There is a general common law presumption that family members who enter into an agreement do not intend to create legal relations. But how does this presumption play out in the employment jurisdiction, especially in situations where an individual finds themselves in an informal arrangement to perform work for a family member's business?
Recent case law highlights the difficulties which can come from such informal familial arrangements, and why having a soundly constructed agreement is important even when doing work for a close and trusted relative. This lesson may be particularly important in New Zealand, where approximately 97% of our businesses have fewer than 20 employees.1 Many of these small businesses are likely to be family businesses.
What issues may arise from familial arrangements to perform work?
Defining the working relationship
The main issue likely to arise in the context of an informal familial working arrangement is whether there is an employment relationship between the individual performing the work and the person for whom they are working. A workers' employment status is important as there must be an employment relationship for a worker to be afforded many of the statutory rights available under the Employment Relations Act 2000 and Holidays Act 2003, such as the right to the minimum wage, leave and the ability to pursue a personal grievance.
In Dillon v Tullycrine Ltd [2020] NZEmpC 52, Mr Dillon claimed unpaid wages from Tullycrine, a company owned and operated by Mr Dillon's son, Hayden, and daughter-in-law, Lisa. In 2010, Hayden, Lisa, Mr Dillon and Mrs Dillon agreed to purchase a farm to run as an agistment business, whereby customers paid to have their livestock grazed and fed on the farm. It was agreed that Hayden and Lisa would provide the funding and Mr Dillon would be responsible for the day-to-day running of the farm.
In determining whether the arrangement gave rise to an employment relationship, the Employment Court noted the general presumption against an intention to create legal relations in family arrangements. However, it also confirmed that a family context does not preclude a finding of employment and noted that there are circumstances where one member of a family is vulnerable to exploitation by virtue of the family relationship. Accordingly, each case needs to be carefully considered in context and on its own facts.
The Court held that the arrangement did not give rise to an employment relationship. While Hayden and Lisa principally dealt with the management and financials, and Mr Dillon with the running of the farm, the usual control an employer would be expected to have over an employee was not present. At all material times, the arrangement was based on their familial relationship with the hope that the business would be successful to everyone's benefit.
Conversely, in McKay v Wanaka Pharmacy Ltd [2020] ERA 230, the Employment Relations Authority (the Authority) found there was an employment relationship in the context of a familial working arrangement. In this case, Ms McKay performed a range of work for a newspaper company and a pharmaceutical company, both owned and operated by her husband, Mr Heath. This work included answering phone calls which were directed to her mobile, uploading the newspaper to the website, managing social media accounts, assisting with recruitment, taking charge of rostering and taking photos for the newspaper. There was no employment agreement between the couple and these tasks were mainly performed remotely around Ms McKay's family commitments to her three sons.
When the couple split, Ms McKay raised a personal grievance for unjustified dismissal after being informed she would no longer be working for the companies. While Ms McKay was being paid for the work she undertook, Mr Heath claimed the payments were set up as a way of "income splitting" for tax purposes and argued that Ms McKay was not an employee because of the matrimonial relationship between the pair. However, the Authority referenced Tullycrine in noting that a family context does not preclude a finding of employment, and each case needs to be considered on its facts. In this case, the Authority applied the control, integration and fundamental tests to determine Ms McKay was an employee despite the matrimonial relationship with her husband. She had therefore been unjustifiably dismissed.
Holiday Pay
Another issue which may arise in the context of informal family working arrangements is determining the amount of holiday pay due and owing on termination where it is determined that a worker has been an employee, but no record of holidays taken has been kept.
The Employment Court dealt squarely with this issue in McKay v Wanaka Pharmacy [2021] NZEmpC 112. Following the Authority's determination that Ms McKay had been an employee for 13 years, but not had these holidays deducted from her holiday entitlements, the Court had the difficult task of determining her holiday pay entitlements on termination. This required the Court to figure out how many holidays Ms McKay had taken over this period – a challenging factual assessment to make several years after many of the holidays in question. The Court dealt with conflicting accounts from Ms McKay and Mr Heath as to how many trips away Ms McKay had taken. It then turned to consider the equally challenging question of whether and how much Ms McKay worked during her holidays, and how this affected her rights under the Holidays Act 2003. Coming to the conclusion that Ms McKay was required to work about 10% of each week she was on holiday, the Court credited this time to Ms McKay
Ultimately, the Court determined that Ms McKay was entitled to 34.25 weeks' holiday pay, being the difference between the accrued holiday entitlement figure in the payroll system and the holidays Ms McKay had taken. At the rate of $1208.12 per week, Ms Heath was required to pay Ms McKay a gross payment of $41,378.11 plus interest.
What does this mean for employers?
Employers cannot rely on a familial relationship to argue that a working arrangement is not an employment relationship. The common law presumption against an intention to form legal relations with family members derives from an English contract law case. While this presumption is recognised by the New Zealand employment institutions, the Employment Court has made it clear that intention is not the only factor to be considered when determining whether the true nature of the parties' relationship was one of employment. The courts will continue to apply the well-established common law tests of control, integration and the fundamental test to the facts to determine whether there is an employment relationship, so that a family context will not preclude a finding of employment.
It is therefore important to consider the true nature of any working arrangement (including those involving family members) prior to its commencement and put in place a sound and legally compliant employment agreement which reflects this. While a party's statement as to the nature of their relationship is not conclusive, reflecting on the working arrangement in advance will minimise the likelihood of an unexpected declaration that a worker has always been an employee. Such a declaration can see the employer slapped with an order to pay a hefty sum towards unpaid entitlements under the Holidays Act or Employment Relations Act, and open the employer up to unexpected personal grievance claims.
Footnote
1 Ministry of Business, Innovation and Employment "Data for Business" (2024) https://www.business.govt.nz/data-for-business
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
