EMPLOYMENT LAW IN NEW ZEALAND: EMPLOYMENT AGREEMENTS AND RESTRAINTS OF TRADE CLAUSES

EMPLOYMENT LAW IN NEW ZEALAND: EMPLOYMENT AGREEMENTS AND RESTRAINTS OF TRADE CLAUSES

 

Table of Contents

I.      Introduction.. 3

II.     Contract of service vs Contract for services.. 3

A.    Employment Agreement. 4

B.    Employment Relationship. 5

1.     Scope of Control 5

2.     Independence in the Agreement 6

3.     Integration and Organisation. 7

4.     Intent of the Parties. 8

5.     Fundamental Tests. 9

III.        Restraint of Trade Clauses.. 10

A.    Is it Reasonable?. 10

B.    Remedies upon Breach. 12

IV.       Conclusion.. 13

V.    References.. 14

 

I.     Introduction

Developments in the labour sector are normally defined by the prevailing laws and policies in employment. The relationships between parties as well as the agreement between them place great implications on the rights and entitlements that exist between those involved. In the case of New Zealand, the type of contracts signed by the parties establishes these rights and employment relationship that should be observed in the duration of the contract implementation. This paper will be focusing on this area of employment law. A discussion relating to the distinctive attributes of contract of service and contract for services will be provided in the consequent parts of the paper. Provided the focus on employment agreements and relationships, a close examination of the existing laws on restraint of trade will be given. This will balance off the debate relating to the policies protecting the employees as well as those that seek to protect the employers. To support the arguments and observations provided below, past New Zealand cases, existing laws applicable in the said jurisdiction, and articles on the said subjects of employment law will be consulted and consequently cited. Moreover, a conclusion will be given to sum up these arguments and discussions provided in the paper.  

II.   Contract of service vs Contract for services

Laws covering the principles and values of employment places distinct definitions on the terms “contract of service” and “contract for services.” The following sections will be discussing the distinctive features of these two legal terms.

A.  Employment Agreement

One of the most indispensable documents needed in any employment relationship is the employment contract. The employment contract defines the existing legal relationships that exist between the employer and employee. Without the existence of such an agreement, the employer and employee functions with limited certainty pertaining to their employment relationship. There are two types of employment contracts: contract of service and contract for services.

It stated that for an employment contract that has a contract of service, the relationship is akin to employer and employee. On the other hand, the contractual agreement that represent a contract for services represents a relationship that emulates an employer and an independent contractor. It is also intimated that this relationship, at times, does not implicitly reflect on the contract itself. There are instances where the employment relationship is implied based on the circumstances surrounding the terms of employment. This means that the implications of whether a contract of service or always show itself in written words.  

 

B.  Employment Relationship

As mentioned above, the type of employment contract defines the relationship of the parties involved. However, it is also mentioned that there are times when the circumstances surrounding the employment relationship are defined by several factors. Normally, the courts are consulted to interpret the contracts of employment when conflicts arise. In the Employment Relations Act 2000, s6 specifically mentioned that the courts rely not only at the written document but also in the “real nature” of the said relationship. The following discussions are considered as tests by the New Zealand jurisprudence on the determination of the existing relationship between parties, particularly if they are employee-employer or employer-independent contractor. In providing the said discussions, it will similarly establish the distinctions between contract of service and contract for services.

1.    Scope of Control

This factor tends to provide a precise indication on the power of the employer or the principal on the tasks performed and the way it is carried out. The principle of this test is that the more the principal or the employer is able to control the materials involved in work, the length of time needed to complete the task, the hours in a day required from the other individual, capacity to make the other person conform and discharge the employment contract, then there is a distinct possibility that the individual is more of an employee than an individual contractor. However, this type of test is not sufficient to standalone in determining the existing relationship of the parties involved. In the case of TNT Worldwide Express v Cunningham, this tests was used to interpret the contract between the parties but regarded that this alone is an adequate determination of whether the relationship is employer-employee or employer-individual contractor.

