When attention to detail goes bad, in corporate law…

September 26 2016

Dot your I’s and cross your T’s! In business, we know we should do this but we sometimes don’t. The idiom exists to remind us to carefully review documents, facts and important information, to examine the details in order to make sure we don’t make costly mistakes. If you’re in business, make sure you talk to a commercial/corporate lawyer about any matter relating to business law. A commercial lawyer is trained to spot another idiom, ‘the devil in the detail,’ and will save you unwanted expenses.

Critical Detail #1: Are you putting start dates on your employment contracts?

Recently the Employment Relations Authority (ERA) released four decisions relating to the employment contracts of four early childhood teachers and the 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, even though the agreement did specify a start date for the employment elsewhere. The ERA said it was not reasonable to assume the 90-day trial period started on the same day as the employment relationship because it had not been expressly stated. The ERA considered both parties could have agreed to the trial period starting, for example, after initial training or an 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, our commercial and corporate lawyers 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.

There are other requirements relating to trial periods that you will need to comply with as well. Talk to a commercial lawyer if you need advice.

Critical Detail #2: Who reports and pays tax on employee share schemes?

The legal requirements necessary to establish an employee share scheme in New Zealand have recently been clarified under a new securities exemption in the Financial Markets Conduct Act 2013. Share schemes are globally recognised as an effective way for companies to recruit, retain and offer incentives to staff. Inland Revenue has since examined whether income tax is being properly collected on employee share scheme benefits. New legislation has been passed.

Previously, employees were required to 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.
  • 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. Wider policy changes under current consultation are likely to effect the fundamental taxation of employee share schemes. Talk to our commercial lawyers if you need more information and advice.

Critical Detail #3: When agreements aren’t final

Did you know an employee can bring a claim for breach of minimum entitlements even after signing a settlement agreement?

A recent ERA case[2] determined, on termination of her employment, the employee (KC) signed a settlement agreement under s149 of the Employment Relations Act 2000. 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 stated that the parties had not forgone minimum employment entitlements.

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

The school applied to strike out the claim arguing it had been settled. The ERA 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 minimum wages for sleepovers 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, look at the details carefully and identify all claims your employee may be able to make. Before you issue an agreement to any settlement, talk to a commercial lawyer.

Critical Detail #4: When does a director ‘live in New Zealand’?

Since 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’. This is to ensure someone 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 determined that a broader test will 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 the relevance of these considerations:

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

If you’re incorporating a company, keep this detail in mind and how will 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

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