interview techniques. However, we question whether a compensatory cash payment of $7,000 for missing out on career transition advice was necessary or appropriate for a chief executive, especially given the large redundancy payment (which was equivalent to nine months’ remuneration).

2.22
In our view, the compensatory payments to the chief executive of Rodney District Council of $35,000 for missed professional development and $7,000 for not receiving career transition advice, although well intentioned, were not required to be made under his employment agreement. We consider that they were, therefore, in breach of sections 103 and 104 of the Transitional Provisions Act.

Ex gratia payment

2.23
We considered whether the ex gratia payment to the chief executive of Franklin District Council was a breach of sections 103 and 104 of the Transitional Provisions Act for the same reasons noted in paragraph 2.18. We do not consider that the payment breached those provisions because it was to compensate the chief executive for covering the roles of senior staff who had left during the transition period.

Process followed by the local authorities

2.24
Five of the local authorities got legal advice about the entitlements due to their chief executives at the end of their employment. In some instances, the advice was sought for clarification, but in two instances the issues were more complex. These matters were appropriately dealt with by senior staff within the local authorities, rather than the respective chief executives. In the two more complex instances, decisions were made by relevant committees and the full councils as appropriate.

Approval for a variation

2.25
Franklin District Council approved a minor variation to the chief executive’s employment agreement in May 2010, to clarify that redundancy entitlements are based on total remuneration, not salary. The chief executive told us that the Council did not seek the ATA’s approval for that variation because it viewed the change as a point of clarification. Our view is that ATA approval should have been sought, but we acknowledge that the chief executive has not received any financial benefit from the variation.

3: Local Government Act 2002, section 42 and clauses 34 and 35 of Schedule 7.

4: The Transitional Provisions Act refers to this as contractual compensation.

5: Sections 103 and 104.

6: The redundancy provision for this chief executive was amended to this effect in May 2009 to align with entitlements applying to other senior staff of that council.

7: This figure is the cost to the seven local authorities that made payments before dissolving.

8: NZ IAS 24: Related Party Disclosures.

9: Figure 1 includes the deferred redundancy entitlements of the chief executive of the North Shore City Council, as advised by that local authority before it dissolved.