2.    Independence in the Agreement

In relation to the control that the employer or principal possess courts are also required to consider the level of independence enjoyed by the employee or the contractor. To some extent, this test is reciprocates the need to consider the circumstances on the part of the employee or the contractor. This is done in order to substantiate whether the control of the employer or principal is equivalent or sufficient enough to consider the other person as an employee or contractor. For instance, if a person is allowed to work with other clients and operate within his/her own property, then it is more likely that he/she has high levels of independence. In addition, having one’s own tools as well as the legal duty on the income and perils of running a business also points to a great possibility that the person is more of a contractor than an employee.

 However, regardless of the kind of agreement between the parties involved, they still have a binding duty of care with each other. The case of Donoghue v Stevenson [1932] clearly defined this legal concept as a term that places legal responsibility on the other. An actual manifestation of this is seen in contract implying the prevention and possible damage clauses in the event that any conflict of interest takes place. Nevertheless, this contractual term does not explicitly confirm that a person is undoubtedly an employee. These terms added merely puts responsibility on the people involved to keep trade secrets and veer away from any action that would compromise the integrity of the contract.

3.    Integration and Organisation

In a case in UK, Lord Denning described the distinction of contract of service and contract for service based on the integration and organisation conditions. (Stevenson, Jordan and Harrison Ltd v MacDonald and Evans, 1952) More specifically, he described and employment agreement as a contract of service when the person is employed as a part of the business and the job required of him/her is a vital part of the business. On the other hand, the contract for services tends to consider the work done by the person as a mere accessory to the overall operations of the organisation. On the whole, this finding establishes the test determining the type of employment relationship based on the person being “part and parcel” of the organisation. This principle is reinforced in the case of Enterprise Cars Ltd v CIR (1988) where weight is given to the person being integrated on the organisation and not on the context of his/her job being needed on the operations of the business.

More specifically, a person is considered as an employee if it satisfies a number of specific details. For instance, if the job is continuous and reasonably falls on the category of not being an accessory, then the relationship tends to be employer-employee. In the same regard, if the outcome of the job appears to work more on the benefit of the company and less for the worker, then the person may well consider himself/herself an employee. More so, if the job done is falls to a category which is normally done by employees, then the person is definitely under a contract of service.

4.    Intent of the Parties

Possibly distinct in New Zealand jurisprudence, the intention of the parties involved upon the creation of the agreement is also an important part of determining the type of relationship they possess. In the case of Challenge Realty Limited and Ors v CIR (1990), providing a written account of the details of the relationship in the contract is considered as a strong indication of the actual relationship. However, the ruling in the said case intimated that it is not sufficient to determine a conclusive relationship between the parties. This purports that when conflict arise regarding the employment agreement, the courts will have to examine the actual overall intentions of the parties involved in agreeing in the contract to determine the type of employment relationship even if it has plainly labelled as an independent contract or an employment contract. Recent legislations pointing to s6(3)(b) of the Employment Relations Act 2000 reinforced this claim implying that the laws in New Zealand currently involves a greater consideration on the substance of the contract and veering away from the form.

In the TNT case, the defendant claims that a clause in the contract implies that the relationship between the parties is entirely employee and independent contractor. However, the initial findings of the Employment Court indicates that the control of the defendant tend to have considerably high levels to actually correspond to the standards of being an individual contractor. In short, the parties’ intent falls short of what the contract asks them to do. In the end, the Court of Appeal reversed this decision after consideration of the circumstances surrounding the case and maintained that the parties have an independent contract.

5.    Fundamental Tests

This test of regarding employee agreements is closely related to the independence of the party claiming to be an employee or an independent contractor. A more concise description of this test indicates refers to the economic reality present in the case. The case of Market Investigations Ltd v Minister of Social Welfare (1969) provided the framework pertaining to this test. Basically, the test involves the determination on whether the person who performed a specific form of service on his/her own account. This means that it must be determined whether the person who performed a task for a specific organisation disbursed the capital on his/her own accord and faced the apparent risks. Moreover, the possibility of profit on the part of the person who performed the task should been taken into consideration. If all these lean positively towards the person performing the task, then it is more likely that it operates under a contract for services. A more practical determinant on whether the employment agreement falls under the category of economically realistic is determining whether the person doing the task is the one liable if the outcome is below par or if the entire project goes awry. If the company is held responsible, then it is under a contract of service. Otherwise, the person performing the task is clearly an independent contractor. (Challenge Realty Limited and Ors v CIR, 1990)

