Unclear wage subsidy rules lead to Court action

Two ERA determinations have found employers acted unlawfully when reducing their employees’ pay during the COVID-19 Level 4 lockdown. Both determinations have been appealed to Employment Court.

Gate Gourmet

Gate Gourmet New Zealand Limited (Gate) provides inflight catering services to passenger aircraft.[1] On 27 March 2020 Gate told its employees that as a result of COVID-19 and the lockdown it was closing part of its business.

Gate presented a number of options to its employees in terms of how they would be paid during this period. Its employees agreed that, subject to Gate complying with all applicable legislation, Gate would pay each employee at least 80% of their normal pay. A group of Gate’s employees were paid at the minimum wage. On 1 April 2020, the statutory minimum wage increased to $18.90 per hour ($756 per week for a 40 hour week).

On 1 April Gate told its employees that only employees who actually performed work would be paid at the new minimum wage rate. Employees who did not work would continue to be paid at the agreed rate of 80% of normal pay but based on the old minimum wage rate. The employees objected to this on the basis that Gate could not reduce an employee’s pay below the current minimum wage rate, i.e. below $756 per week. Gate agreed to apply the new minimum wage rate to all employees but maintained that employees who did not perform work would receive only 80% of normal pay. As a result, the employees were paid $604.80 per week (80% of $756).

The employees who were paid at the minimum wage (Employees) asked the Employment Relations Authority (the Authority) for a determination that Gate acted unlawfully in paying the Employees below the minimum wage rate.

Gate argued it had complied with the Minimum Wage Act (MW Act) by increasing the wage rate payable to employees that performed work. This ensured no employee was paid less than the minimum wage for the hours they worked. Gate believed it did not need to increase the wage rate of employees who did not work. Gate argued an employee could not be paid below the minimum wage if they didn’t do any work.

The Employees argued the only reason they were not performing work was that Gate unilaterally imposed a partial closedown of its business and failed to provide them work, despite being an essential service which remained open during the lockdown. The Employees said they were entitled to their normal wages and that there can be no contracting out of the MW Act, i.e. Gate could not pay them less than the minimum wage regardless of their agreement to receive 80% of their normal wages. The applicants said that the ‘no work, no pay’ principle relied on by Gate, could not apply in this case as it only applies when an employee fails or refuses to perform work.

The Authority held that the sums paid to the Employees were wages; the sums were not gratuitous and were paid on the basis of the Employees’ employment agreements with Gate. Because the sums were ‘wages’ the Authority said that the MW Act “is in play”. The Authority held that it followed “that if the applicants were ready, willing and able to carry out their function in an essential industry, Gate was required to pay them at least the minimum wage, notwithstanding any agreement it may have to the contrary.”

The Authority determined that Gate had breached the MW Act and ordered Gate to pay the employees any shortfall in their wages.

Dove Hospice

On 23 March the Eastern Bays Hospice Trust (trading as Dove Hospice) applied for the COVID-19 wage subsidy. The next day it closed its retail stores due to the lockdown. Dove Hospice sent a memorandum to staff advising that staff would be paid 80% of their normal wages until 22 April. Four employees were then dismissed on the grounds of redundancy. Dove Hospice gave the employees eight weeks’ notice of termination of employment; the first four weeks to be paid at 80%, and the second four weeks to be paid at just the wage subsidy rate.

The dismissed employees sought a determination from the Authority that the Dove Hospice had made unlawful deductions from their pay in breach of the Wages Protection Act 1983 (WP Act) as they had not agreed to be paid less than their normal pay.

The WP Act defines ‘wages’ as “salary or wages…to be paid to a worker for the performance of services or work.” The Dove Hospice said that because the employees had not performed services or work during the lockdown it was not obliged by the WP Act to pay the employees their normal pay. The Authority rejected this argument and said Dove Hospice had stretched the language of the WP Act too far. The WP Act and the definition of ‘wages’ must be considered within the context of the relevant employment agreement. The employees’ employment agreements did not permit the Dove Hospice to suspend payment of normal wages in lockdown circumstances. The employees were ready and willing to work and would have worked but for the lockdown.

The Authority held that the Dove Hospice had breached its obligations to the workers under the WP Act and their employment agreements because it had not sought or received the employees’ consent to reduce their wages. The Dove Hospice was required to pay the shortfall.

Determinations challenged

Both of these decisions have been challenged in the Employment Court.

A full Court of the Employment Court heard Gate’s challenge on 13 October 2020. Business New Zealand and the Council of Trade Unions also appeared to provide submissions, emphasizing the potentially wide-reaching implications of this decision. If every employee who was at home during lockdown was at ‘work’ and so was required to be paid the minimum wage for their contracted hours, then whole industries (such as hospitality and retail) will be in breach of the MW Act. The distinguishing factor in this case could be that Gate Gourmet was an essential service and its employees could have worked, it just did not have any work for its employees to do.

While the decision in Dove Hospice was relatively unsurprising – it was always generally understood that to reduce employees’ salary or wages, written agreement would be required – it might come as a wake-up call for employers who during the uncertainty of the move to ‘lockdown’ implemented reductions in pay and hours quicker than they might normally have and without clearly documenting employees’ agreement.

[1] Quigg Partners has previously acted for Gate Gourmet Limited but is not involved in these proceedings.

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