Who Is The Employer In A Receivership Or Liquidation Situation, The Parent Company Or The Subsidiary?

In Hutton v ProvencoCadmus Ltd [2012] NZEmpC 207, the Court considers who was the Employer of 112 plaintiffs in a receivership situation.

The Facts

Provenco Ltd and Cadmus Ltd merged in 2008 forming ProvencoCadmus Ltd. All the Employees signed employment agreements with the new parent company ProvencoCadmus Ltd, and Provenco Payments Ltd paid all the Employee salaries. ProvencoCadmus Ltd went into receivership in 2009.

Under the Companies Act 1993, Employees are preferential creditors for certain types of entitlements up to $20,340. As ProvencoCadmus Ltd was not a trading entity, there was no money to pay preferential entitlements. However, Provenco Payments Ltd did have money available for distribution to the Employees. It was argued on behalf of the Employees that Provenco Payments Ltd was a joint Employer as it had the customers, generated revenue, paid the employees and accounted for their tax and ACC.

The Findings

The Court applied the test in s 6 of the Employment Relations Act 2000 to determine the employer. The matter was one of “the real nature of the relationship”. It was duly noted that it is possible to have joint employers but control is seen as particularly determinative. The question could be asked who an independent but knowledgeable observer would consider the plaintiffs employer.

The Court observed that it would be too easy for Employers to evade their obligations by imposing employment agreements with shell companies with no assets. The Court also stated that complexity in corporate arrangements should not work as an injustice in employment law. Nonetheless, the Court stated that the Court should be cautious to retrospectively recreate a contractual reality.

It is open to those controlling a business to select which company should be the Employer, provided that the selection is consistent with the financial and administrative organisation of the business and is not otherwise a sham.

Who was or was not the Employer is informed by a consideration of who benefited from the services provided by the plaintiffs. Although Provenco Payments Ltd was carrying out a payroll function, there was insufficient control. Provenco Payments Ltd did not have the practical control in terms of hiring, disciplinary matters, remuneration, and termination of employment which were normally incidental to the employment relationship. The Court held that the sole employer of the plaintiffs was ProvencoCadmus Ltd.

Comment

The warning for Employer here is the need to be careful to structure their corporate affairs in such a way as to avoid the position of a joint Employer relationship. Receiverships and liquidations place Employers and Employees in difficult legal positions. For further advice relating to the employment relationship in such circumstances, call Employers Assistance Ltd on 0800 15 8000.