 

III. Restraint of Trade Clauses

The rationale of placing restraint of trade clauses in employment contracts is to protect the welfare of the employers. This is the law’s way of instilling equal protection for the rights of both parties in an employment relationship. These types of clauses are basically a promise not to do something. This means that to a certain extent, when employers impose certain restraint of trade clauses in the contracts of the employees, they somehow place some level of limit on the ability of the latter to openly trade or perform any commercial capacity. This is where the courts come in. They are the ones who specify whether the incorporated restraint of trade is enforceable or not. This is manifested in the ruling in Medic Corporation Ltd v Barrett [1992] where the courts mentioned that the inclusion of restrictions of trade is potentially harmful to the public interest and potentially unfair. In essence, it is considered as unreasonable by the law as it overly affects the private interests of the employees seeing as they are placed in a position where they have less bargaining position when the contract was signed. Consequently, when the clause is implemented, then certain liberties of that employee are inevitably restricted.

A.  Is it Reasonable?

The courts are given the prerogative to determine whether a restraint of trade clause is enforceable or not. In the ruling in Airgas Compressor Specialists v Bryant [1998], the courts provided a set of factors to consider whether the clauses are reasonable, and thus enforceable. With close reference with the Illegal Contracts Act 1970, the court pointed out factors like public interest, welfare of the parties concerned, proprietary interests, character of the business and the geographical limits, illegality, and possibilities for modification of terms.

In essence, the item in review here is ultimately the contract. There are court findings in New Zealand focusing their attention to the substance of the contract so as to determine whether the clauses are enforceable or not. For instance, there was a case that required consideration which was referable to the restraint of trade clause. (Radio Horowhenua Ltd v Bradley 1993) In this case, the courts intimated that consideration should be present between the parties to establish that there was a “legitimate proprietary reason” for the inclusion of the clause.

Another instance on which the courts regarded the restraint of trade clauses as unenforceable is when the employees were forced to sign the contract under duress. This is shown in the case of Force Four v Curtling (1994) where the employees were placed in an exceedingly unequal bargaining position. The facts of the said case intimated that the employees were under great financial need at the time that the restraint of trade covenant was signed. Thus, the court disregarded the presence of consideration and awareness of the restraint because the contract was plain null as it was signed under duress.

The length of time at which the length of the restraint is to be observed is among the areas of the clause which is considered as reasonable or not. In the case of Walley v Gallagher Group Ltd [1998], the courts require the employers to substantiate the basis of the duration of the restraint of trade clause. Otherwise, the courts will deem that the determination of the restraint of trade as capricious and based on the employer’s whim. In the said case, the duration of the restraint of trade clause indicated a four-year restriction on the employee. The court found this unreasonable and dismissed the enforcement of the clause.

The applicability of the restraint of trade clause is also held into consideration with reference to the materialisation of multinational companies. In the Walley case, the courts deemed that the restraint of trade imposed in a universal and worldwide scope is seen as reasonable. The nature of the company as well as the products it is selling is considered and the courts deemed that it would be better to recognise this as a valid clause.

Shown in the previous discussions, the use of restraint of trade clauses is rather helpful for employers in protecting their welfare. However, it also manifests that the reliance to it would be far from being beneficial and to an extent highly toxic and risky for any organisation. Deterrence is presumably the key element that prompts employers to apply such a stipulation in the contracts of the employees. At some extent, it is understandable that they undertake such precautions. However, as maintained in the cases above, some of the stipulations in this regard are slightly unreasonable as they tend to be used as a tool for monopolistic gains and induce an inequitable position on the part of the employees.

B.  Remedies upon Breach

Ironically, the clauses of the employment contract enforcing restraint of trade are made effective at the instance when the employee has severed its ties with the employer. Thus, there is very little control that employers have in implementing these terms of the contract. This is where the proper authorities and courts come in the picture. The employer could file for an injunction or a compliance order if they intend to enforce the clause.

