Many start-ups choose to utilise independent contractor agreements, volunteer agreements and/or offer equity to workers as opposed to paying wages, particularly when cash flow is an issue. However, in the event the legal status of such a worker was challenged in the Employment Relations Authority (the ERA) by the workers themselves, or alternatively, the Labour Inspector, the evidence of the parties’ intentions and/or the existence of a signed agreement stating the worker is not an employee will not suffice from preventing a finding that the worker was in fact an employee. Rather, the Courts will look to determine the ‘real nature of the relationship’ using several established tests to determine the legal status of the working relationship.
If the ERA found a worker to not be a volunteer or contractor, but an employee, that individual could be entitled to receive all minimum entitlements available to them by law, which include, but are not limited to:
- The Minimum Wage (currently $21.20) for each hour the employee worked since the commencement of their employment with the company;
- KiwiSaver payments;
- Annual leave (four weeks per year, however pro-rated if the employee is not a fulltime worker); and
- Sick leave.
Therefore, as raised above, while many start-ups pay their workers in shares or offer other non-waged arrangements, if an employment relationship is later found to exist with those workers, the payment of shares alone will not override the company’s statutory duty as an employer to pay the Minimum Wage + other entitlements owed.
Consequently, directors of start-ups and companies should be aware of the potential legal risks associated with using agreements which may not necessarily truly reflect the nature of the company’s relationship with their workers. For example, in the event a worker’s relationship with the company was determined to be an employment relationship by the ERA and the relationship had lasted for several years, the remedies available to the employee for Minimum Wage payments alone could result in a not-insignificant sum being awarded to the employee.
In respect of Minimum Wage entitlements, where directors of companies who have in any way been “knowingly concerned” with a breach, or party to a breach of the Minimum Wage Act, can be held personally liable for the breach itself. Recently, where such breaches have been established by the courts, employees have been permitted to pursue the directors of companies personally for compensation, even where the companies in question had been wound up and liquidated.
Finally, the personal liability of individual founders in start-ups is an interesting question, given that founders usually hold many different roles within their companies, for example, as directors, shareholders, volunteers, employees, contractors, etc. and therefore it can be difficult to assess exactly what type of liability could arise, particularly where there is more than one founder involved in the company. However, as raised above, what is clear is that if the legal status of a worker in a company becomes an issue, the Courts will look to determine the real nature of the relationship, which could cause issues for start-ups, where for example, there has been an imbalance of work completed between multiple founders and a claim is made against the company.
If you require any assistance regarding anything raised above, please do not hesitate to contact our employment team.
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.
