Businesses use all sorts of arrangements to conduct their affairs, usually to manage tax issues or to operate in different jurisdictions. Usually there is no issue about who the employer is, but this may be difficult to determine in some situations. Dr Michael Johnston found this out to his detriment when his alleged employer used a novel legal defence in employment law.
Dr Johnston moved to New Zealand from the United Kingdom in around 1989 focussing his career on developing software, technical strategy, and developing digital mobile payment solutions in the startup context. Dr Johnston met Chris Jones and started working with him in various companies that he had an interest in. In 2007 Mr Jones started a new company, Youtap Ltd, and Dr Johnston was employed as the chief technical officer.
YMMA was incorporated in Singapore in 2015 to assist Youtap expand into the Asian market. It is wholly owned by Youtap Mobile Money Ltd, a New Zealand-registered company, which itself is wholly owned by Youtap Ltd (also registered in New Zealand). Mr Jones was the chief executive and director of YMMA as well as of Youtap Mobile Money Ltd and Youtap Ltd. Dr Johnston agreed to relocate to Singapore to spearhead the expansion of the Youtap Group through YMMA. Employment arrangements for Dr Johnston were put in place to make this work. He needed to be employed by a Singaporean company to obtain an employment pass (an “E-pass”) so that he could work in Singapore. Dr Johnston also became a director of YMMA because Singapore law requires that at least one director of a company registered in Singapore needs to reside there.
The businesses of Youtap Ltd, YMMA and other Youtap entities were intertwined. Dr Johnston was paid in Singaporean dollars by YMMA into his Singaporean bank account but YMMA would receive the funds from Youtap Ltd (or one of the other New Zealand Youtap entities) because it otherwise would not have had the funds to pay Dr Johnston. But Dr Johnston accrued annual leave in YMMA’s books.
Dr Johnston said that he agreed to being employed by YMMA because he was quite prepared to do whatever was required. He said he continued to assume that he remained employed by Youtap Ltd because “nothing really changed”.
Mr Jones did not agree. While he agreed that Dr Johnston retained the responsibility of being the Youtap Group’s chief technical officer and that he was still part of the Youtap Group senior management team, Mr Jones said that the focus of Dr Johnston’s work was growing YMMA’s business in the wider Asian market.
Dr Johnston’s employment was terminated by letter dated 8 February 2022. He was given one month’s notice in accordance with his YMMA employment agreement. The termination was based on YMMA’s understanding of Singaporean employment law.
Although Dr Johnston made a claim in Singapore against YMMA in May 2022 he engaged lawyers in New Zealand who claimed that Dr Johnston was unjustifiably dismissed under New Zealand law as he was in reality employed by the New Zealand company Youtap Ltd. This argument was accepted in a preliminary decision of the Employment Relations Authority. Dr Johnston was held to be an employee of the New Zealand company Youtap Ltd.
Youtap Ltd appealed to the Employment Court. Youtap Ltd argued that when Dr Johnston commenced work for YMMA in Singapore there was a change to the identity of his employer by the legal concept of “novation”.
In a novation, an original party to a contract is replaced by a new party, with all the rights and obligations of the original party being transferred to the new party and the original party ceasing to be a party to the contract. In considering whether there has been a novation the Court needs to decide whether it has been agreed that a new contract is to be substituted for the old and the obligations of the party under the old agreement are to be discharged. Agreement to a novation may be inferred from conduct and does not need to be expressly agreed.
The Employment Court accepted that the change in employer from Youtap Ltd in New Zealand to YMMA in Singapore was mutually beneficial to both parties. The Youtap Group wished to have a senior person resident and working from Singapore to provide service to key customers and access the markets nearby. The Court concluded that while Youtap Ltd did not appear to have been particularly concerned about which entity employed Dr Johnston both parties understood that Dr Johnston needed to be employed by a Singaporean-based employer to get the E-pass enabling him to work in Singapore. Being domiciled in Singapore and employed by a Singaporean company also gave Dr Johnston significant tax advantages.
Judge Holden concluded that there was a novation in 2015 when Dr Johnston started work in Singapore. This meant that Dr Johnston was not employed by the New Zealand company.
The concept of novation is an unusual argument in employment law in New Zealand. In theory it provides another useful tool in the toolbox to determine the “real nature of the employment relationship” – the usual legal test used for determining whether or not there is an employment relationship. Read more...