When Worlds Collide – The Risk of Family Members “Helping Out” in the Family Business

When Worlds Collide – The Risk of Family Members “Helping Out” in the Family Business

A recent string of decisions in the Employment Relations Authority and the Employment Court has confirmed that when family members are helping out in the family business, they can still be considered employees, and therefore entitled to all the minimum entitlements like holiday pay.

This article discusses the impacts these arrangements can have on your business if you are in a similar situation.

In one recent case, a married couple ran two businesses in a small town. The husband was the sole director and shareholder of the two companies. The wife helped out in both the businesses from time to time. After they separated, the wife sued the companies, alleging that she had been unjustifiably dismissed and seeking holiday pay.

The wife was paid a “salary of sorts” by one of the companies. The husband said that this was primarily a way of introducing more funds into the relationship and was not necessarily reflective of there being an employment relationship. His argument was that there was no intention for the company to actually employ the wife. There was no employment agreement.

A couple of weeks after the parties separated, the wife attended at one of the businesses to complete payroll. She was told that someone else had taken that over. That same day, she received a letter from her husband’s lawyer telling her she no longer worked for either of the businesses.

The Employment Relations Authority found that, despite the husband’s arguments, the wife was an employee and therefore entitled to holiday pay and had been unjustifiably dismissed.

Here, because the wife had been paid a consistent salary and worked undertaking a number of different tasks, the Authority considered that she was really an employee, rather than just “helping out the family business” which was the husband’s view.

Because of the informal way in which this had developed, the wife had never really taken annual leave. Even when they had been on holiday, she still undertook some work. This resulted in a holiday pay liability of just over $40,000.00.

While the Authority did say that it could be possible for family to help out a business without forming an employment relationship, that will depend on the facts of each case. The things that the Authority or Court will be looking for are:

  • To what extent the company controlled the work being undertaken by the family member;
  • How integral the work being completed is to the business; and
  • How the family member was being paid, and the tax arrangements around that.

Having the support of family members in a business can be really important to making sure that the business is sustainable. However, people running their own businesses need to be sure that they haven’t accidentally got more than they bargained for by signing themselves up for an employment relationship when they didn’t intend to, as this can create significant liabilities for the company. If you are concerned about this, get in touch with a member of our employment team to discuss.