While the Employment Relations (Restraint of Trade) Amendment Bill (“the Bill”) is yet to have its first reading in Parliament, what is apparent on current information is that it could significantly limit the use of employment related restraint of trade clauses in New Zealand, particularly for lower to middle-income earners.

Currently, the starting point with restraints is that they are generally considered contrary to public law, anti-competitive and therefore unenforceable.  Nonetheless, restraints can be valid in certain instances, particularly where an employer has what is known as a legitimate ‘proprietary interest’ and can prove that the restraint is no wider than what is reasonably necessary to protect that interest(s).  For example, an employer is entitled to protect trade secrets and/or a continuing business relationship, so long as it does so in a reasonable manner.

Over the years however, restraints of trade have been used liberally by New Zealand employers and have not infrequently been included for roles which may not in fact warrant them.  In turn, employees have been left in a difficult position when their employment ends, unsure of whether a restraint is enforceable against them and/or if they can or cannot accept a new role which might breach the restraint.

In drafting the Bill, Parliament have recognised a number of issues of public interest, including the two raised above, and has effectively sought to even out the playing field.

This includes:

• seeking to prohibit the use of restraints for lower and middle-income employees (which would be achieved by providing that such clauses will have no effect if an employee earns less than 3 times the minimum wage); and
• employers of higher income employees needing to carefully consider whether a restraint clause is actually required and to compensate employees appropriately where a restraint is imposed, both during and following termination (i.e. during the restraint period).

If the Bill passes through Parliament and receives Royal Assent, employers will need to work through a number of matters set out in the Bill where they are proposing that a restraint of trade clause apply to a new employee.  Employers will also need to turn their mind to whether restraints which apply to current employees will be effective and valid on the termination and the potential implications if they are not.

 

Do Call Agreements and Volunteer Working Arrangements Automatically Prevent Employment Status Being Confirmed in Religious Settings?

Historically, church ministers have often been provided with call agreements, rather than employment agreements.  Similarly, many churches rely on the use of volunteers on a day-to-day basis to work in a variety of different areas and either use a formal volunteer agreement or have verbal agreements with the individuals concerned.   However, while many consider that a historic legal precedent exists that ensures persons in such roles will be automatically recognised as religious volunteers and therefore cannot legally be recognised as employees, the mere existence of a call or volunteer agreement between a church and an individual will not necessarily preclude an individual or group from arguing or even establishing that they should be legally protected by employment law.

 

More recently, it has become clear in New Zealand that the Courts are seriously willing to consider whether ministers and volunteers in certain situations could be recognised as employees.

 

For example, in the 2022 case of Courage v Attorney-General Sued (On Behalf of the Ministry of Business, Innovation and Employment, Labour Inspectorate) the Employment Court found that while the religious context of a relationship is relevant, it is not determinative, and a presumption against the existence of an employment relationship does not exist in relation to religious individuals carrying out the duties of the Church.  In another recent case from 2017, Below v The Salvation Army New Zealand Trust, the Employment Court, in the context of a religious volunteer working relationship stated there was no presumption operating in New Zealand to restrict classes of workers from employment protection.

 

In both cases mentioned above, the Employment Court made it clear that automatic legal protection for religious institutions does not exist when it comes to assessing the nature of a working relationships with ministers and volunteers.  Rather, the Courts will first look at the true nature of the relationship and subsequently apply a number of legal tests to determine whether the workers are actually employees.  For example, the Courts will consider:

1. the amount of control exercised an employee (the greater the control exercised over an individual, the more likely that person is an employee);
2. whether the worker is “part and parcel” or fundamental to the organisation;
3. in the event a worker was paid, how the worker was paid and the reason/intention behind payment; and
4. other relevant factors relating to assisting the court to understand the true nature of the working relationship.

Consequently, while call and volunteer working agreements can be utilised by churches, we suggest that at a minimum, organisations who use such agreements, ensure they are aware of the relevant legal risks, including the possibility of their workers being recognised as employees, and consider getting advice on how the relationship will actually operate in practice and whether that will be more consistent with an employment relationship or not.

