Higher Health & Safety fines are a new reality

Businessman

Insurance Update

By:

On 22 August, the first fine was imposed on a business for breach of the Health and Safety at Work Act 2015. While these fines cannot be insured, the 6-fold increase in penalties under the new Act will change defence strategy in a number of ways and businesses need to ensure they have appropriate insurance cover.

In WorkSafe New Zealand v Budget Plastics (New Zealand) Limited (1), the case involved failing to guard machinery, which injured a worker. A portion of a worker’s hand was amputated after it was caught in the auger of a plastic extrusion machine. The machine was insufficiently guarded and lacked emergency stop controls, and the company did not have adequate systems in place for identifying hazards, safe operating procedures, or training of workers.

Under the old Act, the starting point for the fine in such cases was $90,000-100,000. Under the new Act, the maximum fine in usual cases increased 6-fold from $250,000 to $1,500,000. On that basis, the court said the starting point in assessing the fine was in the range of $400,000-$600,000.

Having applied discounts for mitigating circumstances, the court said it would have imposed a fine of $275,000. However, to the inability of the business to pay that by reference to accounting evidence, it reduced the fine to $100,000. 

The court has been careful to say that, while disregarding them on the basis that the New Zealand legislation stands apart from the Australian legislation (from which it was derived), the lower fines applied in Australia may be an issue to be addressed by a New Zealand appeal court. 

The take outs from this decision are:

  • Investment in health and safety compliance must be a priority for businesses if injuries to workers and these significant exposures are to be avoided. 
  • It is important to have sufficient insurance cover under a statutory liability policy to cover legal defence costs, as well as Court awards of reparation to victims. As to recent increases in reparation awards, see our article here
  • As it is unlawful to insure for the fine, if facing a conviction, businesses will need to reserve on the assumption there will be fines reflecting the 6-fold increase in maximum penalty.
  • More businesses than in the past will legitimately say they don’t have the ability to pay those fines. Accountancy evidence will be required at sentencing to prove that, and so reduce the fine. The cost of preparing that evidence will usually be covered by a statutory liability insurance policy. Defence costs, on average, will increase.   
  • Fines of this magnitude will encourage businesses to apply to WorkSafe to accept an Enforceable Undertaking instead of pursuing the criminal proceeding to conviction and fine. 
    • WorkSafe expects a financial commitment from the insured in lieu of conviction but the process is not only about spending money on good causes. The quality of the proposal is important and must meet WorkSafe’s policy criteria.
    • The legal costs of negotiating an Enforceable Undertaking are usually covered under a statutory liability policy.
    • WorkSafe’s criteria prescribe that injured persons must be compensated as a condition of an Enforceable Undertaking being accepted. Typically, any voluntary payment to injured workers is not covered under a statutory liability policy, and that will need to be weighed in the balance by businesses in determining whether that is a viable option in each case. 
  • Inevitably a guideline decision from the High Court will be required, and so the prospects of the costs of an appeal of sentence should be borne in mind.

We are experienced in advising clients in management of their risk and so compliance with the Act. We routinely act for defendants in WorkSafe investigations and prosecutions, and in the Enforceable Undertaking process. Please contact us with any questions you may have.

(1) [2017] NZDC 17395