Sweat Equity in New Zealand: Understanding Rights and Realities
What Is Sweat Equity?
“Sweat equity” refers to contributing labour, time, or expertise to a new or early-stage business instead of being paid a wage immediately. The “sweat” is the work done now, and the “equity” is the promise of a future ownership stake or shareholding.
This model is common in tech start-ups, creative ventures, and social enterprises, where cash is limited but potential is high. Contributors often agree to work without pay initially, building value so that when the business succeeds, their efforts are compensated via shares or profit.
In Mooney v JNCTN Ltd [2023] NZERA 596, the Employment Relations Authority described precisely such an arrangement. Mr Mooney devoted significant effort to a tech business in exchange for a shareholding rather than wages. The Authority held this was a sweat equity arrangement, not an employment relationship.
Are People Working for Sweat Equity Employers?
Whether someone working for sweat equity is an “employee” or something more like a partner or investor depends on the substance of their relationship under section 6 of the Employment Relations Act 2000.
An employee works under a contract of service: paid wages (or salary), taxed under PAYE, accrues holiday and sick leave entitlements, and is subject to direction, supervision, and control.
By contrast, a sweat equity contributor generally operates under a commercial arrangement: they contribute skills, labour, or time with the understanding that their reward will come later via ownership, shares, or profit-sharing. They function more like co-founders or business partners than traditional employees.
In the Mooney case, the Authority identified factors that pointed away from an employment relationship:
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There was no formal employment agreement, PAYE deductions, KiwiSaver contributions, or holiday arrangements.
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Payments (if any) were irregular and dependent on available cash flow.
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The contributor received shares rather than wages.
Those features led the Authority to conclude that although Mr Mooney worked full-time and rendered valuable services, the relationship was not one of employer-employee.
What Are Employees Legal Rights?
People working for sweat equity do not automatically enjoy all legal protections that employees have, unless the reality of their arrangement demonstrates that it is in substance employment.
That means typically they cannot file personal grievances under the Employment Relations Act, and they lack entitlement to:
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Paid holidays, sick leave, or parental leave
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Employer contributions to KiwiSaver
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Protection under minimum wage and other minimum employment standards
Instead, their legal recourse lies in commercial and contract law—for example, enforcing shareholder or partnership agreements, suing for breach of contract, or addressing misrepresentation. Disputes over promised shares or ownership rights are usually resolved in the civil courts, not via the Employment Relations Authority.
However, the Mooney decision reminds us that each case is fact-sensitive. If an arrangement looks and functions like employment (regular payments, supervision, set hours, employer control), a tribunal or court may determine that it is employment in disguise.
It’s also worth noting that sweat-equity contributors do not have access to important workplace protections that employees enjoy, such as the right to raise issues around bullying or sexual harassment.
What Industries Commonly Use Sweat Equity?
Sweat equity shows up most often where capital is tight but vision is ambitious:
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Technology start-ups creating software, apps, or AI products
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Creative industries: film, design, digital media, content production
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Social enterprises and NGOs relying on early volunteer or low-paid labour
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Small businesses in the formation phase, where founders swap their labour for future ownership or profit
These arrangements can work well when legally documented and transparent. But without clear vesting schedules, definitions of equity, or exit terms, misunderstandings and disputes are common—especially once the business becomes profitable or relationships sour. In those cases, questions around unfair treatment or dismissal can arise, making issues like Defending Unfair Dismissal Claims and Disciplinary Action highly relevant.
Get Expert Advice from Resolve Legal Employment Law
If you’re a founder, contractor, or contributor considering sweat equity, it’s wise to get expert legal advice before you commit. At Resolve Legal, we help set up clear frameworks so everyone knows what they’re agreeing to:
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Whether someone is truly an employee or a commercial contributor
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How equity is calculated, vested, or redeemed
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What happens if the business is sold or dissolved
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Protection of your rights in case promises go unmet
Sweat equity can align incentives and reward risk and dedication—but only if the terms are clear, fair, and enforceable.
Talk to Resolve Legal Employment Law today to make sure your contributions, investments, and future are fully protected.
