Running a cash-strapped start-up and thinking of paying staff in equity instead of wages? Think again. The Employment Court has now confirmed that shares cannot be used to pay wages, even where the employee agrees in writing.
López v Kāriki Pharma Ltd (in liquidation)
Mr López was Chief Technical Officer of Kāriki Pharma Limited (Kāriki), a start-up company reliant on investor funding. By late 2020, Kāriki could no longer afford to pay him.
Subsequently, Mr López agreed, by directors’ resolution, to take 3,533 shares valued at $6.40 each, instead of his salary for August to October 2020. The hoped-for investment never arrived, and Mr López resigned in July 2022.
Mr López brought a claim in the Employment Relations Authority (Authority) for unjustified disadvantage, unjustified dismissal and wage arrears. He succeeded on most of his other claims, but the Authority declined to award him salary for August to October 2020.
Employment Court decision
The Employment Court held that the Authority had got it wrong:
- Section 7 of the Wages Protection Act 1983 (Act) requires wages to be paid in money, which the Act defines narrowly as New Zealand coins and banknotes that are legal tender.
- The only exceptions in sections 8 to 10 of the Act cover payment by cheque, payment into a bank account by agreement, and deductions for absences. A shares-for-wages deal did not fit into any of these.
- Shares are therefore not “money” under the Act and cannot be set off against wages owing either.
Judge Beck went on to outline that the Act forms part of the statutory minimum code and serves a protective purpose. It contains no exception to the requirement that wages be paid in money and applies regardless of the parties’ relative bargaining power.
It was held that a genuine written agreement between the parties could not override the Act, and that Authority had erred by not considering section 7. Salary for August to October 2020 remained outstanding.
A costly outcome
Kāriki was ordered to pay:
- $220,153.52 in unpaid wages;
- $15,884.65 in holiday pay; and
- $6,789.55 in KiwiSaver contributions.
Mr López has the option to recover the arrears (other than KiwiSaver) from two of Kāriki’s directors personally, to the extent that Kāriki is unable to pay.
The bottom line
- Equity can be offered on top of wages, but not instead of them.
- An employee’s written consent will not save the arrangement.
- Directors involved in the breach can be pursued personally for unpaid wages.
If you have questions about any of the above, or any other employment-related matters, contact our Workplace Law team today.
