Balancing People and Money

The Fair Pay Agreements Act 2022 came into effect on 1 December 2022. The Act creates a statutory framework for collective bargaining for Fair Pay Agreements (FPA) that provides for a mandatory, sector-wide collective bargaining regime. FPAs will also supplement collective bargaining between unions and employees, as well as bargaining for individual terms and conditions.

We have outlined how FPAs will operate and the potential implications for businesses and employers.

Why are Fair Pay Agreements being implemented?
The Government has stated that the purpose of the legislation is to bring together employers and unions to bargain for minimum terms and conditions for all employees across an entire industry or occupation.

How will the Fair Pay System work?
Initiating the process
The FPA process will start if a union meets either the representation test, or the public interest test and initiates bargaining. The representation test means that 10 percent of a given occupation or sector, or 1000 workers (whichever is less) support initiating bargaining for the proposed FPA. The public interest test requires the relevant employees to receive low pay and:

  • Have little bargaining power; or
  • Have a lack of pay progression; or
  • Not be adequately paid, taking into account factors such as working long or unsocial hours (for example, weekend or night shifts) or have contractual uncertainty (for example, performing short-term seasonal work or working on an intermittent or irregular basis).

The union must identify who would be covered to establish that one of the above tests have been met. The union must also identify whether it is to be occupation or industry based. The union then applies to the Chief Executive of the Ministry of Business, Innovation and Employment (MBIE).

MBIE must be satisfied that either the representation or public interest test has been met. MBIE can request further information and/or call for public submissions in making this determination. If a union is successful it must identify and notify all unions that represent affected employees, and affected employers, and publish a notice to that effect. All employees in the occupation or sector covered by the proposed FPA will be covered by the bargaining, as will their employers.

Both employers and employees will be represented throughout the process. For workers, this will likely be the union who initiated the bargaining process. For employers, this will largely depend on whether or not it is a public or private sector.
All parties have a duty of good faith, as well as requirements to ensure Māori employees and employers are adequately represented.

FPA terms
Parties must agree on the following employment terms:

  • Start date and expiry date of the FPA which must be for a period of between three and five years;
  • Who is covered by the FPA;
  • The normal hours of work;
  • Minimum base wage rates (including when and how they are adjusted);
  • Overtime;
  • Penalty rates;
  • Any superannuation; and
  • The process for varying an FPA.

Parties must discuss, but are not required to include in the FPA, the following topics:

  • Redundancy;
  • Flexible working;
  • The objectives of the FPA;
  • Training and development;
  • Leave entitlements; and
  • Health and safety.

Parties may also discuss and include any other employment-related topics they consider to be relevant.

They can also allow exemptions for businesses that are in significant financial hardship, set regional differences, and other differential terms, so long as they comply with the Human Rights Act 1993 and minimum employment entitlements.
If disputes arise during the bargaining process, parties can access the MBIE mediation service. In some circumstances they may also apply to the Employment Relations Authority (ERA) to have the terms of an FPA fixed through a Determination.

Finalising FPAs
Once agreed between the parties, an FPA needs to be approved by the ERA who will carry out a compliance assessment. If approved, then it will be ratified and come into force through regulations or orders.
All employers who fall within the coverage of the FPA will then be bound by it. This includes employers who did not participate in the bargaining process.

What are the (potential) implications of the Fair Pay System for employers and business owners?
Unlike current collective bargaining, under the Fair Pay System there is no opportunity for employers to opt out. Therefore, businesses may have less freedom to negotiate individual employment terms with their employees which could have a negative impact on small-to-medium-sized businesses. That employment terms will apply to all businesses operating in an industry or occupation regardless of their involvement in the bargaining process could lead to businesses feeling disengaged. It also remains to be seen how this will work in practice with multiple employers with competing interests.

Independent contractors are not currently covered by FPAs but the Government has indicated this may change. There will be penalties for employers that attempt to avoid the FPA process by engaging workers as independent contractors when they are truly an employee.

If you would like further information regarding the effect that the Fair Pay System may have on your business, please contact a member of our employment law team.