Employee Benefits – which Employer carries the can?

When a ‘vulnerable’ employee elects to transfer employers under Part 6A of the Employment Relations Act 2000 (“Act”), all their employment entitlements transfer with them.  The new employer becomes liable to pay all of those accrued benefits.  Has the old employer got off scot-free?  Can the old employer prevent recovery by saying that the new employer passed on the cost of the entitlements to the end client?  Is the old employer still liable to the new employer?

In the recent decision of LSG Sky Chefs Ltd v Pacific Flight Catering Ltd, the High Court has firmly rejected an argument that the old employer is entitled to raise a defence of passing on in these situations to prevent paying the new employer in restitution.

The Sky Chefs case is a long-running saga that has been in both the Employment Court and the High Court.  It involves two food catering companies that cater for airlines – LSG Sky Chefs and Pacific Flight Catering.  Pacific held a contract to cater for Singapore Airlines.  It lost that contract to LSG.  As a consequence, 44 employees formerly employed by Pacific whose work involved Singapore Airlines catering elected to transfer their employment to LSG.  They were entitled to do this under Part 6A of the Act.

When the employees transferred to LSG, their employment entitlements that had accrued when they worked for Pacific transferred with them.  LSG therefore inherited a liability of $257,809.05 at the date of transfer.

LSG sued Pacific for restitution of the money it paid in meeting the employment entitlements of the newly-transferred employees.  It claimed it was well-established that where the new employer (LSG) has been compelled by law (in this case, Part 6A) to pay, the old employer (Pacific) obtains a benefit by virtue of the fact that it no longer has to pay out the entitlements.  As a result, the old employer is indebted to the new employer for that amount.

Pacific disputed this argument, and claimed that there was a defence of ‘passing on’.  Under a passing on defence, the old employer would be able to defend a claim against it in restitution by saying that the new employer ‘passed on’ the charges/pay out of entitlements to another party, and therefore it (the old employer) is no longer liable to the new employer for that amount.

In the present case, Pacific argued that LSG passed on the cost of the entitlements to Singapore Airlines and had therefore not suffered any loss.  As a result, Pacific did not have to pay LSG.

Justice Toogood rejected Pacific’s argument completely.  His Honour canvassed cases from Australia, Canada, the UK, and New Zealand, as well as articles on the subject, and decided that no defence of passing on exists in New Zealand law.

The Court also stated that it is not a prerequisite of a claim in restitution that the new employer has suffered loss.  Restitution operates to restore the new employer to the position they would have been in had the old employer not been unjustly enriched by no longer having to pay out the entitlements.

In our view

The vulnerable employee legislation in Part 6A is a complex and technical part of the Employment Relations Act 2000.  The law of restitution is similarly complex.  The facts and discussion of law in this case reflect these complexities.

The High Court’s decision in this case was only on preliminary points of law and not the substantive outcome of the dispute.

Whether Pacific does have overall liability for its ex-employees has not yet been determined.  The High Court simply struck out Pacific’s passing on defence, and did not rule on the overall merits of the case.

However, the effect of Justice Toogood’s decision that there is no defence of passing on in New Zealand law means that:

• When employees transfer their employment under Part 6A to a new employer, their employment entitlements/benefits transfer with them;
• The new employer assumes legal liability and is required to pay out those entitlements when they become due;
• Once the entitlements are paid out, the new employer may then seek to recover the amounts paid out from the old employer;
• The old employer may not deny liability by simply asserting it does not have to pay because the new employer has passed on the costs of the entitlements to its end client.

In practical terms, any employer who is the old employer needs to be careful.  They may still be liable for all employment entitlements/benefits accrued.  It does not matter that employees have transferred their employment to another company under Part 6A and no longer work for the old employer.

Given that entitlements can add up quickly, this type of situation may have real financial ramifications for the old employer who thinks it has escaped a bullet.

If you have any questions regarding Part 6A or transferred entitlements (we wouldn’t blame you!), feel free to email us on employmentnews@heskethhenry.co.nz or call us on (09) 375 8699.