Posted on: Apr 23, 2013
With the recent increase in the minimum rate of KiwiSaver contributions rising to 3% for both employees and employers, it is timely to examine the implications of KiwiSaver from both a financial and legal perspective.
For employers, there are two approaches to calculating minimum employer contributions to KiwiSaver: the “default” approach and the “total remuneration” approach.
The default approach occurs when an employee, who is a member of KiwiSaver or joins KiwiSaver, effectively receives the 3% employer contribution in addition to his or her normal remuneration.
The alternative is that employers adopt a total remuneration approach to KiwiSaver. This involves paying all employees the same total remuneration regardless of KiwiSaver membership. Therefore, if an employee joins KiwiSaver or is a KiwiSaver member, that employee’s take-home pay is effectively reduced by the percentage of the employer contribution that the employer is required to make to the employee’s nominated KiwiSaver scheme.
Many employers have chosen to adopt the total remuneration approach because the default approach results in those employees who join or are members of KiwiSaver effectively receiving more income, being their agreed remuneration plus the employer contribution. The total cost for employers is also lower when a total remuneration approach is adopted.
It is important to note however, that if an employer wishes to adopt a total remuneration approach to KiwiSaver, that employer must provide for this in the employment agreement. If an employer does not include a total remuneration clause in an employment agreement, the default approach will apply.
Minimum Wage and the total remuneration approach
In a recent case (Faitala v Terranova Homes & Care Ltd  NZEmpC 199, Ms Faitala and another employee were employed by Terranova Homes and Care Limited as caregivers in a rest home. Both employees were KiwiSaver members and both were paid the statutory minimum wage at the time of $13.50 per hour.
The employees’ employment agreements contained clauses which stated “the employee’s remuneration is inclusive of any KiwiSaver compulsory employer contributions”. The employer therefore adopted the total remuneration approach.
As a result of adopting a total remuneration approach the employees in this case did not receive the current prescribed minimum wage of $13.50 per hour worked before tax and deductions. They actually received $13.24 and the remaining $0.26 was taken out as the employer’s contribution to KiwiSaver. The employees therefore argued that the employer breached the Minimum Wage Act by paying the employees less than the statutorily prescribed minimum wage.
The Court was asked to determine whether an employer was entitled to deduct its compulsory KiwiSaver employer contributions from the employees’ wages when those employees were receiving the prescribed minimum wage.
The Court observed that the purpose of the Minimum Wage Act was to protect vulnerable employees by requiring those employees to receive a base wage for their work to enable them to meet their daily living expenses, and that the purpose of the KiwiSaver Act was to encourage long-term savings by those who were not in a position to enjoy standards of living in retirement similar to those in pre-retirement.
The Court held that section 6 of the Minimum Wage Act required an employee to actually receive payment for work at not less than the prescribed minimum wage rate.
The Court then considered whether payment of the employer contribution satisfied the requirement to receive payment of the prescribed minimum wage. The Court held that the total remuneration approach in this case did not. The Court held that KiwiSaver provides that employer contributions are not passed directly to the employee but to Inland Revenue. The Court observed that there was no guarantee that an employee would receive any benefit from the employer’s contribution.
The Court also held that the employer’s contribution was not made in return for work provided by the employee but was separately triggered by the KiwiSaver Act. Therefore, the employer contribution was not money paid in exchange for labour and no consideration was provided in exchange for the employer contribution.
The Court concluded that deferred payment (ie an employee is only generally entitled to receive KiwiSaver funds when the employee reaches the age of 65) to an employee of the employer’s contribution was not a payment to an employee, nor was it a payment for the work that the employee performed. As such, the employer in this case breached the Minimum Wage Act.
For an employee who is paid at the prescribed minimum wage, an employer is obliged to pay its contribution in addition to the minimum wage. Alternatively and only if the parties agree, the gross wage must amount to the minimum wage plus the employer contribution.
Total remuneration approach (for wages/salary above Minimum Wage)
Section 101B(4) of the KiwiSaver Act 2006 (which allows employers to adopt a total remuneration approach) does not apply unless the parties’ contractual terms and conditions “account for the amount of compulsory contributions the employer is required to pay”. The Court held that this did not require an employer to specify the precise employer contribution in the relevant employment agreement.
The Court examined the total remuneration clause in the above case and held that the wording of the clause which stated that the salary was “inclusive” of the employer’s KiwiSaver contribution satisfied the test in section 101B(4) because the amount of contribution could be determined by reference to the statutory KiwiSaver rate.
Employers who pay more than the minimum wage can, if the employee agrees, make use of s 101B(4) which allows the employer contribution to come from the employee’s total remuneration. Employers should carefully consider whether a total remuneration approach is right for their businesses. The financial implications of employer contributions may only grow with the prospective increase of the contribution amount to 3%. Future governments may also look to increase the compulsory contribution figure further, remembering that when it was first introduced is was destined to become a minimum of 4%. It may therefore be appropriate for employers to consider whether a total remuneration approach suits its business as there is a very real future cost saving if this approach is adopted.
Implementing a total remuneration approach
For an employer to adopt a total remuneration approach to KiwiSaver it is straightforward for new employees — simply include an appropriate clause in their employment agreements. For help drafting such a clause contact the team at Paul Diver Associates.
For existing employees, employers must ensure that they meet the requirements of section 101B(4) of the KiwiSaver Act. In particular, if the employer contribution is currently paid to an employee on top of remuneration (ie the default approach) and an employer wants this to change to a total remuneration approach, an employer must consult and:
- agree with the employee to vary the terms of the current employment agreement to specifically state that the employers’ contribution will be paid by way of total remuneration
- provide an explanation (preferably a covering letter) to the employee stating what change has been made. We recommend providing the justification that the employer seeks to adopt a total remuneration approach because it treats all employees equally, regardless of KiwiSaver membership
- provide consideration to the employee for the variation (it can be timely to seek a variation after an employee goes through their performance review and receives a proposed salary increase as the salary increase can be consideration for the variation)
- provide the employee with a reasonable opportunity to seek independent advice about the variation, and
- ensure that the employee signs the new employment agreement containing the new total remuneration clause
It is important that each of the above steps is adopted to validly vary the terms and conditions of employment for the employee. A failure to do any one of the above steps could materially disadvantage the employee in their employment and provide them with an opportunity to challenge the variation by way of a personal grievance.
This article, and any information contained on our website is necessarily brief and general in nature, and should not be substituted for professional advice. You should always seek professional advice before taking any action in relation to the matters addressed.