Looking to hire a contractor but not sure whether they might be an employee instead?  This article looks at the difference between employees and contractors and the tests that are used to help work out which is which.

It’s important to get it right as employees have minimum entitlements, such as the right to receive at least the Minimum Wage; leave entitlements and the right to only be terminated in certain circumstances and subject to a fair process.

What is the difference?

On the face of it, the definition of contractors and employees don’t seem too different.

An employee is a person employed by an employer to do any work for hire or reward under a contract of service (an employment agreement).  It includes a homeworker or a person intending to work but excludes volunteers and certain persons engaged in film production.

A contractor is engaged by a principal to perform services under a contract for services (an independent contractor agreement), earning income by invoicing the principal for their services.

However, where there is a dispute as to whether someone is a contractor or an employee, several legal tests are used to determine the dispute. Each test on its own is not determinative, they all must be assessed together to reach a conclusion.

Intention Test

What the parties intended is relevant to deciding whether the relationship is an employment one.

Generally, intention involves looking at what the parties’ written agreement says. The title of an agreement and specific clauses within an agreement can suggest what the parties intended. Likewise, where an agreement does not have specific clauses is also relevant to intention. For example, an employee’s employment agreement would have clauses relating to leave including sick leave, annual leave, and bereavement leave, whereas this would not be present in a contractor’s agreement.

Control Test

The greater control an employer has over the individual the more likely that individual is an employee. Control will be assessed in relation to work content, hours and methods. Thus, an individual who is set specific tasks to do which must be done in a particular way and whose start times and end times are controlled suggests that they are an employee. If an individual can control their own start times or work on a specific project using their own methods, this is more consistent with a person being a contractor, rather than an employee.

Integration Test

If the work performed by the individual is “fundamental” to the employer, this suggests that the person is an employee.

This is indicated by factors such as team integration, being reimbursed for work-related expenses and wearing a uniform.  Conversely, an individual being paid by results and whose work is not fundamental to the business, but accessory to it, indicates they are a contractor, rather than an employee.

Economic Reality Test  

This test involves looking at the whole working relationship to determine the economic reality.

In particular, a contractor is a person in business on their own account. This means that the individual is not engaged on a continuous basis by one business but is self-employed and contracts out their services to businesses that need them for a particular project or period of time.

A contractor usually charges a fee for their services, whereas an employee is paid a salary or a wage. Employees are entitled to at least the minimum wage, however a contractor can be paid whatever rate is agreed to. An employee’s employer pays PAYE tax and ACC on the employee’s behalf, whereas contractors generally issue invoices setting out their fees and pay their own tax directly to Inland Revenue.

Other factors relevant to the economic reality test include GST registration, the ability to subcontract work, who wears the financial risk in the relationship, and whether the person can work for more than one entity. All those factors are more consistent with a contractor relationship.

Industry Practice

Industry practice can also inform whether an individual is an employee or contractor. While industry practice is not determinative, it can be considered by the Court especially when a custom or practice is well established. It could also help to show the intention of the parties.

Case Example – Employee

Southern Taxis Ltd v Labour Inspector

Southern Taxis Ltd (“STL”) operated a business in Dunedin and employed drivers described as “commission drivers”. The Labour Inspector alleged that four commission drivers were in fact employees and that in some instances they were not paid the minimum wage, holiday pay, sick leave or rest breaks.

The Court had to decide whether the commission drivers were employees or contractors.

Common Intention Test

There were no written agreements between the parties. There was also little evidence of discussions between the parties except that the drivers would be paid 40% of the takings.

Control Test

Each of the drivers operated under a roster which was prepared by STL. The roster would let the drivers know in advance what days of the week they would work and broadly which shift that driver would work. The drivers would have to work the shifts that they were rostered for and their work patterns were similar every week. This suggests a degree of control was imposed over the drivers.

The drivers had to log on and off as well as maintain contact with the dispatcher. A dispatcher would assign work to the drivers and, although the drivers could theoretically decline work, in reality they had no choice if they wished to be paid.

The Court found that the working arrangements of the commission drivers was more controlled than those of independent contractors.

