Employment Obligations and COVID-19 FAQs

This is a step that is consistently missed and one that employer’s consistently get called out for.  The answer is Yes.  Any changes that a business wishes to make that will impact an employee’s agreement they have with the employer (their employment agreement), needs consultation.  This doesn’t mean the business can’t make changes, but they are required to discuss any proposed changes with those impacted.  Changes could be reduction in hours, a restructure, a change to normal days of work, and in the case of COVID-19, a reduction in wages.

In the event an employee or employees do not agree to their hours and pay being reduced, and an employer needs to reduce the wage bill in order to stay afloat, an employer could undertake a restructure to make these changes. 

Such a proposal may be framed on the basis that some or all current roles must be disestablished and replaced with, for example, fewer roles and/or part-time roles.  Employees affected by the proposal would have the option of being redeployed into the new roles and, in the event, they chose not to be redeployed, their employment would come to an end by reason of redundancy.  In that case, the terms of their employment agreement in respect of notice and redundancy compensation would apply. 

The usual requirements to consult with employees and fairly consider feedback received would continue to apply.  However, the process may be able to be truncated given the unique circumstances. We suggest that if an employer is considering such changes, they get in touch.

This is a unique situation because the Government has made a wage subsidy available to employers who make best efforts to pay their employees at least 80% of their normal income.   

However, the default position remains that an employer cannot unilaterally reduce any employee’s pay – their agreement is required.   

Employers should, therefore, consult with employees in good faith and try to reach agreement on this issue in the first instance.   

However, if they cannot agree and have exhausted all reasonable alternative options, it is arguable that an employer could rely on the “frustration of contract” principle to enforce the reduction.  The law remains unclear on this point and it is a high-risk option, but if the employer would otherwise go under, it may be a better option than the alternative. 

Even with the wage subsidies, many companies will struggle to stay viable and, in some cases, will need to consider making changes to their business which could impact the number of people employed.  

In the first instance, employers should explore all reasonable alternatives, such as seeking an employee’s agreement to reduce their pay to no more than the value of the wage subsidy (bearing in mind that the wage subsidy will not be available unless the employer can demonstrate that they have made “best efforts” to pay employees at least 80% of their normal income), to take leave without  pay, reducing employees’ hours or requesting that employees take annual holidays. 

However, in the event that employees do not agree to any such changes, or even with employee agreement to changes, and an employer needs to make structural changes in order to stay viable, they could commence a restructuring process.  

As described above, even though the circumstances are very difficult, employers will still be expected, in almost all cases, to consult fairly with staff regarding what is proposed.  If you are in the position where you need to consider such changes, we recommend that you get in touch to discuss what such a process would look like. 

We note that, where you have received the wage subsidy that will likely undermine the justification for making employees redundant if the justification is based on an inability to pay employees. That is because, if employees are prepared to agree to reduce their salary or wage to the value of the subsidy, the employer’s wage cost should be zero.  The justification for changes would, in that case, need to be something other than the ongoing cost of wages. 

In order to be eligible for wage subsidies, employers must make best efforts to retain staff and, as we have described above, redundancies based on wage cost where an employer is receiving the wage subsidy may not be justified. 

However, leaving that aside, we consider that you could use the wage subsidy to pay an employee’s notice period, but not to pay redundancy compensation, as it is not wages.   

There is some debate about this issue, and the answer is not clear from the guidance issued by the Government. Our view is that the most likely legal position is that you must continue to pay staff 
during the (current) four-week lockdown, even if they are not working from home.  

However, if may be that an employer could claim frustration of contract if they were unable to pay 
employees because of the lockdown and had exhausted all other options. This has not been tested in New Zealand employment law and would be a high-risk option.  

There may also be an exception for employers who have a “force majeure” or “business interruption” clause in their employment agreements. If such a clause exists, the requirement to pay employees would depend on the wording of that clause and if it covers this situation. Please note that the threshold for invoking such a clause is high.

In the event an employer cannot afford to pay employees during the lockdown period, there are several options available. In this respect, an employer could propose that: 

There is a reduction in the number of hours for which employees are paid. 

Employees are paid their annual holiday entitlements for some or all of the period.

Employees take a period of leave without pay during the lockdown period. 

Keep in mind that each of these options requires the agreement of the employee(s).  

Yes, as annual holidays are wages. However, you would need to seek the employee’s agreement, or give 14 days’ notice of the requirement to take annual holidays.  

While the wage subsidy is applied for and granted on a “per employee” basis ($585.80 or $350 for 12 weeks), it is paid as a single lump sum and not as an employee-specific entitlement.   

The expectation is that an employer will make best efforts to pay employees at least 80% of what they would normally earn during the 12-week period that the subsidy is provided for using the wage subsidy lump sum together, wherever possible, with the employer’s own money. 

This means that there is no obligation to pay the full “per employee” rate to each employee if that would amount to a greater sum than their usual earnings. 

On the other hand, if an employee earns more per week than the “per employee” subsidy rate, the amount paid to them may be higher than the “per employee” rate. 

When employers apply for the wage subsidy, they must agree to make best efforts to both retain employees the subsidy was paid for and pay those employees a minimum of 80% of their normal income.  

The “best efforts” requirement does not preclude redundancies during the period for which the wage subsidy is granted (although you will not be entitled to wage subsidies for employees that were made redundant).  However, please note our comments on issues of justification above. 

