Implementation of the wage subsidy scheme, wage reductions and the duty of good faith


In response to the Covid19 pandemic, the New Zealand government has introduced a four-tiered system of alert levels. Currently, New Zealand is assessed as being at Alert Level 4, the most serious level. This assessment requires New Zealanders to stay at home and to be isolated or quarantined unless they are performing an essential service.

To mitigate against the adverse financial impacts caused by the Level 4 arrangements, the government has introduced a number of measures. From an employment law context, the most significant is the wage subside scheme (the Scheme). In short, the Scheme provides a payment of $585.50 per week for full time employees and a payment of $385.00 per week for employees working less than 20 hours per week. Payments are made in bulk for a period of 12 weeks.

The official government advice is that:

Employers must make best endeavours to pay employees 80% of their normal income. Where that is not possible – in particular where a business has no activity whatsoever due to the shutdown and workers are not working any hours – employers must pass on at least the whole value of the wage subsidy to each affected worker. If a person’s income is normally less than the subsidy, they can be paid that normal salary.

This guidance has been relied on by some employers to apply for the subsidy and to decrease wages by 20 percent. Based on the official wording, the scheme does appear to provide employers with a discretion to reduce wages to at least the amount of the subsidy. But such a discretion would cut across the well-established principle of the law of contract that any variation to a contract (including the amount of remuneration) must be mutually agreed by both parties and supported by consideration.

If an employer were to reduce wages to 80% of the pre-Covid 19 level or to the amount of the subsidy, then that could be seen as a breach of contract which would entitle an employee to seek remedies against the employer. Under the law of contract, reliance on the Scheme or guidance produced about the Scheme would not amount to a defence.

Further, parties to an employment relationship must act in good faith which requires parties to an employment relationship to be active and constructive in maintaining a productive employment relationship in which the parties are responsive and communicative. Unilaterally reducing wages would fall foul of this requirement.

Any reduction in wages could also give rise to a personal grievance claim for unjustified disadvantage. To defend the claim, an employer would need to prove that its actions were the actions of a fair and reasonable employer. This test of justification has both substantive and procedural aspects to it. Procedurally, an employer will need to show that it provided affected employees with access to relevant information and an opportunity to comment on that information.
In light of the discord between the official guidance and settled employment law principles, the government should be encouraged to reword its guidance as the guidance does not override employment law provisions.

In the interim, the duty of good faith should be seen as the minimum standard for putting in place appropriate employment arrangements during the Level 4 period. If employers or employees have any doubts or concerns about employment issues, they should seek proper advice, at an early stage, and before any decisions are made. Given that the subsidy is paid to employers, it is likely that they will pay the greater price for any unwise decisions.