Employers with no assets…

Employers with no assets…
Thursday March 21, 2013

The December 2012 decision of the Employment Court (“the Court”) in Hutton v Provencocadmus Ltd (in receivership) should encourage all employees to look at who their employer is, and what assets their employer holds. By way of background to the Hutton decision, two separate groups of companies, the Provenco Group and the Cadmus Group, merged to produce a single group of related companies – the Provencocadmus Group (“the PC Group”).  The structure of the PC Group included a holding company, PCL, and a number of trading subsidiaries.  PCL had no assets other than shares of the trading subsidiaries.  The majority of the individuals who provided services to the PC Group were employed by PCL.  At the time of the merger, each of the employees of the Provenco Group and the Cadmus Group were provided with a copy of a proposed new employment agreement identifying PCL as the employer (“the PCL IEA”).  After the merger, the employees provided services across the PC Group, and one of the PC Group’s trading companies, PPL, performed the payroll function for PCL’s employees. PCL was placed in receivership roughly a year after the merger.  The employees of PCL were advised of PCL’s receivership and their employment relationships’ with PCL were terminated.  The employees were advised of their preferential claims entitlements[1] but were subsequently advised that as PCL had no inventory or accounts receivable against which the preferential claims could be paid, there were no funds available for distribution to the employees. A group of 112 PCL employees brought a claim in the Employment Relations Authority (“the Authority”) contending that they were employed jointly by PCL and a number of the trading companies which they provided services too (who had assets out of which the employees’ preferential claims could be paid).  The claim was unsuccessful, the Authority ultimately determining that the employer was PCL alone. The employees challenged the Authority’s determination in the Court, arguing that their employer was jointly PCL and PPL.  The employees’ basis for their argument was that they performed services for PPL (as well as a number of other trading companies) and PPL performed the payroll function for them, including paying their salaries/wages, deducting PAYE, paying PAYE to the IRD, and paying ACC levies. While the Court accepted that it is possible to have joint employers, in Hutton the Court ultimately found that PCL was the sole employer. The Court’s finding was predominantly based on the following: PCL was named on the employment agreement as the employer (very clearly, and in multiple locations within the employment agreement), and PCL had control of the employees.  Despite PPL performing payroll services for and receiving services from the employees, it was not itself meeting the costs of the employees’ services (costs were apportioned across the PC Group), nor did it have any practical or legal control of the employees in terms of making decisions about hiring, disciplinary matters, remuneration or termination of employment. The Court found that it is “open to those controlling businesses 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. The important outcome of Hutton for all employees is the Court’s confirmation that a group of companies may be set up with one company (with no independently held assets), established solely to employ one or more employees who provide services to the group.  Provided there has been no intention to deprive the employee(s) of benefits, the employee(s) cannot successfully claim that they were jointly employed by members of the group.  The end result may be that, where the employer company is placed in receivership or otherwise wound up, employees will be stuck with the asset position of the employer company, leaving the employees with unfilled preferential claims.



[1] In accordance with s 312 and Schedule 7 of the Companies Act 1993, which provide that when a company is in liquidation or receivership, the liquidator/receiver must pay out of the assets of the company, in priority to the claims of other secured and non-secured creditors, money owed to employees by way of wages, holiday pay, redundancy compensation etc.

 

By Chris Patterson