John Farrow, Partner at Anderson Lloyd, discusses the Employment Relations (Triangular Employment) Amendment Act that came into effect in mid-2020 and how it offers some insight into the factors that may be relevant in deciding whether an entity is in fact a controlling third party.
In the recent decision (Keanu Head v Chief Executive of the Inland Revenue Department) a full Employment Court considered whether the claimants who had entered into employment agreements with Madison Recruitment Limited were in fact employees of the Inland Revenue Department.
While much of the consideration was focussed on the real nature of the relationship, the Court also made a number of observations about triangular employment relationships.
The Facts
IRD used agency-employed staff on a temporary basis to manage workflow and customer demand peaks. Madison Recruitment Limited is a long-established recruitment and labour-hire agency dealing with both public and private sector clients.
Each employee was provided with an employment agreement with Madison Recruitment Limited as the employer. The letter of offer was made on Madison letterhead but also contained a job description prepared by IRD and a copy of IRD’s Code of Conduct.
Statements of work were produced by IRD, from time to time, outlining the scope of the assignments to be performed by those engaged by Madison Recruitment. The work mainly involved call centre tasks.
The employees were not under a recruitment agreement. They were placed on assignment with IRD as part of Madison Recruitment fulfilling its services obligations.
Recruitment services v Labour-hire
The Court discussed the difference between recruitment services and labour-hire arrangements.
In a classic labour-hire arrangement the labour-hire agency hires out labour of a worker to another business.
Recruitment services involve the brokering of an employment relationship by introducing a worker to an employer, or vice-versa, and leaving them to form a contract.
The Court commented that while it has been recognised that workers’ rights may require statutory protections, these concerns have not proceeded on the basis that using agency labour is inherently illegal.
Despite the potential for the labour-hire model to disadvantage workers due to breaches of employment standards, statutory protection was only recently enacted in the form of the Employment Relations (Triangular Employment) Amendment Act.
The Court further commented that the definition of a ‘controlling third party’ is now expressly relevant to a Section 6 (meaning of ’employee’) analysis.
The Court proceeded on the basis that an agency-hire arrangement is not illegal but can be open to abuse. Where an agency-hire worker contends they are in fact an employee of the host, the issue must be assessed under s6.
The full Court referred to the Decision of Prasad as being “the only case to date which has been required to consider an agency-hire employment relationship on its facts.”
In that decision the Court described the arrangement as involving an issue as to a triangular, labour-hire relationship between an end user and an intermediary. The s6 considerations included the written and oral terms of the agreement, the way the relationship operated in practice and any features of control and integration. It was the real nature of the relationship that was determinative.
Controlling third party
It was argued that IRD was in fact “a controlling third party” in a legitimate triangular employment relationship, and therefore it was to be expected control would be exercised. The Court stated that on the face of the documents it reviewed, there were triangular arrangements between the parties.
The Court also found that there was no indication, prior to the enactment of the Employment Relations (Triangular Employment) Amendment Act, that Parliament intended to rule out the application of s6 to a labour-hire arrangement. The date of enactment of the Amendment Act meant that it did not apply to the present case.
The Court then went through a detailed analysis considering the following factors:
- IRD’s Code of Conduct;
- The Service Agreement;
- The Statements of work;
- Relevant documentation (Individual Employment Agreements);
- The intention to create legal relations;
- How the relationship operated in practice (including training, work performed by the employees, competency, coaching and development, time reporting, annual leave, how the Code of Conduct operated, management performance, resignation / ending of assignment, social gatherings, monitoring of relationships).
The Court also considered the Common Law Tests including the Control Test, Integration Test and Fundamental Test, together with other relevant matters.
The Court concluded that considerable efforts were devoted to respecting the difference between IRD employees and Madison Recruitment employees who worked at IRD. The nature and control exercised over the employees was consistent with a genuine labour-hire arrangement where day to day tasks sit with a host organisation.
Control was shared between each organisation. IRD exercised control over the tasks which had to be performed but Madison Recruitment exercised control over the employment relationship which was broader than the tasks performed.
The employees were not fully integrated into IRD’s operations. They worked only when required and when they did, they were not treated as if they were fully-fledged IRD employees. They only provided supplementary resourcing during busy periods.
The Court also looked at the underlying objectives of the Employment Relations Act including the intention to address the inherent inequality of power in employment relationships.
Here the employees were not vulnerable and open to abuse of the kind which features in a number of s6 cases. The arrangements were genuine, coupled with protections which the employees obtained as employees of Madison Recruitment. This meant that it was not a case where it was appropriate to conclude there was a deliberate attempt to bypass the obligations and protections of the Employment Relations Act.
The Learnings
The Employment Relations (Triangular Employment) Amendment Act enables employees to bring personal grievances against their actual employer and also against an entity that exercises control over them (“controlling third party”). This decision offers some insight into the factors that may be relevant in deciding whether an entity is in fact a controlling third party. In addition, it is clear that the introduction of triangular employment legislation, and the definition of a controlling third party, is expressly relevant to any s6 analysis.
John Farrow is the Partner leading Anderson Lloyd’s National Employment and Health and Safety Team. He is a member of the Institute of Directors, a LEADR accredited mediator and a past president of the Otago branch of the New Zealand Law Society. Contact John at john.farrow@al.nz or connect via LinkedIn 
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Disclaimer: The opinions expressed in this article are those of the writer and do not purport to be specific legal or professional advice
