Can NZ employers legally reduce pay?

It’s a situation both employers and employees dread: when the business is forced to choose whether to cut jobs to stay afloat or to cut pay to prevent layoffs.

Faced with the possibility of retrenchment, workers might opt to take a pay cut instead. But can employers in New Zealand legally reduce pay – and under what circumstances?

READ MORE: Why Fair Pay Agreements shouldn't be hurried

Reducing pay with the employee’s consent
“As long as an employee’s pay is above the relevant minimum wage and complies with the employment agreement and legislation, an employer can choose how much to pay their employee,” Employment New Zealand states.

Pay and the terms, conditions and policies governing it such as payment method, schedule and frequency, and even deductions, should be clearly stipulated in the agreement at the start of one’s employment. Deductions may be made only when they are mandated by law; agreed upon by the employer and employee; or in cases of overpayment.

However, businesses are prohibited from unilaterally changing the terms. Employers who need to reduce pay will have to secure their employee’s consent first before they can adjust remuneration.

A worker whose earnings have been reduced without their consent can request assistance from the Employment Relations Authority. The ERA will then order the employer to pay back wages owed, including interest, throughout the period when the adjustment was made, and to reinstate the worker’s initial pay. The agency may also impose a penalty on the employer for violating the terms.

Reducing pay legally through deductions
While some pay deductions may be reasonable, legislative changes introduced in 2017 mean employers still need to consult staff before implementing certain pay cuts, according to Hamish Kynaston, a partner at Buddle Findlay.

“The employee can still withdraw his or her consent to a deduction – if an employee does object to it, then it’s problematic for the employer and probably unlawful for the employer to deduct,” Kynaston told HRD New Zealand.

“The circumstances which would let an employer deduct wages are actually very limited these days,” he said. These include instances of overpayment by the employer or legal obligations of the employee.

“An employer can also deduct when there is a court order or statutory obligation – so PAYE, child support, fines – those do provide a right but otherwise you need consent,” Kynaston said.

“For example, if you want to recover some costs because the employee has lost or damaged some equipment, or you accidentally paid them for a day’s leave and you’ve only discovered that six months later, you’ll need the employee’s consent.”

Reducing bonuses instead of basic pay
An employer can also opt to slash staff bonuses instead of their basic pay in order to cut costs, but only when the company’s bonus scheme is discretionary.

“In relation to bonuses, some employers have bonus schemes with set criteria that must be fulfilled before the employee is entitled to any payment,” said Charlotte Bates, an employment relations specialist and senior associate at Bartlett Law.

“Some big corporations will have an annual bonus scheme, but will make it very clear it is discretionary so there is no guarantee of any bonus payment, even where the employee has met their targets,” Bates told HRD New Zealand.

“If the scheme is not discretionary, it is a contractual term, so failure to pay it where the bonus criteria have been met would be a breach of the terms and conditions of employment.”