Some employees are eligible to receive shares in the company they work for under an Employee Share Scheme (ESS). It is helpful to understand what is likely to be taxed and when.

Some companies adopt ESS to incentivise their employees to work towards the success of the company as both an employee and as a potential shareholder. Because owning shares may benefit the employee financially, income tax may be payable.

What is taxed?

There are many forms of ESS. Some employees are given shares for free or at below market rate if they meet certain conditions. Others are given the opportunity to buy shares and pay them off through salary sacrifices.

In a nutshell, if as an employee receives a financial benefit from ESS, irrespective of how the shares were acquired, the taxable amount is the difference between the market value of the shares and what was paid for the rights. Note that some ESS are exempt from taxation.

Employers may tax ESS employee benefits, however, if they don’t, the employee will need to account for it themselves by filling out an IR3 form. Note that employees can retrospectively advise Inland Revenue of benefits from previous years by making a voluntary disclosure.

When does tax get calculated?

When it comes to ESS the point the employer holds the shares for the beneficial ownership of the employee is the vesting date. In straight forward ESS, the share scheme taxing date is when the employee exercises their option for the shares (takes up their right to the shares).  This makes sense in situations where there is a risk that after the shares have vested, the employee might leave or otherwise forfeit their right to the shares. In those situations, it would not be fair to tax the employee at vesting date, because they might not ever exercise their option.

Recently however Inland Revenue released a Technical Decision Summary about a situation that was not a straight forward ESS. The employer had taxed the employee at the date the shares were exercised but the employee disputed this interpretation, arguing that the tax date should be when the shares vested.

The Tax Council Office in its adjudication found in this particular situation the share scheme taxing date was the date of vesting because that is the first date that the shares were held for the benefit of the employee and after which there was no material risk that their beneficial ownership of the shares would change, for example by the employee leaving. In this case there was no material risk that the employer would fail to exercise their option after the vesting date.

Key takeaway

If you make a financial return from an ESS you will likely need to pay tax. The date from which the tax applies will depend on the particular ESS and the employee’s circumstances. It might be at the date the employee exercises their rights or it might be at the date of vesting if there is no material risk that the employee will fail to realise their option.

Contact us if you would like to know more about ESS and whether this might be a good option for your company and employees.

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This article is general in nature and is not a substitute for legal advice. You should talk to a lawyer about your specific situation. Reproduction is permitted with prior approval and credit being given back to the source. 

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