9.05.2018

KiwiSaver V Minimum Wage – It’s a Knockout!

In the recent decision of Faitala v Terranova Homes & Care Ltd, the Employment Court firmly rejected an employer’s position that it was entitled to deduct the employer’s compulsory KiwiSaver contribution from employee’s gross wages – but only when such a deduction would take the employees’ pay below the level prescribed by Minimum Wage Act 1983.

The Fight

The employees in Faitala were employed as caregivers at a rest home.  They were paid the statutory minimum wage of $13.50 per hour (gross), and were also members of KiwiSaver.

Their employment agreements contained a schedule that stated that their pay was “inclusive of any KiwiSaver compulsory employer contributions”.  This is also known as a ‘total remuneration’ approach to KiwiSaver.  The employer therefore deducted its KiwiSaver contributions from the employees’ gross wages.  As a consequence, the employees were left with only $13.24 in the hand before tax.

The employees claimed that the treatment of their remuneration as inclusive of the employer’s compulsory KiwiSaver contributions breached section 6 of the Minimum Wage Act.  Section 6 establishes that an employee is entitled to receive payment for their work at a level no less than the minimum rate, which was (at the time of this case) $13.50 per hour (gross).

Round One

The employer claimed that the compulsory 2% employer KiwiSaver contribution that employees received was ’payment for their work’, and therefore they were not being paid less than the minimum wage.

Round Two

The employer also argued that its total remuneration approach was permitted under section 101B(4) of the KiwiSaver Act 2006.  That section states that, from 13 December 2007, all compulsory employer contributions have to be paid on top of an employee’s gross salary unless the employer and employee agree contractual terms to the contrary.

Here, the Court had to consider the relationship between the KiwiSaver Act and the Minimum Wage Act.  It needed to consider:

  • section 6 of the Minimum Wage Act – which establishes that payment can be no lower than the minimum rate; versus
  • section 101B(4) of the KiwiSaver Act – which allows the parties to agree contractual terms that employer contributions would be paid out of an employee’s gross salary.

If section 6 of the Minimum Wage Act prevailed, the employees would succeed.  Conversely, if section 101B(4) of the KiwiSaver Act won out, then the employer’s total remuneration approach would not offend the Minimum Wage Act.

The Decision

Round One

The Court stated that there was nothing to suggest that the Minimum Wage Act builds in a component for saving for retirement.  It is designed to meet the basic necessities of day-to-day living.

Further, while other deductions can be made from an employee’s pay (such as PAYE), the employer’s compulsory contribution under the KiwiSaver Act is different, as it is the employer’s contribution, and not the employee’s.  In addition, the employer’s contribution is not paid directly to the employee – rather, it goes straight to IRD and is then held for the benefit of the employee for many years.

Given these factors, while there was a nexus between the employer’s contribution to KiwiSaver and the employees’ work, the employer’s contribution was payable only because the employees chose to join KiwiSaver.  As a result, payment of the employer’s KiwiSaver contribution did not constitute payment for the employees’ work.

Round Two

The Court acknowledged that section 101B(4) of the KiwiSaver Act did state that the parties could agree contractual terms to negate the standard position that employer contributions were to be paid on top of an employee’s gross salary or earnings.  It also acknowledged that the employer and employees did purport to do that through the total remuneration schedule in each employee’s employment agreement.

However, section 101B(4) did not state that the parties were free to agree contractual terms that overrode the Minimum Wage Act – in fact, section 6 expressly prohibits such an approach.  Further, when section 6 of the Minimum Wage Act and section 101B(4) of the KiwiSaver Act were read together, the Court stated that it was apparent that the KiwiSaver Act was subject to the Minimum Wage Act.

In light of this finding, the Court held that the employer was in breach of section 6 of the Minimum Wage Act, as the employees were being paid for their work at a rate less than the statutory minimum wage.

In our view

The Court’s finding that the Minimum Wage Act trumps the KiwiSaver Act is, in our view, entirely correct.

The Minimum Wage Act is part of the ‘minimum code’ and is a fundamental cornerstone of employment law.   It exists to protect the most vulnerable employees – those earning the minimum wage – and exists as a bulwark against potential poverty.

But the Court also correctly declined to go further and make a grand pronouncement that a total remuneration approach is ‘unlawful’.  It is clear that Parliament intended to allow employers and employees to essentially agree to a total remuneration approach – that is what section 101B(4) of the KiwiSaver Act expressly states.

Ultimately, employers need to be very careful when purporting to take action that may diminish an employee’s rights or run contrary to the ‘safety-net’ statutes (including the Minimum Wage Act 1983, the Equal Pay Act 1972, the Wages Protection Act 1983, the Parental Leave and Employment Protection Act 1987, and the Human Rights Act 1993).  Given these are ‘fundamental cornerstones’ that impose minimum conditions of employment, it is likely that they will prevail if inconsistencies arise.

If you have any questions about KiwiSaver, the Minimum Wage Act, or any other minimum  code statutes, feel free to email us at employmentnews@heskethhenry.co.nz or call on (09) 375 8699.

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Contact the expert team at Hesketh Henry.
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