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2 November 20228 minute read

Fair Pay Agreements - Is your organisation ready?

In arguably the most significant development in New Zealand employment law for over 20 years, Fair Pay Agreements are now imminent with the Fair Pay Agreements Bill passing its third reading on 26 October. The Bill now awaits royal assent and is due to take effect on 1 December 2022.

In essence, Fair Pay Agreements are a form of industry-wide collective employment agreement. They will sit above, and work alongside, individual and other collective agreements to create a minimum floor of rights for all employees in a particular occupation or industry, whether union members or not. 

This system is conceptually similar to Australian modern awards, which gives us a potentially ominous insight into the likely complications and difficulties that New Zealand employers of all sizes can expect to grapple with. Our experience of modern awards is that they are often criticised for being overly prescriptive, inflexible and difficult to interpret.  Further, determining coverage can be complicated and there is commonly ambiguity when an employee performs work covered by multiple awards. This often leads to miscalculations and widespread non-compliance, resulting in large liabilities for back-payments.

At face value, Fair Pay Agreements appear well-intentioned.  In an age where ESG is having a more significant impact on how employers are engaging with their employees, a system that improves the livelihoods of New Zealand's more vulnerable workers would seem to have a number of positive elements.  However, the devil is in the detail. The legislation sitting behind Fair Pay Agreements is complex, technical, difficult to interpret and has a number of gaps. The process from initiation through to bargaining and enforcement will undoubtedly carry significant financial consequences for employers.

We anticipate the first industries likely to receive notice initiating a Fair Pay Agreement will be cleaning, security, early childhood, hospitality or retail.  

We have identified key aspects of the Bill that employers will need to be aware of.

1. Initiation 

Any union(s) may initiate the Fair Pay Agreement process, by meeting a representation threshold of support from 10% or 1,000 workers in coverage, or a public interest test and seeking the approval of MBIE.  Although aimed primarily at employees that have little bargaining power, lack of pay progression or inadequate pay, contractual uncertainty or long or unsocial working hours, higher paid workforces could still initiate a Fair Pay Agreement using the representation test.

The initiating union(s) must decide which type of work they want covered, based on occupations or industries.  If there is an overlap in coverage between two Fair Pay Agreements, the second one only applies if the workers would be better off overall. 

Independent contractors are currently excluded, but consistent with the work being done to give more protections to 'dependant contractors' the government is due to begin work to incorporate some contractors into the Fair Pay Agreements regime. Penalties will be applied to employers who attempt to avoid coverage by misclassifying employees as contractors.

Once MBIE has determined that an application for a Fair Pay Agreement has been approved, unions employers, business representatives and government will each have a role in notification, to reach as many affected parties as possible.

2. Scope of Agreements
Broadly, Fair Pay Agreements will set a ‘floor’ for minimum standards and entitlements. Issues like coverage, hours, wages, expiry, and bargaining process must be included in a Fair Pay Agreement. 

There are, however, issues that must be discussed at bargaining, but do not have to be included in the Agreement itself. These include: 

health and safety requirements
arrangements relating to training and development 
arrangements relating to flexible working
leave entitlements
arrangements relating to redundancy

A Fair Pay Agreement can allow for exemptions for businesses if they are in significant financial hardship. They can also accommodate regional differences, and other differential terms if they comply with the Human Rights Act and minimum employment entitlements. 

A Fair Pay Agreement can also set a preferential payment for union members, up to a maximum value of their union membership fees. 

3. Bargaining Representatives

Unions will represent employees, and employers will be able to select an employer bargaining party or parties to represent their interests. This may include eligible employer associations, a specified employer bargaining party (in relation to certain public service personnel), and other default employer bargaining parties that may be specified in regulations.

This raises a number of questions and concerns for employers. Many employers are not members of any “employer association”. Further, setting up such an association is not easy.  Any employer association must be “independent from, and is constituted and operates at arm’s length from, any union or worker organisation” and must be an incorporated society. Eligible employer associations must also have a constitution that enables them to promote the collective interests of covered employers for the purposes of bargaining for a Fair Pay Agreement.

Of particular concern, if there is no employer bargaining party or default party, then the Employment Relations Authority automatically has the power to set the terms of a Fair Pay Agreement. It is unclear whether employers will have any ability to be represented before the Employment Relations Authority when exercising this power.
4. Communication

Unions have been given significant rights during the bargaining process. Unions will have the power to enter workplaces, without an employer’s consent, to discuss bargaining or a Fair Pay Agreement. Access must still however be at reasonable times and comply with health and safety requirements, similar to existing union access provisions in the Employment Relations Act 2000. 

There are still questions remaining regarding the expectations of employers to share information between each other during the bargaining process.  As is commonly the case during bargaining for a MECA, employers (who will commonly be competitors with significant commercial, proprietary and confidential information to protect) will invariably be reluctant to share such information due to the impact it may have on their commercial position. The Bill appears to assume that employers on the same bargaining side will have the same goals and bargaining strategies, which will often not be the case. 

Consistent with existing collective bargaining processes, the duty of good faith will be the driver of fairness. Parties must act in good faith with their bargaining side and towards the other party. 

5. Ratification

The process of finalising a Fair Pay Agreement requires that it be:
a. Assessed and approved by the Employment Relations Authority;
b. Ratified through a voting process by the covered employees and covered employers; and 
c. Brought into force by the Chief Executive of MBIE through secondary legislation.

The Employment Relations Authority will therefore vet an agreed Fair Pay Agreement to ensure the terms are lawful, before it goes to a vote.

The ratification process provides employers with one vote per employee in coverage, with higher vote weighting for employers with fewer than 20 employees.  Parties can return to bargaining if the first ratification vote fails, but the Fair Pay Agreement must go to the Employment Relations Authority for determination if a second vote fails. This default to the Employment Relations Authority to set terms is again a further area of significant concern.

Importantly, a finalised Fair Pay Agreement will apply to all employers within its coverage (industry or occupation), regardless of whether that employer participated in the bargaining or ratification process. This could result in a number of employers being subject to, and subsequently non-compliant with, the terms of a Fair Pay Agreement that cover their employees.

Employees within coverage of a Fair Pay Agreement can enforce their rights through the standard employment dispute resolution systems, including mediation in the first instance. In addition, the Labour Inspectorate can enforce certain terms of a Fair Pay Agreement.

6. Penalties

Penalties for breach of a Fair Pay Agreement will be $10,000 for an individual, and $20,000 for an employer.  Interestingly, penalties are higher for a breach of obligations during the bargaining process. These are up to $20,000 for an individual, or $40,000 for an employer.

Our concerns

As detailed above, the Australian experience with modern awards signals that a number of major issues can be expected with the introduction of Fair Pay Agreements in New Zealand.  

We have concerns that they simply will not allow businesses to be able to adapt to changing market and trading requirements. Further, we already have effective systems in place to provide minimum employment entitlements, including minimum wage, holidays/leave and employment rights.  We consider that increasing enforcement of rogue employers' breach of minimum entitlements through the Labour Inspectorate would be a far better use of resources and focus on those relatively few employers that actively breach employees' rights.

The numerous gaps in the current Bill will inevitably need to be addressed through litigation.  We will continue to update you with all key developments.

For further information, please contact one of our team.