What happened to the contract?

Come on New Zealander’s, let’s get the basics right, please.

Whenever I meet clients, whether it’s an employer or an employee, my starting question is always the same – “what does the contract say?”

Yet, no matter how many times I tell employers to get all their paperwork in order, it never ceases to amaze me how many businesses employ staff without providing the most basic of employment contracts. To me, the need to issue an employment contract is rule 101, but as confirmed in last weeks’ Employment Relations Authority decisions, it seems that many of us do not take this legal requirement seriously.

In Flannagan v PMR Holdings Ltd, an employer’s repeated attempts at trying to improve an employee’s performance by issuing one warning after another, fell on deaf ears and had little sway with the Authority. Even though Mr F was a nightmare employee (continually late for the morning shift, messy, untidy, moody, smoked in the premises and generally unhygienic), and the warnings may well have been justified, the employer failed to convince the Authority that it acted fairly when it said, ‘enough was enough’ and dismissed him.

Under normal circumstances, a dismissal after repeated warnings would seem the logical next step. So, why did Mr F’s claim for unjustified dismissal succeed?

Well, in short – he had no contract of employment and this was a fundamental breach of a statutory obligation. Despite trying to convince the Authority that Mr F “was simply a housekeeper working for his keep” and no contract was required, the Authority did not agree. It looked at the factual matrix surrounding the relationship and determined that a “mutuality of obligation” was evident. There was an understanding that:

  • Mr F would work set hours each week;
  • Work was to be regularly provided by the employer;
  • A comprehensive list of duties was to be undertaken on each shift; and
  • Mr F would be rewarded for his labour (albeit accommodation and board, as opposed to a monetary amount).

The Authority determined that Mr F was an employee and for that reason was legally required to receive a contract setting out the salient terms of his employment. The employer’s failure to provide this basic document proved it’s costly undoing. Not only was it required to pay Mr F all statutory leave entitlements that he has accrued over the years of employment, but was also fined a hefty sum for non-compliance with the law.

The Authority took the same stance two days later in Hannah v QCL, when it penalised another employer in similar circumstances. In this case, Mrs H was considered “part of the family” so the employer didn’t feel a contract was necessary. Again, the Authority considered the factual matrix and ruled that she was indeed an employee (despite being close friends with the sole director). The mutuality of obligation was evident in their relationship too (like the Flannagan case):

  • Mrs H would work a regular 30 hours per week;
  • She was provided with a company vehicle to promote the trading name;
  • Business cards were issued in her name;
  • Sales targets were often set for her to achieve; and
  • Mrs H was paid for her labour (albeit the amount was firmly in dispute).

Notwithstanding the employer’s argument that Mrs H was a ‘family friend’ who simply volunteered her services to his business, the Authority was not impressed. It was made abundantly clear that even a volunteer still required a contract of employment – regardless of the nature of a person’s involvement in a business, an employer cannot disregard this fundamental legal requirement.

Interestingly, the Authority also made the comment that any failure to provide a written agreement caused an “inherent inequality in an employment relationship, and the employee will obtain the benefit of any doubt”. For example, the absence of a contract meant that the employer could not disprove Mrs H’s claim that she was to receive $20 per hour (as opposed to the base minimum wage that the employer alleged).

Damages were awarded to Mrs H based on her claim of $20 per hour, which included reimbursement of statutory entitlements dating back to 2009, plus an additional penalty for non-compliance was awarded. Another costly and somewhat avoidable experience for an employer.

So, what is the moral of this story – “you can have the worst employee in the world, but they still have rights, treat them carefully and follow the rules”; this is where the existence of a contract is paramount. Despite this being a legal requirement, it is also an employer’s ‘get-out-of-jail’ card in the event things go wrong. If you, or your staff do not have contracts of employment, please give us a call without delay as this could prove your undoing in the long-run.