A teacher accused of abusing and confining preschoolers has negotiated an exit that does not let her school tell prospective employers about the allegations.

The head teacher of the school said she has been in tears after being forced to write in glowing terms about a woman whom she thinks should not be a teacher.

Accusations arose that the woman smacked children, pulled their hair and put them into "weird timeout situations", including being put in cupboards for up to half an hour.

Police formally warned the teacher but decided not to prosecute because of the difficulty in getting evidence from preschoolers. A warning letter was also sent to the wider preschool saying that the behaviour reported was unacceptable.

But the Employment Relations Authority has ordered the school to abide by the terms of the teacher's exit settlement, including giving a reference that referred to the teacher as "competent" and providing "excellent" documentation.

It has banned publication of her name and the school.

"She did it [the abuse] behind my back. If she goes to another school, it might be worse," the principal said. "I said `I can't do the reference dishonestly'. If something happens to a kid at another school, I will blame myself."

The head teacher said Child, Youth and Family and Ministry of Education became involved, with the ministry telling her to suspend the teacher or they would shut the school down.

But the ministry has refused to step in and prevent the teacher from walking away with effectively a clean record.

Ministry acting regional manager, Vivien Knowles, said it made sure the centre "followed its own child protection procedures set out in its licence. Any subsequent employment issues are a matter for the centre."

The allegations of abuse arose at the West Auckland preschool in August last year.

Detective Sergeant Megan Goldie said police investigated after reports surfaced of "inappropriate physical discipline" and "weird timeout situations".

Teachers were said to be smacking the students, pulling them around forcefully and putting them into towel cupboards for extended periods.

"Parents were horrified when they found out," Goldie said.

A meeting was called where police explained what was being investigated and parents were given questions to ask children. Many reported inappropriate behaviour that the children had been "putting up with" without their parents' knowledge.

Goldie said the difficulty of getting evidence from children and the trauma it would put them through made police decide not to prosecute.

The teacher left the school and, in a mediation conference, the school's board agreed to pay $12,000 in a grievance settlement, provide a positive reference, not mention the allegations and send a letter to police stating that their "considered view" was that they had different conclusions about them.

The head teacher said she was counselled to sign off on the agreement "to get it over with". She gave a differently worded reference but the Employment Relations Authority upheld an appeal stating that she had to provide a reference following "agreed wording".

CYF general manager of operations, Marama Wiki, said the agency "worked with the police to investigate the concerns raised and to ensure children at the preschool were safe".