The “best efforts” requirement also does not preclude paying employees less than 80% of their normal income where that is not possible.  As described above, this means that you may ultimately be in a position where you can pay no more than the wage subsidy to your employees.  

If the employer applied for and received the wage subsidy after 5pm 27 March they are unable to make anyone redundant for the duration of the subsidy scheme. - (9 June 2020) If they applied for the subsidy prior to the 27th March then they must enter into a consultation process with the employees. Employees can raise the matter with MBIE or seek legal advice and support. Employers are entitled to the subsidy if they agree to retain employees and make best efforts to pay them a minimum of 80% of their normal income for the duration of the scheme.  It is not intended that employers receive the subsidy if employees are not being retained.

It is also expected that employers will make best efforts to pay employees a minimum of 80% of their normal pay.  Even if they cannot do this, it would be expected that as a minimum, employers pass on the  wage subsidy to employees.

An employee who is sick, or who needs to care for a spouse or dependent who is sick, is entitled under the Holidays Act to paid sick leave.

The minimum statutory entitlement is five days each year, which can accumulate to up to 20 days.  However, some employment agreements provide for more sick leave than this, and some employers allow employees to take more leave as a matter of discretion.

Once an employee’s sick leave entitlement is exhausted, an employee may wish to take paid annual holidays in order to ensure consistent income.  The parties can agree to this approach, but an employer should not automatically place an employee on paid annual holidays without the employee's consent.  Once those are used up, assuming the employer does not allow the employee to take annual holidays in advance, there is no obligation on the employer to pay the employee for any further time off work due to sickness. 

There will be situations in which an employee is not at work because he or she has been exposed to the risk of infection, but neither is actually infected or sick. 

As a general rule, the employee is not entitled to paid sick leave if there is no identifiable illness or injury (unless the employment agreement says differently).  However, many employers may agree to recognise this as sick leave in the circumstances.  Any agreements made should be recorded in writing, even if simply by email or text.

Even if the employee is not on paid sick leave, the employee may still be entitled to be paid during their absence.  This will depend on the answers to different questions, addressed below.

In general terms, if an employee is ready, willing and able to work, the employer is obliged to provide the employee with work.  However, an employer may want an employee who is suspected of having come into contact with coronavirus to stay away from work, so as not to pose a risk to others in the workplace.

In our view, an employer will be entitled - and perhaps obliged under the Health and Safety at Work Act 2015 (HSWA) - to direct that the employee not come in to work.  If there is a risk of general infection, or if the workplace is unable to function effectively due to employee absences, an employer may also be justified in closing down the workplace altogether.

A key issue for employers in those circumstances will be whether absent, but healthy, employees are entitled to be paid.

Some employment agreements contain clauses that excuse payment where an employer requires the employee to stay away, for instance due to the risk of infection.  However, generally speaking, if it is the employer deciding that the employee must stay away, the employee is entitled to be paid so long as the employee is ready, willing and able to work.

Some employers might be able to rely on a 'force majeure' type clause if one is included in their employment agreements, which will usually release a party from its contractual obligations to pay an employee or provide them with work when an extrinsic event renders the employment agreement impossible to perform.  This can be a high threshold to reach and will depend on the severity and likelihood of the risk posed to the workplace.  If your employment agreement does not contain such a clause, the doctrine of frustration of contract may provide some relief, but this is often difficult to make out.

In these circumstances, the employee is not ready, willing and able to work.  The starting point, therefore, is that the employee is not entitled to be paid.

However, before an employer decides not to pay, it will need to consider other options, such as working from home,
working different hours or taking other measures to avoid personal contact.  The employer and employee may also agree to the employee using other entitlements, such as sick leave or annual holidays (as discussed above).

Most employers will want to do the best by their employees and assist them where possible.  Even so, payment will not always be an available or acceptable option, particularly if the issue is widespread or recurring.

Under the HSWA, employees can refuse to work if they have reasonable grounds to believe that the work, they are required to perform is likely to cause them serious harm.  An employee may also have a broader right to refuse to attend work where the employee has a reasonable (and not remote) fear of contracting coronavirus in the workplace. 

Either way, employees will be obliged to discuss such an issue with their employer, and they may be able to find other solutions, such as working from home, working different hours or taking other measures to avoid or limit personal contact.

If an employee refuses to attend work, the employer is probably not obliged to pay the employee unless the employer is at fault in some way.  For example, if the employer allows an evidently infected employee to continue working with a risk of infecting others in the workplace, as this would not be compliant with the HSWA.  In that circumstance, the employer would be obliged to pay any employee reasonably refusing to work (and without having to use their accrued holidays and leave entitlements).  

Genuinely casual employees are only employed during each particular work assignment. As such, employers are under no obligation to provide any further work to employees beyond each engagement/assignment. 

Be aware: Where a regular pattern of work has developed, there is a risk that the true nature of the employment relationship may have become permanent one. The courts will consider length of employment, and how long a regular pattern of work has existed. 

Whether an employer can cease using contractors depends on the terms of the particular contract for services. 

Many contractor agreements simply provide for terminating the agreement on one month’s notice, in which case, employers are able to simply provide notice of termination.  

However, if the contract limits the circumstances in which termination can occur, for example where termination has to be for “reasonable cause”, it may be necessary to follow a process akin to a lawful restructure, in order to justify termination.