ERA settlements and s 150A "Payment on resolution of problem": paying advocates directly and GST Invoices

Section 150A payments and GST invoices - what is actually lawful

A common settlement question is whether an employer can pay a separate amount to an advocate for representation costs, and whether GST should be added. The anser: Yes, this is legal and best practice for resolving employment relationship problems and disputes. How the settlement is structured and what the Employment Relations Act 2000 treats as a "payment" for settlement purposes is discussed below.

When an employment relationship problem is being resolved and an employment advocate assists in resolution of that problem, the parties to the employment relationship problem can freely agree to the employer paying the advocate directly. This can be recorded in an s 149 Record of Settlement and expressly record the parties agreement to this, for example:

"The Employer will pay the amount of $4,500 plus GST to [the Employee's representative's company Limited] by direct credit as a contribution to the Employee's advocacy costs. An appropriate tax invoice from [the Employee's representative's company Limited] will be addressed to the Employer."

This is the process that will be followed:

1. The settlement is negotiated in good faith.
2. The employee agrees to the advocate being paid directly by their employer or former employer.
3. The amount to be paid to the advocate is specific and has rationale behind it.
4. The employee signs their agreement to it.
5. The mediator confirms with the employee that they confirm the effect of settlement is understood by the employee, this is:
   1. Those terms are final and binding on, and enforceable by, the parties; and
   2. The terms may not be cancelled under sections 36 to 40 of the Contract and Commercial Law Act 2017; and
   3. Except for enforcement purposes, no party may seek to bring those terms before the Authority or the court, whether by action, appeal, application for review, or otherwise.
   4. A person who breaches an agreed term of settlement to which subsection (3) applies is liable to a penalty imposed by the Authority.

In this situation it is pretty obvious that the employee has control over the arrangement of how their costs will be paid for. In November 2008 the Mediation Service endorsed this practice, and this practice has continued ever since.

Parliament intended for non-lawyer representatives and employment advocates to be paid directly in s 149 settlements.

If it were the case that the amounts payable to the employee under the record of settlement were paid to the advocate or representative directly, that would render the payment as being if it had not been made. That is how s 150A works from a literal and purposive interpretation.

Section 150A was inserted because what was happening is that advocates and representatives were providing their own bank account numbers to the employer to then be paid and then the money would be passed on to the employee client after the costs are taken out of the full amount. That is a totally different scenario to parties agreeing that advocacy or representation costs are paid directly upon a GST invoice.

Advantage to the employer

An employer paying an advocate directly upon a GST invoice does help the employer because there is a tax advantage in being able to claim back the GST portion. Compare this with if the employer were to pay the employee the amount directly the employer will be unable to claim back GST if the employee is not GST registered, which is often the case.

An employer being able to claim back 15% on a $1,000 plus GST invoice might seem insigificant if it were only the amount of $150 that can be claimed back, however, when the parties enter into a record of settlement when there has been significant advocacy costs, for example where the matter has been dealt with by the Employment Relations Authority or beyond that to the Employment Court, the employer being able to claim back GST on a principle liability for example of $20,000 is much more significant, that is $3,000 GST at 15% if we use that example.

If the advocate's time at $300 plus GST per hour and having spent 40 hours on the case in total (written correspondence, mediation, assisting in writing witness statements and managing documents, writing submissions and investigation meeting attendance, the fee could rationally be $12,000 plus GST. That is a figure of $13,800 inclusive of GST.

If the advocate's employee client was awarded a total of $30,000 (including contribution to costs), the advocate and their client could agree (and to agree with the employer) that $13,800 be paid inclusive of GST by the employer to the advocate, and the client receives the remaining about of $16,200. The employer would be getting a 15% discount on the invoice portion from the advocate.

Compliance order decisions

If the parties have entered into a record of settlement and it has been agreed that the advocate will be paid costs directly by the employer on a GST invoice, and then if there is a breach of this term of settlement, the Employment Relations Authority has the power to order compliance.

For example, in this case an employer was ordered to comply with the terms of settlement and pay the advocate their costs directly.
Maree v Sanem Digital Limited [2023] NZERA 50

The record of settlement in that case contained the term: "Upon receipt of an invoice for legal fees, Sanem Digital Limited agrees to pay $3500 plus GST to Christine Maree's legal advisor on or before the 20th of November 2022."

The Authority Member ordered the employer to pay the advocate directly: "In order to effect compliance with clause 4 of the Record of Settlement, I therefore order Sanem Digital Limited to pay Ms Maree's advocate the sum of $3500."

The Member forgot to add the GST, in which case if it was the writer's case, the matter would have been challenged to the Employment Court to put right the amount plus GST.

The Authority's interference with the freedom of parties to contract

In a recent Authority decision involving the issuing of a compliance order another Authority Member has interfered with how the payment of the contractual agreement is to be effected. The Authority ordered that payment of an advocate's invoice be made directly to the employee client of that advocate.
Armstrong v MTS Energy Limited and Anor [2023] NZERA 72

Second year law students learn about the law of contract and the first lecture contains the following.

From the Economic Theory of Freedom of Contract: "From the laissez faire economies of the 19th century, to the free market and global economies today, freedom from interference has been and remains a fundamental premise" (emphasis added, Thomas J. p 6 of the review article)

Further: "... it is the law of contract which has the greatest impact on interactions where freedom of choice and action and freedom from interference are most coveted." (p 14)

The writer places emphasis also on the relevance of contractual jurisprudence, Liberal Theory ("liber" (Latin) = "free"), promotes individuals rights, liberty, free enterprise. It focusses on consent and voluntariness. Courts give effect to agreement of parties.

There was no legal basis for the Authority Member to make the order that was made in this case. If the writer had the opportunity to challenge a decision like this to the Employment Court just to make the point, the writer would do so. As stated above, taking both a literal and purposive approach to s 150A does not reasonably result in the conclusion that was made here.

The Authority should have ordered that the employer pay the advocates invoice directly because that was what was contemplated by the parties in having entered into the Section 149 settlement.

As it stands the employer is not getting the benefit of being able to claim back the GST.

Just because one Authority Member has this view does not make it the law, the Authority is not bound by its own decisions.