Integration Test

The drivers drove vehicles owned by STL and the company would meet the expenses for the vehicles. Particular clothing was worn by the drivers and the drivers would operate according to a roster.

The Court found that STL relied on the availability of the commission drivers for its business operation. The test supported the conclusion that the commission drivers were employees.

Economic Reality Test

The Court found it was clear that the commission drivers were not in business on their own account as they did not own their own vehicles or pay running costs. They could not subcontract their work.

STL deducted PAYE so the drivers did not make personal tax payments to IR. Furthermore, the drivers were not registered for GST and did not render invoices.

The economic reality test pointed towards the commission drivers being employees.

The result

The Court found that the commission drivers were employees. The employees were paid varying amounts of approximately $13,000 to $32,000 for unpaid entitlements.

Case example – Contractor

Arachchige v Rasier New Zealand Ltd

This case concerned an uber driver, Mr Arachchige. He argued he was an employee of Uber after he was terminated.

Common Intention Test   

There was a services agreement between Uber and Mr Arachchige. This suggests that the relationship was not an employment one. In the agreement it stated that the parties did not have an employment relationship. The services agreement did not require exclusivity of the drivers and there was an lack of clauses expected in an employment agreement, such as performance expectations.

Control Test

Mr Arachchige had a lack of control over his client base and over determining what fare to charge. However, the Court stated Mr Arachchige could charge less than the quoted price but this would have been no value to him, as he had no ability to establish a relationship with the riders and thereby attract future work.

Mr Arachchige could decide to work in peak times and where he would work. He could also choose what car, phone, data plan, insurance and other business support he might use. Mr Arachchige also could share the vehicle with another person to reduce expenses.

Integration Test

Uber drivers carry out work integral to Uber. However, Uber had little control in the way in which drivers carried out their work. This was different from Southern Taxis Ltd where the drivers had little autonomy over the way in which they carried out their business activities.

Economic Reality Test/ Fundamental Test

Mr Arachchige could decide when he undertook his services. He provided all the necessary equipment needed including the vehicle. He was also responsible for his tax obligations.

Result

Mr Arachchige was not an employee of Uber. Thus, he could not claim the rights of employees, such as the right to bring a claim of unjustified dismissal.

Conclusion – Employees vs Contractors

There are various factors to consider when determining whether an individual is an employee or contractor. The Court uses four tests, as well as industry practice, to help answer this question. It is important for employers to get it right because employees are entitled to broader legal rights than contractors, including minimum wage entitlements.

This article is not a substitute for legal advice, and you should consult your lawyer about your specific situation. Please feel free to contact us at Parry Field Lawyers:

• Hannah Carey Senior Counsel – hannahcarey@parryfield.com

When an employee is not performing as expected, what should an employer do? Are there steps an employer should take or, conversely, not take?  This article considers this issue further, including some recommended steps at the start of an employment relationship, during and, if required, the end.

Starting point – the importance of the job description

It is much more difficult to manage an employee’s performance, and for an employee to know what is expected of them, if job descriptions and job expectations are not clear from the start.  What does success look like in the employee’s job?

At a minimum we recommend that all employment agreements have good job descriptions, which not only set out what tasks/jobs an employee will undertake but also what expected performance looks like.  For example, a performance objective might be “deliver projects on time and within budget”.

Probationary periods – are these useful? 

A probationary period is a period of time to enable an employer to “assess the suitability of the employee . . . normally in terms of skills, diligence and personality.”

Unlike 90 day trial periods, probationary periods can be for any length of time, although we often see them set at 3 months.  They can also be used if an employee is changing from one role in a business to another.   However, they must be specifically included in the employee’s employment agreement (whether for a new role or a changed role) in order to be utilised.

While a fair process must still be followed over a probationary period, particularly leading up to any dismissal, that process is qualified somewhat by the fact that the employee is considered to be “on notice” over this time that they are being specifically assessed and that permanent employment will only be confirmed if the requisite standards are met.

That means that the process does not have to be as stringent as it would be once a probationary period ends (or if there is no probationary period), although it does, as noted, still need to be fair. For this reason, probationary periods remain useful as part of the employment relationship.

