If you’re involved in running a business in New Zealand, the upcoming Fair Pay Agreement system is going to affect you! The bill was introduced into Parliament on 29 March 2022 and is now at the select committee stage. This means that before you know it, you’ll need to start complying with the most significant change to New Zealand’s employment law in decades.

Let’s rewind to May 2021 when the Labour-led government announced its long promised plan to introduce a mandatory collective bargaining system for all sectors — in the form of Fair Pay Agreements. The idea is to improve working conditions for employees, drive productivity and establish minimum employment standards across sectors, industries and even individual occupations.

So, what is a Fair Pay Agreement?

A Fair Pay Agreement (or FPA) is a sector level collective agreement that sets out the minimum pay, terms and conditions for ALL the employees in that industry or occupation. For example, an FPA for Shop workers would set country wide standardised entitlements for all employees. This would include wages, hours of work, overtime and penal rates, leave entitlements and any amounts that are due for redundancy. Businesses of all sizes (even small ones) will need to comply with this — and most importantly, whether or not their employees are union members. Every sector or occupation will have its own individual agreement.

What happens to existing union agreements?

From the outset, the NZ government made clear that the new Fair Pay Agreement legislation was designed to complement rather than replace the existing system. For example, in NZ there are collective bargaining agreements already in place for large enterprises and in certain sectors. These are run by different sector-specific unions. This means that employers and employees will still need to abide by existing agreements and be involved in ongoing negotiations for pay and other conditions. It’s also worth knowing that at this stage, the new FPA legislation doesn’t cover independent contractors (although it’s thought that the government will add them to the FPA system further down the line).

How does this affect business as usual for New Zealand Businesses?

Fair pay agreements will be negotiated between unions (representing employees) and employers. Employers will be able to collectively choose representatives who will negotiate with the unions on their behalf (although right now, the government hasn’t explained exactly how this will work).

Employees will take the first step in kicking off the bargaining process. They will need to show that at least 1,000 employees in their sector (or 10% of the employees in the sector — whichever figure is less) actively support the introduction of a fair pay agreement. In industries or sectors where there are ‘harmful conditions’ for employees, those minimum thresholds won’t apply, allowing the bargaining process to begin right away. Think industries where there is sector-wide poor working conditions and lower than average wages.

If and when unions and employer representatives agree an FPA proposal, both the employer and its employees will go to a vote. Employers get a vote for each employee that would be covered by the proposed FPA. A majority of both employer and employee votes are needed for the FPA to get the go-ahead.

Can employees go on strike or take industrial action during the FPA negotiation process?

The good news for employers is that under the new legislation, strikes and industrial action are not allowed during the period when bargaining and negotiations are ongoing — related to an FPA. If the first vote fails, another bargaining process can take place and a second round of voting too. If the second ratification vote doesn’t succeed, then the terms of the Fair Pay Agreement may be decided by the Employment Relations Authority (ERA).

97% of NZ businesses are small — and don’t have an HR department. How will they properly engage in the FPA process?

That’s right — 97% of businesses in New Zealand employ less than 20 people and don’t have a formal Human Resources department. Meanwhile, only 17% of New Zealand’s workforce is unionised. You’re probably left thinking, “we’ve never been involved with unions before and are worried about how this whole thing will affect our business.” The truth is most business owners and directors have never sat around the bargaining table before. They are rightly worried about the effect that changes to pay and conditions will have on their operations and the real prospect of being visited by unions who will engage directly with their employees. Undoubtedly, the outcome of an FPA agreement is likely to have some tangible effect on the bottom line for thousands of businesses across New Zealand. This is both in terms of employee wages and the increased costs of administering payroll and compliance.

To help mitigate some of the costs of making the switch to an FPA and the time involved in the bargaining process, the government has promised NZ$50,000 for each bargaining side. This is a one-off contribution — after which the employer is responsible for any additional costs that are required to ensure the terms of the FPA are met.

For many people, the whole thing does sound a little odd; unions only represent 17% of the working population yet are being given the exclusive right to oversee the interests of ALL employees in any given sector or industry. What’s more, employer participation in the process is mandatory — there is no way to opt out.

You’ll be interested to know that various bodies acting on behalf of employers have pointed out that the new FPA system in New Zealand may actually breach international law around the rights of employers and employees to freely and voluntarily negotiate collective agreements. It will be interesting to see whether this has any impact on the bill finally being passed in Parliament (since the reality is — it’s still at the select committee stage!).

Assuming the FPA system goes ahead as planned — how does this affect the way we run payroll in our company or organisation??

The best way to predict the effects of the Fair Pay legislation is to look at what happened in Australia when the Modern Awards system was introduced in 2010. These modern awards (along with other collective arrangements and enterprise agreements) brought in minimum rates of pay and have governed other benefits such as overtime and penalty rates, allowances, leave, superannuation and redundancy pay. In Australia, there’s 120 different modern awards covering various different occupations and industries. The difference there is that these ‘awards’ are set by the Fair Work Commission, rather than a bargaining process between employers and unions.

The Modern Awards system in Australia hasn’t been without its challenges. One of the complexities payroll teams have had to get their heads around is that some employees are covered by more than one award — so they’ve struggled to actually decide which one is actually relevant.

Many payroll systems and software were like rabbits caught in the headlights when modern awards came in. Older payroll systems were just not made for these kinds of complexities. And here’s why… Modern awards contain multiple different triggers for the payment of overtime. That means hours worked over a daily threshold, hours worked outside of a designated span of hours and on top of that - hours worked in excess of an average weekly number of hours (over a seven, 14 or 28 day period). These kinds of nuances left many Australian payroll systems completely befuddled. And — you guessed it! — this led many payroll departments to start making complex payroll calculations in spreadsheets, which then opened pandora’s box to a whole host of potential errors and mis-calculations. Sure — some employers switched to locally focused, cloud based payroll systems just in time. It’s the companies with older, non-local and on-premise payroll software that were most likely to be caught out.

Australian businesses have adapted over time, overhauling their choice of payroll and time and attendance solutions. In a world where the Australian government can make changes to the different Awards almost overnight — payroll departments need to be ready and poised to ensure pay runs reflect these legislative changes!

Therefore, companies in New Zealand should expect a similar experience to that felt by their cousins in Australia — with the same challenges of being compliant and adopting the right online payroll solutions and technology.

Whilst the Fair Pay legislation is being examined by the New Zealand select committee, businesses like yours would be advised to get a head start by taking a look at how the Fair Pay system will affect you and doing an audit of whether the payroll and time and attendance systems you currently have in place are future-proofed enough to cope with the upcoming changes. By taking a look now, you’ll avoid the deluge of companies trying to do this at the last minute — plus you might be able to save yourself some real heartache.