Employers cannot build their KiwiSaver contributions into the total remuneration of a worker on the minimum wage, where the effect is to take that wage below the statutory minimum – currently $13.75 an hour.
This was confirmed by the Court of Appeal last week. We look at the basis for the decision, and the implications of it.
The case1 depended on the relationship between section 6 of the Minimum Wage Act (MWA) and section 101B of the KiwiSaver Act (KSA).
Section 6 MWA provides that employees are entitled to receive the minimum wage rate “notwithstanding anything to the contrary in any enactment, award, collective agreement, or contract of service”.
Section 101B(4) KSA provides for a total remuneration approach from 13 December 2007 where the parties agree and provided that it is accounted for in the employee’s pay.
The Court agreed with the Employment Court that, where there is a conflict between the effect of section 101B(4) and the policy intention of section 6, the Minimum Wage Act must prevail.
What do I need to do?
If you employ staff on the minimum wage and pay KiwiSaver on a total remuneration basis, you will need to reverse out of that arrangement or increase your minimum pay rate by 3% (the current KiwiSaver employer contribution rate) - and you will need to maintain this 3% margin through any subsequent increases to the statutory minimum wage.
Even if you are not affected by the Appeal Court decision but pay your KiwiSaver contributions on a total remuneration basis, you may want to take this opportunity to review your arrangements because there has been a lot of historical change in this area which may impact on previous agreements.
A long and winding road
When it was originally enacted in 2006, KiwiSaver was in essence an employee contributions scheme. Employers were only required to facilitate staff enrolment and the collection of payments. Employer contributions were voluntary, though tax-advantaged.
Employer contributions were made compulsory in 2007, effective from the start of the 2008 tax year. The permissibility of total remuneration was unclear at first, but the KiwiSaver Act was then amended to allow for a total remuneration approach so long as this was negotiated in good faith after 13 December 2007 (section 101B).
This option was removed in September 2008 when the then Labour Government amended the Employment Relations Act 2000 (ERA) to make it illegal to treat or pay otherwise comparable KiwiSaver and non KiwiSaver employees differently.
Then, in December 2008, the newly elected National Government repealed the 2008 ERA amendments, effectively re-legalising total remuneration.
Total remuneration agreements made before 13 December 2007
As the KiwiSaver Act only permits total remuneration packages to be agreed from 13 December 2007, a total remuneration clause in any employee contract entered into before that date will be of no effect unless the agreement has since been renegotiated or the total remuneration aspect has since been re-agreed.
Total remuneration agreements made after 13 December 2007
These agreements are broadly permitted under the KiwiSaver Act. However, for employees who first joined KiwiSaver on or after 15 December 2008 (the date when National legislated to again allow total remuneration) they are effective only if the employee’s contractual terms and conditions “account for” the amount of the employer’s compulsory contributions.
What this means in practice has never, to our knowledge, been argued in detail before the Courts, but the Employment Court in the first Terranova Homes judgement found that (for a new employee anyway) it was sufficient for a contract to state that the employee’s remuneration “is inclusive of any KiwiSaver compulsory employer contributions” rather than providing a numerical figure.
An employee’s own contributions must be a tax-paid amount
For completeness (and though there is no indication that, in practice, Terranova Homes breached the KiwiSaver legislation in either further respect) the judgment reproduces the remuneration schedule from the employees’ contracts, which:
- shows a “before-tax” employee contribution of 2% (the then minimum), and
- shows that contribution as a deduction from gross wages.
Employee contributions (though calculated as a percentage of before-tax pay) must be made from after-tax pay at the full rate (currently 3%, 4% or 8%). They cannot be reduced for PAYE.
Employee contributions also cannot be deducted from the gross pay figure which is used as the basis for calculating employees’ and employers’ KiwiSaver contribution obligations.