However, we recommend that, where employers use probationary periods, they run for longer than 3 months, say, for example 6 months.  Sometimes issues with an employee’s performance do not surface straight away and, even if they do, employers are still required, over probationary periods, to do the following, which takes time:

• Advise the employee of any concerns with performance, advise of any necessary improvements, and warn of possible consequences if performance does not improve; and
• If performance does not improve, give fair warning of termination.

In addition, just because an employee is not meeting standards to begin with, this does not mean that, with additional time and assistance, they cannot later do so.  Therefore, it’s important to have sufficient time to assess an employee’s performance and assist them to improve, before the probationary period expires, rather than rush through this process.

When performance falls short – can employer have an informal discussion with their employee? 

Regardless of whether an employee has a probationary period or not, employers have a duty of good faith to bring to an employee’s attention areas where they are not performing as needed.  Raising matters also has the benefit of (more likely) identifying such things as if the employee actually understands what is expected of them, if they might need additional training, or if there are any issues with the employer’s processes, systems or workplace that might be impacting on the employee’s performance.  Further, in some cases, an informal chat may be all that is needed for an employee’s performance to improve.

To start with, raising performance concerns with an employee does not necessarily need to be done in a formal way.   A formal process is needed where there may be a disciplinary outcome, like a warning, to ensure fairness to the employee.  Formal processes are discussed further below.  Employers should also check the employee’s employment agreement and their policies, as these may set out certain steps that need to be followed where there are performance concerns.  In that case, those steps should be followed.

However, where an employment agreement/policy does not prescribe a particular process and an employer just wants to let an employee know, for example, that an employee’s performance is falling short in some way and to assist them to improve, then this can generally be raised in a less formal way.  It is prudent however to let the employee know at the start of any discussion that it is not a disciplinary process.   All discussions should also still be held privately, rather than in front of other employees.

In these discussions, the employer can explore with the employee:

• what the employer’s expectations are, working to be as clear and precise as possible;
• why they consider the employee’s performance is falling short;
• is there anything affecting the employee’s performance, either at work or outside work, that needs to be addressed first;
• does the employee understand what is expected of them; and
• can the employer provide any additional assistance or training to help the employee improve.

A written record should be kept of these discussions.

The employer should then continue to check in regularly with the employee, giving additional feedback on their work and working with them to try and help them meet expectations.

Formal/disciplinary processes – when are these needed? 

Sometimes, however, despite informal chats with an employee, their performance still continues to fall short.  In that case, it is not helpful for either the employer or the employee to let matters drift on.

In these cases, we recommend an employer have one final discussion with their employee, letting them know that, if their performance continues below expectation, the employee may need to start a formal performance management process.  Sometimes this is enough to result in improved performance but it also ensures there are no surprises if an employer does need to move to a formal process.   Again, a written record should be kept of this discussion.

A formal performance management process is a process which involves certain steps to ensure that it is carried out fairly.  This is because the process could end in disciplinary action, including possible dismissal (depending on the circumstances).

At a minimum, the employer needs to:

• Write a letter to the employee outlining the specific ongoing issues with the employee’s performance and proposed next steps and provide the employee with all relevant information (such as any documents which support the employer’s concerns).
• In terms of proposed next steps, this will usually include setting out the further time period the employer proposes to give the employee to improve; the targets or objectives the employee need to meet over this time, and the further support the employer will give the employee. This is often referred to as a Performance Improvement Plan or a PIP.

Ideally performance expectations should be holistic to ensure that it is clear that performance needs to be achieved across the board.  This means that, even if an employee improves in one area, the PIP (if it proceeds) does not need to start again if the employee is not performing in another area.

• Advise the employee that, if the proposed next steps proceed and the employee does not sufficiently improve, disciplinary action may be taken, up to and including possible dismissal (if this is a possibility).|
• Give the employee a reasonable opportunity to consider the concerns raised and proposed next steps, including time to obtain independent advice, before the employer meets with the employee again.
• Ensure the employee knows that they can have a support person with them at all meetings.
• Arrange a meeting with the employee (and their support person) to give them an opportunity to respond to the concerns raised and the proposed PIP.

