A Reassessment of the Legal Tests Used in Determining Whether Controlling Shareholders are Employees

Abstract A recent decision by the Employment Relations Authority (the Authority) in New Zealand, which granted controlling shareholder employee status, has led to significant confusion regarding the appropriate method for determining the employment status of business owners. This paper found that the Authority’s reliance on traditional legal tests contributes to misclassification, posing substantial corporate governance risks. It examines the governance challenges arising from the misclassification of controlling shareholders as employees and provides targeted recommendations to address this issue. After a literature review of relevant English case law, we apply the UK’s approach to determining the employment status of controlling shareholders to a New Zealand case to assess its suitability. The findings reveal that neither the Authority’s method nor the UK’s approach was appropriate for determining a controlling shareholder’s employment status. Overall, this paper contends that there is no strong justification for granting employee status to controlling shareholders. We advocate for statutory reforms that set aside the doctrine of separate legal personality within the context of employment law. This change would ensure that controlling shareholders cannot be classified as employees, thereby helping to prevent significant governance problems.