Are your shareholders also employees?

Shareholders of a company may also be employees. This means that employers are legally obliged to provide them with minimum entitlements and a failure to do so could result in significant liability for the company (in the form of back pay (for 6 years), penalties, and potentially defending other claims or personal grievances).

Determining whether a shareholder is also an employee requires you to determine what the real nature of the relationship is. This test, which is similar to the test for determining whether a person is an independent contractor or an employee, requires analysing the intentions of the parties and how the relationship operates in practice. This is obviously specific to each individual arrangement/relationship.

Facilitating minimum wage increases

Helpfully, however, case law provides some guidance as to the relevant factors for consideration when determining whether a shareholder is also an employee.

Smith v Practical Plastics Ltd

In this case, the following factors persuaded the Employment Court (Court) that Smith, who was a director and shareholder of Practical Plastics Ltd, was also an employee:

(a) Whether or not the company was a family company (in this case only the directors had a business relationship);

(b) The amount of shareholding interest Smith held in the company (Smith held only a minority interest in the company and could not exercise any control over its operations);

(c) Whether Smith performed services for the company and did so as a person in business on his own account;

(d) Whether Smith provided equipment, hired helpers, undertook financial risk, and/or had responsibility for investment and management in the performance of his tasks; and

(e) Whether Smith was required to sign minutes, approve accounts, or pass company resolutions.

Lamerton v Comsol (Computer Solutions) Ltd

In this case, the Court decided that Lamerton, who was one of two directors and shareholders of Comsol (Computer Solutions) Ltd, was not an employee.

While Lamerton worked full-time at the company, received a salary, had entitlement to annual and sick leave, and was paid for public holidays, the company could not alter Lamerton’s remuneration, discipline him, review his performance, or dictate his work hours without the other two directors’ agreement.

Workplace Law team

If you are concerned that your shareholders could also be considered employees under New Zealand law please contact us to discuss.

Employment: Andrew Shaw, Fiona McMillan, Gwen DrewittMaria Green,  Hannah Martin, Joseph HarropHolly StruckmanAlex Beal, Giuliana Petronelli, Abby Shieh
Immigration: Mark Williams, Rachael Mason, Daniel Kruger, Nicky Robertson, Julia StrickettKen Huang, Mary Zhou, Shi Sheng Cai (Shoosh)Sarah Kirkwood, Janeske SchutteLingbo Yu
ACC: Andrew Shaw
Health and Safety: Andrew ShawFiona McMillan

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