The Supreme Court decision in LSG Sky Chefs NZ Ltd v Pacific Flight Catering Ltd and anor [2014] NZSC 158 is the finale in a long running dispute over the apportionment of employee entitlements under the restructuring provisions of the Employment Relations Act 2000 (ERA).

The Supreme Court dismissed LSG’s appeal seeking reimbursement of employee entitlements for employees transferred to it under Part 6A of the ERA.

The case and its passage

The dispute related to a tender for airline catering services won by LSG Sky Chefs Ltd (LSG) from Pacific Flight Catering Ltd (Pacific) and the consequent transfer of employees from Pacific to LSG.

The transfers were of employees commonly referred to as “vulnerable employees”, whose employment fits the description in Schedule 1A of the ERA. Under Part 6A of the ERA, the transfers of those employees were to be on existing terms and conditions and LSG was required to recognise accrued leave entitlements.

At issue was whether Pacific, as the transferring employer, remained primarily liable, to employees who transferred to LSG, for leave entitlements accrued prior to transfer.

LSG claimed it was entitled to be reimbursed by Pacific for the leave entitlements of transferring employees¹ accrued prior to the transfer to LSG (pre-transfer leave entitlements).

The High Court found that the primary liability for pre-transfer leave entitlements fell to Pacific, which had to reimburse LSG for pre-transfer leave entitlements paid to transferring employees.

Pacific was successful on appeal. The Court of Appeal concluded that Pacific, as the previous employer, had no ongoing contractual obligations towards transferring employees and that for those obligations, from the time of transfer, the new employer assumes the full liability.

The Court of Appeal noted that, under the ERA, at the time of transfer:

• transferring employees are deemed to be employees of the new employer²;
• the new employer becomes party to the collective agreement in relation to the transferring of employees³; and
• employment of the transferring employees is to be treated as continuous including for the purpose of service related entitlements.⁴

In considering the combination of these provisions the Court of Appeal found that there was nothing to indicate that the former employer should be liable to the new employer for pre-transfer leave entitlements.

LSG appealed to the Supreme Court on the basis that, when it paid accrued leave entitlements, its payments were to the use of Pacific and made under compulsion of law.

Supreme Court decision

The Supreme Court concluded that Pacific’s liabilities for accrued entitlements did not persist after transfer of its employees to LSG, meaning LSG’s claim could not succeed.

The prohibition in the ERA against paying Pacific for untaken holidays to transferring employees, meant that Pacific’s transferring employees “were required to look to LSG for the honouring of their entitlements”⁵ and not to Pacific.

The Supreme Court followed the reasoning adopted by the Court of Appeal noting the purpose of Part 6A of the ERA⁶ is to provide protection for employees working in specified service industries involving cleaning and food catering. In its absence, employees of such contractors in those areas would have little job security.⁷

Under Part 6A, employees are entitled to transfer to the new contractor who must recognise all existing accrued entitlements.⁸ The Court said:

“The overall effect of the legislative scheme makes it clear that LSG was substituted for Pacific and leaves no room for residual liability on the part of Pacific for the Holidays Act entitlements which LSG was required to recognise.”⁹

The Court noted the significance of Part 6A subpart 2, which at the time of the tender process would have allowed LSG to obtain disclosure of employee transfer costs, including the number of employees eligible to transfer and the cost of service related entitlements.¹⁰

The Court’s view was that the express provision for disclosure in the legislation at the time of the tender, together with the phrase “service related entitlements” suggested that liability will be transferred from the former employer to the new. The Court noted that such disclosure would be pointless if the new contractor was not to assume responsibility. The appeal was dismissed.

In relation to unused sick and bereavement leave, Pacific was held to have no obligation after the transfer date, as an employee is not entitled to payment for such leave.

Legislative developments in light of decision

The Employment Relations Amendment Act 2014 (the 2014 Act) will become law on 6 March 2015 and will amend Part 6A of the ERA¹¹. The 2014 Act appears, at least in part, to be a legislative response to a lacuna in the law made apparent by the present case.

In its judgment, the Supreme Court commented¹² that the disclosure regime in the ERA “is of limited utility because the information which can be obtained is aggregated” and that the incoming employer would have to rely on their industry experience to arrive at a “reasonable estimate of likely accrued entitlements”.¹³

To assist the new employer, the amendments require employees affected by restructuring to notify their current employer within five working days (or a longer timeframe agreed by the two employers) of their decision as to whether or not to transfer. The onus is then on the outgoing employer to provide the new employer with detailed information about transferring employees before the restructuring takes effect.

Employers are able to negotiate an agreement regarding the apportionment of liabilities for transferring employees’ service related entitlements, between the former and the new employer. In cases where agreement cannot be reached, an apportionment formula is provided in the new legislation.

The Court of Appeal decision briefly addressed alleged deliberate inflation of transferring employees’ leave balances and pay, which would result in an increased burden to the new employer.

The amendments address that possibility by requiring an implied warranty from the outgoing employer that the arrangements of work have not been changed in a way which would adversely affect the incoming employer.¹⁴

Practical result for employers

Service related leave entitlements of transferring employees will be a factor for businesses taking over a contract which provides employment in the food catering and cleaning industries.

Transferring employers will need to be aware of the requirement to provide detailed disclosure of the costs of transferring employees’ accrued entitlements under the changes to the ERA.

Both sets of employers will need to be aware of the time frame within which the employee must elect whether or not to transfer to the incoming employer; be aware that accrued entitlements will be apportioned where agreement between both employers cannot be reached.

As a result of the amendments to the ERA, the requirement to automatically take on “vulnerable” employees will not apply to businesses of 19 or fewer employees, recognising the larger proportional costs burden to small- and medium-sized businesses of accepting transferring employees.

Naoimh McSparron is a solicitor in Wynn Williams’ litigation and dispute resolution team and advises business and individuals on a range of litigation and dispute resolution matters. She has particular interest in employment litigation and she advises clients on all aspects of employment law, from employment agreements through to disciplinary processes and restructuring. Before living in New Zealand, Naoimh practised in a general practice firm in Northern Ireland.

1. LSG Sky Chefs NZ Ltd v Pacific Flight Catering Ltd and PRI Flight Catering Ltd SC [2014] NZSC 158.
2. The decision is dated 5 November 2014.
3. Leave entitlements accrued under the Holidays Act 2003.
4. Employment Relations Act 2000 section 69I(2)(a).
5. Employment Relations Act 2000 section 69M(2).
6. Employment Relations Act 2000 section 69J(1).
7. LSG Sky Chefs NZ Ltd v Pacific Flight Catering Ltd and PRI Flight Catering Ltd SC [2014] NZSC 158 at para 22 (e) per Woolford J.
8. Ibid paragraph [14].
9. Ibid paragraph [23].
10. Ibid paragraph [18].
11. Employment Relations Amendment Act 2014 sections 31 – 48.
12. LSG Sky Chefs NZ Ltd v Pacific Flight Catering Ltd and PRI Flight Catering Ltd SC [2014] NZSC 158 at para [24] per Woolford J.
13. Ibid para [24]. However the Supreme Court noted they did not see this as detracting from the point as LSG would have been able to arrive at the reasonable estimate based on the information obtainable and its own knowledge of the industry.
14.  Employment Relations Amendment Act 2014 clause 40 inserting new section 69LC into the Employment Relations Act 2000