In the case of injunctions, the Employment Relations Authority (ERA) and Employment Courts (EC) are the ones given the ascendancy to enforce this type of interim relief. It must be emphasised at this point that the granting of injunctions are entirely discretionary. The said institutions have the option to reject, approve or even set aside a particular petition.

On the other hand, compliance orders are acquired solely from the ERA. They have been authorised by the Employment Relations Act 2000 to carry out this mandate. Specifically, s137 of the said Act permits the ERA to compel a private individual to follow the terms of the contract, along with the restraints of trade clauses. In the same regard, the ERA is allowed to customise certain conditions in the compliance order to fit the circumstances surrounding every particular case. In addition, the burden of proof in seeking these types of cases is placed on the employers if they seek to ERA to even consider their case.

IV.Conclusion

The law covering the area of employment relations seeks to protect both the employer and employee. This is seen in the discussions above regarding the developments in contracts for service, contracts of service, and restraint of trade clauses. The paper, in general, has painted the complex picture of employment relations in New Zealand. The relationships between the employer/principal and the employee/contractor teeter along the lines of what those defined as legal and those the falls on the illegal. It emphasised the importance state institutions and courts in resolving conflicts especially in cases where this line is significantly blurred.

V.  References

Airgas Compressor Specialists v Bryant [1998] 2 ERNZ 42, available in: www.justice.govt.nz/.../judgments/decisions/WRC_9_07_CREDIT_CONSULTANTS_DEBT_SERIVICES_V_WILSO_JTK_91.pdf  [Accessed 02 April, 2008]

Challenge Realty Limited and Ors v CIR [1990] 3 NZLR 42  available in: www.lawworksnz.com/resources/To%20be%20a%20Contractor%20or%20Not%20to%20be.pdf [Accessed 02 April, 2008]

Donoghue v Stevenson [1932] AC 562, HL available in: www.leeds.ac.uk/law/hamlyn/donoghue.htm [Accessed 02 April, 2008]

Employment Relations Act 2000 available in: rangi.knowledge-basket.co.nz/gpacts/public/text/2000/an/024.html [Accessed 02 April, 2008]

Enterprise Cars Ltd v CIR (1988) 10 NZTC 5,126 available in: www.nztaxagents.com/index.php?pr=Independent_Contractors [Accessed 02 April, 2008]

Force Four v Curtling [1994] 1 ERNZ 542 available in: www.ema.co.nz/Confidentiality.pdf [Accessed 02 April, 2008]

Market Investigations Ltd v Minister of Social Welfare [1969] 2 QB 173 available in: www.hmrc.gov.uk/manuals/esmmanual/esm7040.htm [Accessed 02 April, 2008]

Medic Corporation Ltd v Barrett [1992] 3 ERNZ 523, available in: http://brookersonline.co.nz/databases/modus/caselaw/prnz/link?si=40963&tid=20468519&id=prnz$8D30 [Accessed 02 April, 2008]

Radio Horowhenua Ltd v Bradley [1993] 2 ERNZ 1085 available in: www.brookersonline.co.nz/databases/modus/caselaw/bcase/CASE~NZ~NAT~EMC~1993~1037?si=4&sid=ija4kfmxrf7 [Accessed 02 April, 2008]

Stevenson, Jordan and Harrison Ltd v MacDonald and Evans [1952] 1TLR 101, available in: http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR200014/NAT/ATO/00001&PiT=20001025000001 [Accessed 02 April, 2008]

Walley v Gallagher Group Ltd [1998] 3 ERNZ 1153 available in: www.ipsofactoj.com/international/2001/Part04/int2001(4)-006.htm [Accessed 02 April, 2008]

Worldwide Express NZ Ltd v Cunningham [1993] 1 ERNZ 695 available in: www.justice.govt.nz/.../judgments/decisions/ARC_62_06_DAVIS_V_CANWEST_RADIOWORKS_LTD-JUDGMEN_JTK_63.pdf  [Accessed 02 April, 2008]

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