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When running or starting a small business, it’s not unheard of for business owners to employ their family members to work for them. After all, these are employees you have likely known for some time and you’re familiar with their skills and experience.
It’s common practice to hire family members to work in your business, however, there are certain things you need to be aware of when it comes to paying family members. For example, some family members that work for you will be recognised as ‘closely held payees’.
Closely held payees are determined as those that are:
- Family members of a family run business
- Beneficiaries of a trust
- Shareholders and directors
It can be easier to skip the traditional employer/employee arrangements with someone you’re used to, however, you still need to be aware of your legal obligations as an employer!
Keep reading to know more about dealing with closely held payees so you can go about matters the right way.
Running A Family Business
Running a business is an exciting venture. When you get your family involved, it can make it all the more merrier. Doing something you are passionate about with the ones you love most can make it a very meaningful project.
However, there are some legal obligations when it comes to paying your family members or other closely held payees as staff of the business.
It’s not considered the same as paying an employee that isn’t close to you. The rules are somewhat different and it’s important to keep up with the relevant regulations.
Defining A Small Business
The definition of a small business can vary depending on the context in which it is being asked. For example, if the New Zealand Inland Revenue Department (IRD) is asking, then a small business is a business that has an annual turnover of less than $5 million.
In this scenario, a small business would be any business that has less than 20 employees.
If you have a business with less than 20 employees and have closely held payees working there, then you are required by the IRD to engage in Payday filing.
Paying Family Members In A Small Business
Payday filing is mandatory for closely held payees in a small business. However, you can decide whether this is done with each pay or on a monthly basis.
For all other employees, however (arm’s length employees), the reporting of their pay must be done on or before each payday.
Payday filing is simply the regular reporting most employers would do for all their regular employees. However, the rules changed to include closely held payees in this. In fact, you may decide not to distinguish between closely held payees and arms length payees by reporting their pay during the same period.
It all really depends on what works best for your business.
If you’re still unsure about your business, it can help to talk things through with a legal expert. Our lawyers are available and happy to help!
What Are My Obligations?
As an employer, there are a number of things you need to look out for when it comes to pay and your employees.
For example, pay secrecy is not encouraged in New Zealand. You cannot ask your employees to keep their pay a secret from other employees. If your contracts contain pay secrecy clauses, you might want to consider getting them reviewed. Every employee has the protected right to discuss their pay with another if they choose to do so. In fact, this is often encouraged as it can prevent employees from being paid unfairly.
According to the New Zealand Employment Relations Authority, there’s a minimum standard setting out how employees need to be paid. This can depend on the employee’s industry and type of work, so if you’re unsure, it’s best to get in contact with the Employment Relations Authority or to talk to a legal expert. As an employer, if you’re paying them under the minimum amount or depriving them of other awards and entitlements, then you are most likely in violation of the law.
Another thing to be aware of is paying employees in cash. Some employers might choose to pay their employees in cash. In fact, at times employees may request this.
This is quite common, however, you still need to keep accurate records and be compliant with ordinary pay duties, such as tax and KiwiSaver contributions. Paying cash in hand can sometimes raise eyebrows as it’s often associated with illegal or under the table activities. However, if it’s done correctly, then it can be a perfectly legal practice.
Key Takeaways
- Family members, shareholders, trust beneficiaries and directors in a small business can be known as ‘closely held employees’.
- In this context, a small business is considered to be one with less than 20 people
- Payday filing is mandatory for all closely held employees of a small business, however you can determine whether this is done on a monthly basis or during regular pay periods
- As an employer, it’s important to be aware of your other obligations when it comes to paying your employees, such as avoiding pay secrecy practices.
If you would like a consultation on your employer obligations, you can reach us at 0800 002 184 or [email protected] for a free, no-obligations chat.
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