The employee’s response should then be considered and, if it does not address the concerns raised or raise other matters which reasonably need to be addressed first (e.g. issues with the workplace that may be affecting performance), then the next step would be to proceed with the PIP.

However, employers should take on board any comments the employee raises about the PIP, particularly about the length of time the employee has to show improvement, and amend the PIP if necessary.

The finalised PIP should then be confirmed with the employee, including any changes made as a result of the employee’s feedback.

During the PIP, the employer still needs to continue to give feedback and provide any additional training or support that is reasonably necessary.

However, if the employee is still not improving, progressive warnings can be provided by the employer. These warnings should be clear as to the issues and what could be the consequences if performance does not improve or if performance improves but then regresses again.  Further, warnings should be confirmed in writing, to reduce confusion about the warning given, and future expectations.

Unless an employment agreement and/or policies set out how many warnings should be given, it’s prudent to at least provide one written warning and one final written warning in the case of possible dismissal.

Even if an employee’s performance improves significantly, the PIP can continue to its conclusion, although no warnings would be given along the way.

Where a PIP meets these requirements, the employer may be justified at the end of the PIP in taking disciplinary action, up to and including dismissal, if the employee has still not met the required standard. The employer does have to show however that reasonable alternatives to dismissal were explored.

Alternatively, an employer may only issue a warning or extend the PIP, if, for example, the employee has shown improvement such that, with further time, it’s possible that they might meet the employer’s expectations.

Along the way we recommend that, as much as possible, the same personnel deal with performance issues, to help ensure consistency across the process.

Finally, a PIP can also be undertaken with or without a disciplinary process running alongside, such as where an employer considers there is a good likelihood the employee’s performance will improve without possible disciplinary action.  In that case, the PIP won’t refer to possible disciplinary action.

Case example – correct process

A case of where an employer used a fair and reasonable process is Yan v Commissioner of Inland Revenue:

• Reasons for dissatisfaction were provided and were discussed with the employee;
• Detailed explanations were provided regarding improvements required;
• Performance management periods were defined;
• There was comprehensive and objective assessment against targets;
• The employee was allowed opportunity for feedback;
• Feedback was considered before the employer took action; and
• Alternatives to dismissal such as possible redeployment were considered.

Case example – incorrect process

The case of Trotter v Telecom Corporation of New Zealand provides an example of where a performance management process fell short:

• The employee was given two weeks to improve for matters that the employer considered were severe performance issues;
• No support or education was given;
• The employer predetermined the dismissal, evidenced by them writing a letter of dismissal prior to the final interview. The final interview should have actually enabled the employee to demonstrate what steps he had taken to improve his performance and any further action he planned to take.

But doesn’t this all take too much time?

Following the correct process, does take time.  Sometimes employers ask us if there is a quicker way?  Can’t they just have an “off the record” discussion with their employee?

In some instances, employers and employees do, in the context of performance issues, reach a mutual agreement to end the employment relationship.  However, these sorts of discussions need to be handed very carefully because they can lead to legal liability.  Simply calling a discussion “off the record” is not enough.  We always advise employers to seek legal advice before they engage in any such discussions.

Takeaways

Having good performance processes not only improves the likelihood of having well performing employee but also helps ensure employees are treated fairly.  Make sure performance expectations are clear from the start and the employee is ‘set up’ to succeed as much as possible.  Where concerns arise, address these early and clearly and provide support and feedback along the way. Also make sure you follow your employment agreements and/or policies.   If performance still does not improve, this may ultimately be a justifiable reason to dismiss an employee, however, a fair and reasonable process still needs to be followed first to give an employee a fair chance to improve and to fairly warn the employee of what the consequences might be, if performance remains below par.  If an “off the record” discussion is being contemplated, make sure you get legal advice first.

This article is not a substitute for legal advice and you should consult your lawyer about your specific situation. Please feel free to contact us at Parry Field Lawyers:

• Hannah Carey, Senior Counsel – hannahcarey@parryfield.com