Alert: Put a start date on your employment contracts

In late August the Employment Relations Authority (ERA) released four decisions relating to the employment contracts of four early childhood teachers and the 90-day trial clause.

This is a timely reminder that you need to dot your Is and cross your Ts if you want to dismiss an employee on the basis of a 90-day trial clause.

In these cases[1], the 90-day trial clause did not expressly state the date on which the trial period began (although elsewhere the agreement did specify a start date for the employment). In the absence of express agreement as to a trial period start date, the ERA said it was not reasonable to assume that it started on the day the employment relationship started. The ERA considered it was open to the parties to agree to a later start date and, for example, it could have begun after completion of an initial training or induction period. The ERA held the clause invalid.

While there is some doubt in the legal community as to the correctness of the ERA’s decision, we recommend you make sure your employment agreements state that the trial period clause commences on the agreement’s commencement date, and that the commencement date is expressly stated somewhere else in the agreement (it’s often in a schedule). 

There are other requirements relating to trial periods that you will need to comply with as well – we are happy to assist with any queries you may have. 

Employee share scheme tax update

Employee share schemes are globally recognised as an effective way for companies to recruit, retain and incentivise their staff. The legal requirements necessary to establish such schemes in New Zealand have recently been clarified under a new securities exemption in the Financial Markets Conduct Act 2013. Inland Revenue has now turned its attention to whether income tax is being properly collected on employee share scheme benefits, with new legislation passed and in the pipeline.

It has previously been up to employees to self-report and pay tax on any income arising under share schemes in their annual tax returns. However, from 1 April 2017:

  • Employers must report employees’ share scheme benefits to Inland Revenue, and
  • Employers may elect whether or not to withhold tax on any resulting income, using PAYE.

If you have an employee share scheme, you should be aware of the new reporting requirements, and should consider whether you will withhold tax. You can read more about the changes here.

Wider policy changes are currently under consultation: these are likely to affect the fundamental taxation of employee share schemes. If you have an employee share scheme, we recommend you seek specialist tax advice. 

An unsettling agreement

A recent Employment Relations Authority decision is a reminder that an employee can bring a claim for breach of minimum entitlements even after signing a settlement agreement.

In this case[2], on termination of her employment, the employee (KC) signed a settlement agreement under s149 of the Employment Relations Act 2000 (ERA). A s149 agreement usually provides certainty of settlement since its terms are final and binding (except for enforcement purposes). The agreement had a full and final settlement clause and, in accordance with the ERA, stated that the parties had not forgone minimum employment entitlements.

Some years later, KC brought a minimum entitlement claim against her previous employer (Selwyn House School) having become aware of case law favourable to her. KC argued that she should have received the minimum wage when she carried out sleepovers for the school.

The school applied to strike out the claim on the basis that it was already settled. The authority disagreed. The agreement did not attract the certainty afforded under s149 because it (arguably) settled minimum entitlements. Therefore, the school argued that the agreement, though not compliant with s149, was still binding. However for that to occur, the sleepover/minimum wages claim must have been in KC’s thoughts when she signed the settlement agreement. It wasn’t and therefore the full and final settlement clause didn’t exclude KC from pursuing
her claim.

When you’re dealing with minimum employment entitlements, be careful and identify all claims your employee may have. As well, before agreement to any settlement, do talk with us first. 

When does a director ‘live in New Zealand’?

Since 1 May 2015, the Companies Act 1993 has required that at least one director of each New Zealand registered company ‘live in New Zealand’ or ‘live in an enforcement country and be a director of a company that is registered … in that enforcement country’. The aim is to ensure there is someone who can be questioned about, and held to account for, a company’s activities. The Registrar of Companies, drawing on tax legislation, has interpreted ‘live in New Zealand’ to mean living in New Zealand for at least 183 days a year.

This interpretation was recently challenged in the High Court[3]. The court found that a broader test is to be applied and that the 183-day threshold only provides ‘a criterion through which directors can automatically meet the statutory test’. If a director does not meet the threshold, the test can be satisfied by other means. While the court did not set any definitive criteria for assessing whether a director ‘lives in New Zealand’, it noted that the following considerations will be relevant:

  • The amount of time the person spends in New Zealand
  • Their connection to New Zealand
  • The ties they have to New Zealand, and
  • The manner of their living when in New Zealand.

When incorporating a company, bear in mind this New Zealand resident director requirement and how it is to be interpreted. 

[1]   Clark v Lighthouse ECE Limited [2016] NZERA Auckland 281; Du Plooy v Lighthouse ECE Limited [2016] NZERA Auckland 282; Baxter v Lighthouse ECE Limited [2016] NZERA Auckland 283; Honey v Lighthouse ECE Limited [2016] NZERA Auckland 284.  

[2]   Cleverley v Selwyn House School Trust Board [2016] NZERA Christchurch 43

[3]   Re John Malcolm Carr [2016] NZHC 1536

Disclaimer: All the information published in Commercial eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in Commercial eSpeaking may be reproduced with prior approval from the editor and credit given to the source.

Copyright, NZ LAW Limited, 2016. Editor - Adrienne Olsen. em. ph. 029 286 3650 or 04 496 5513.