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By Janet Copeland

Under the KiwiSaver Act 2006 (KSA) an employer is obliged to pay compulsory employer contributions (CEC) for each employee who is enrolled within an eligible KiwiSaver scheme or complying superannuation fund, unless, the employee has turned 65 years old or has been in KiwiSaver for at least 5 years (whichever is later).  The contribution rate determines how much CEC an employer must pay, this is set currently at 2% of an employee’s gross salary or wages.

There are two ways employers may pay their CEC’s under the Act; through either the default approach or what is known as the total remuneration approach. This article focuses on the requirements of the total remuneration approach and recent case law on the matter.

DEFAULT APPROACH

The default approach to paying compulsory employer contributions is that the CEC must be paid in addition to the employee’s gross salary or wages. Any arrangement otherwise is of no effect unless it falls within the exception outlined in s101B (4) of the KSA.

TOTAL REMUNERATION APPROACH

This exception is widely known as the total remuneration approach and allows parties to freely agree to contractual terms and conditions that disregard the default position.  The total remuneration approach provides for all payments an employee receives under their employment agreement including salary, wages, allowances or CECs. This approach will fail to apply where the contractual terms and conditions do not account for the amount of compulsory contributions the employer is required to pay. What is required to “account for” the CEC has been a grey area, but has been traversed by the full Employment Court in the recent case of Faitala v Terranova Homes & Care Ltd [2012] discussed in depth below. The Court held that a calculation of the actual CEC based on the employees gross wages or salary is not required, rather a simple statement of how the figure was arrived at will suffice, such as referring to the current contribution rate.

WHAT IS INCLUDED IN TOTAL REMUNERATION?

A total remuneration approach enables the parties to agree, under the employment agreement, to include into a remuneration package the employer’s contribution as an identifiable component of the employee’s pay.

For example Jane Bloggs’ Total Remuneration Package:
Compulsory Employer Contribution          $785.00  (2 % of base salary)
Take home salary (base salary)           $39,215.00  (less taxes and deductions)
Total Remuneration Package               $40,000.00

The advantages of total rem are that when the CEC increases, the amount adjusts within the capped total remuneration package. For example, if the CEC increases to 3%, the base salary or wage would decrease (to $38,835.00) to account for the change, but the overall total remuneration remains the same ($40,000.00).

The legislative history and the express requirement to negotiate such arrangements in good faith make it likely that an employee, who is currently paid CECs on top of their remuneration, should not have their wages or salary reduced to incorporate CECs within their current remuneration.   However, future variations and/or any new employment agreements can legally include such an arrangement, provided this arrangement is stipulated.  An employer can negotiate a total remuneration clause into an existing employee’s contract by accompanying the offer with the employee receiving at least a 2% pay rise to cover the amount of CEC, provided the employee agrees to formally vary their employment agreement to include the total remuneration.

RECENT CASE LAW

In Faitala v Terranova Homes & Care Ltd [2012] NZEmpC 199 Chief Judge Colgan and Judge Inglis in the full Employment Court had to determine whether Terranova Homes & Care Ltd was entitled to deduct the CEC from the employee’s gross wages in circumstances where those wages are at the minimum level specified in the Minimum Wage Act 1983 (MWA).

Under section 6 of the MWA, an employee is to receive payment for her work from her employer at not less than the minimum rate (currently $13.50 per hour) this is to apply notwithstanding anything to the contrary in “any other enactment, award, collective agreement, determination, or contract of service”. Two issues were said to arise from this, firstly, whether payment of an employee contribution through the IRD to an employees KiwiSaver is payment “received by an employee from their employer” and secondly, whether this constitutes “payment for the employee’s work”.

The Court stated the underlying purpose of the MWA is to ensure that workers receive a living wage to meet the basic day-to-day living expenses of the worker and his/her family. The court said there was nothing to suggest that it builds in a component for saving for retirement, rather it is designed to meet the basic necessities of day-to-day living. The CEC is not paid to the employee rather it is paid to a KiwiSaver provider or complying superannuation fund via the IRD, and then held for the benefit of that person until they turn 65 years (or qualify for withdrawal). Thus the employee may have upwards of 50 years before he/she receives the benefit of the contribution. Additionally, if the money is paid out it is not paid out as salary; rather, it is paid out as pension. Section 4 of the KSA expressly excludes complying superannuation funds form the meaning of salary and wages.

The contribution is payable by virtue of the employee’s election to join KiwiSaver, the trigger is the operation of the statute rather than the labour performed. The employer contribution is not money exchanged for labour and no consideration is provided in exchange for it. Therefore the Court concluded that a deferred payment to an employee of a CEC does not constitute payment by an employer for work performed by an employee for the purposes of the MWA.

Relationship between the KSA and MWA
Section 101B of the KSA deals with the way in which an employer may make contributions to a KiwiSaver scheme or complying superannuation fund. The default position is that the CECs are paid in addition to an employee’s gross salary or wages. However, section 101B(4) provides the exception that parties to an employment relationship may agree contractual terms and conditions that disregard the purpose unless the contractual terms and conditions don’t account for the amount of compulsory contributions the employer is required to pay.

The Court held that nothing in s101B states the parties are free to agree contractual terms and conditions that override the MWA and section 6 prohibits such an approach. The Court said the MWA is designed to provide a mandatory floor by which an employer can not go below and if Parliament intended to provide an exception to the MWA it would have done so expressly. The Court stated when ss 6 and 101B are read together, and in light of their respective purposes, it is apparent that the latter is to be read subject to the former. This means that for an employee on minimum wage an employer is obliged to pay the 2% contribution in addition to the minimum wage.

What is needed to “account for” the amount of compulsory contributions?

The Court stated the requirement to account for the amount of compulsory contributions does not require a statement of a numerical figure, rather a simple statement as to how that figure is arrived at.  In the present case the amount was determined by reference to the prevailing statutory rate contained within the KSA which the Court said was sufficient to account for the amount of compulsory contributions. The Court said adding a numerical amount would require amending the provision each time the minimum wage was altered, the Court said this degree of specificity was not required on a plain reading of s101B(4)(b).

IMPLICATIONS

This case demonstrates that an employer cannot apply a total remuneration approach that negates the requirements of another act that confers minimum payment rights to employees, such as the Minimum Wage Act. This case also helpfully demonstrates what is required to “account for” the amount of CEC, where a simple statement of how the figure was arrived at will suffice, such as referring to the current contribution rate.

PROPOSED AMENDTMENTS TO THE KSA IN 2013

There are proposed changes to employee and employer contribution rates from 1 April 2013 with the minimum employee contribution rate rising from 2% to 3% for all members and the minimum CECs will rise from 2% to 3%.

RECOMMEDATIONS

We recommend including a clause in employment agreements that seeks to incorporate CECs in the total remuneration of a new employee or during negotiations with a current employee as a variation to their terms and conditions.  However, note that during any negotiations the wages or salary of a current employee should not be reduced, particularly if they are currently paid CECs on top of their remuneration. Such an employee cannot have their wages or salary reduced to incorporate CECs within their current levels of remuneration in light of the legislative history and the express requirement to negotiate such arrangements in good faith.

Disclaimer

This article is produced to provide a brief summary of issues that have developed in the area of employment law. While we take time to ensure the information is correct, details may be omitted which may be directly relevant to a particular reader. The information should not therefore be taken to be sufficient for making decisions. If you have any questions in relation to anything discussed in this article or just a general query, contact the writer or team at Copeland Ashcroft Law who will be happy to assist you.

First published in Pay and You (PAY) – Issue 2, February 2013
http://www.nzppa.co.nz/magazine/02/