Liability for the employees of another entity – what to watch out for

Home Insights Liability for the employees of another entity – what to watch out for

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Contributed by: Kylie Dunn and Sally Dickison

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Published on: June 29, 2020

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With effect from Saturday 27 June 2020, the Employment Relations Act now includes an express power to bring a third party into a personal grievance. 
 
It has long been possible for an individual to allege that they are employed by an entity other than the company named on their employment agreement. The Employment Court is empowered by the Employment Relations Act to consider and determine the "real nature of the relationship" – whether that be an employment or contractor relationship, but also identification of the correct employer.
 
In its 2017 decision, the Employment Court in Prasad v LSG Sky Chefs New Zealand Limited considered the position of individuals who, on the face of the relevant documents, were understood to be contractors to a labour hire company. The Court held that they were, in fact, employees of LSG (the end use of labour). In that situation, it was LSG who was liable for remedies. In a personal grievance situation, that could have included compensation and potentially reinstatement.
 
From 27 June 2020, these powers are expanded. In addition to determining that an entity is the "real" employer, now, either the Authority or the Court can also determine that an entity (or individual) is a "controlling third party" in the employment relationship. A "controlling third party" is defined as an entity/individual who:

  • has a contract/arrangement with an employer under which an employee of the employer performs work for the third party; and

  • exercises (or is entitled to exercise), control or direction over the employee that is similar to the control or direction an employer exercises.

This would encompass labour hire and secondment situations and employment relationships where employees perform services for multiple related companies. It could conceivably also encompass situations where an individual contracts through their own company.
 
A controlling third party is not an employer. Rather, a controlling third party could be included in litigation as party to a personal grievance, with potential liability for compensation. The employer would still also be liable – liability would be split according to the Authority/Court's assessment of the fault of each party. The employer (and not the controlling third party) would remain liable for all minimum entitlements.
 
Critically, either an employer or employee can apply to have an entity/individual declared a "controlling third party", or the Authority/Court can determine this without an application. 
 
If you have any non-standard employment or contracting arrangements, it is worth understanding the changed nature of potential liability and assessing whether your contractual documents could better protect you moving forward.
 
If you would like to discuss this issue further, please get in touch with our Employment Law Team.

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