Minimum wage payments during lockdowns: Did your business get it right?

A large number of businesses have taken advantage of the Government’s wage subsidy packages over the last two years. In August 2021 alone, the Ministry of Social Development reported that 1.2 million New Zealanders were supported by the wage subsidy payments from the eighth COVID-19 wage subsidy scheme.

One key condition of these schemes is employers must pay employees at least 80% of their normal wages. However, many businesses concluded that they could reduce employees’ wages to 80% of their normal pay across the board. But, was the minimum wage still payable if employees were not able to work due to the lockdown? And, what happens when employees’ normal wages are close to minimum wage?

Deductions from wages deemed unlawful

In a recent case, the Court of Appeal ruled that the Minimum Wage Act 1983 still applies during a lockdown where employees are ready and willing to work. It found that it was unlawful to make deductions from wages for time not worked at the employer’s direction without prior agreement with their workers. The minimum wage is payable for the hours of work that an employee has contractually agreed to fulfil but does not perform. However, if an agreement is reached to reduce working hours, the Minimum Wage Act applies only to the reduced hours. In this Court of Appeal’s case, there was no evidence of such an agreement, the minimum wage was therefore still payable for work staff were unable to fulfil due to a lockdown. This decision means many companies that did not agree reduced hours and paid employees a flat 80% have likely breached the Minimum Wage Act.

While the main wage subsidy conditions may have led many companies to the 80%-of-pay treatment, the Government’s guidance provides considerations for employment law and leave entitlements. This includes acknowledgement that the application for the wage subsidy does not overrule existing obligations under employment law including the Employment Relations Act 2000, the Minimum Wage Act 1983, the Holidays Act 2003 and Health and Safety at Work Act 2015.

Our experience identifying and remediating issues with the Minimum Wage Act and the Holidays Act found the Covid-19 lockdowns were key periods of employment law non-compliance. A common theme among businesses that we’ve worked with is they had to move quickly, and the right systems often weren’t in place to meet all their obligations at the time.

Who is at higher risk of breaching the Minimum Wage Act?

1. Industries employing large numbers of lower wage workers

Industries most likely to be affected are those with a high proportion of lower-income earners.

These include the retail sector, cleaning and facilities management services, aged care, hospitality, agriculture, and labouring services.

2. Staff paid by the Government Wage Subsidy

Although companies may agree with their employees to reduce hours by any percentage during the lockdown period regardless of receiving the wage subsidy, an employer would potentially need to prove there was an agreement and there had not been a power imbalance if the employee later disputed the agreement. Companies must still pay at least minimum wage, and other employee entitlements, for any hours of work that an employee has agreed to perform regardless of whether the work is actually performed in these circumstances.

3. Staff being paid at or near minimum wage.

Any staff paid close to the minimum wage are typically at risk of non-compliance with the Minimum Wage Act if their pay has been reduced. The minimum wage for 2021 is $20 an hour, so even those earning up to $24.99 an hour could be affected.

4. Staff with compensation coming from commissions

For staff where commissions are the primary pay component, any period where commissions are not able to be earnt can be at risk of breaching the Minimum Wage Act. Commission and other performance-based pay awards cannot override employment entitlements. Commissions may not have been earnt during lockdowns, so there is a risk that reduced compensation for an employee will drop below the minimum wage – even for one pay period.

What should be done?

Employers should review pay treatment and entitlements during lockdown periods to ensure they maintain compliance, especially to the Minimum Wage Act 1983 and Holidays Act 2003.

Companies breaching the Minimum Wage Act will need to undertake a remediation process and consider the implications of underpayments during this period on other payments, such as annual leave in subsequent periods. Additional processes and payroll exception reporting may also be required to reduce the risk of non-compliance in the future.

How Grant Thornton New Zealand can help you.

We appreciate that this can be an incredibly challenging time for companies trying to navigate their employment obligations throughout lockdowns. Grant Thornton's payroll assurance team can give you peace of mind, or help you work through any challenges uncovered.

Written by Ken Gibb and Elisha Nuttall