Impending Fair Payment Agreement System

– A Win for both Unions and Non-Union Members


The government has recently released details regarding the Fair Pay Agreement system it intends to introduce. The system effectively introduces a new mechanism and process for bargaining to set binding minimum terms and conditions of employment across an entire occupation or industry. It is important to note from the outset Fair Pay Agreements (FPAs) are not intended to only cover pay – employers and employees are free to bargaining for minimum terms and conditions in respect of other terms and conditions of employment beyond solely pay.

The introduction of the Fair Pay Agreement system has arisen from some concerning statistics, including that over the last 30 years high-income earners have seen their wages increase at twice the rate of middle-income earners, collective bargaining is down 70% from three decades ago and in many industries there is a ‘race to the bottom’ (i.e. where businesses compete for contracts and gain commercial advantage by reducing their labour/wage costs to levels that greatly disadvantage low-income earners).

It’s no secret that New Zealand is behind when it comes to this area, despite usually being quite progressive when it comes to more left-leaning developments in the law. For instance, New Zealand is a good 11 years behind Australia, which established its “modern awards” system way back in 2010. Although Australia’s system is complex and has it owns fair share of problems, it has resulted in many agreements for minimum standards of pay and other conditions of employment for many specific industries and occupations. This is effectively what our system also hopes to achieve. It is important to note these “Award” agreements in Australia do not replace their National Employment Standards (e.g. the minimum wage which applies across all industries and occupations). Similarly, New Zealand’s proposed new system also does not appear to be intended to replace our body of minimum employment law standards, but rather to supplement them.

Although both major political parties must bear some responsibility for the delay (given they have both been in power in the last 11 years) it appears that National did little, if anything, to make any progress towards establishing a Fair Pay system. Although Labour giving unions more power is not in and of itself surprising it does deserve some praise for putting it front and centre on their agenda, regardless of whether it has some obvious kinks and unknowns.

The prospect of FPA is understandably causing large shockwaves in the business community. Not only will it cause many employers’ labour costs to rise, and potentially make some business financially unviable, but it will also to a certain extent remove some of an employer’s ability to negotiate and set rates of pay with current and prospective staff. Many employer’s will certainly not be happy about being forced to comply with the terms of a collective agreement.

There can be no doubt this is a hot political issue. Watch this space as if National were to get back into government next term, they may very well seek to unwind the intended Fair Pay Agreement system or dilute its impact significantly.


What is a fair pay agreement?

A fair pay agreement is a legally binding agreement that sets minimum rates of pay and other employment conditions between employers and employees in the same industry or occupation. The idea is that different industries and occupations will negotiate their own FPAs which will apply to every employer and employee within that industry or occupancy, regardless of whether they agree to it. That the agreements will cover non-unionised employees across a whole industry or occupation represents a significant difference with our current collective bargaining model, which only binds the parties to the particular collective agreement. This is extremely controversial because by requiring employees and employers to comply with a collective agreement they are not party to, it could be seen as the government instituting “compulsory unionism” (a term Act Party leader David Seymour has used to describe the new system).

Individual employees and employers will still be able to agree to terms and conditions above what is contained within a FPA, but it will be bound to at least provide the “minimum” terms as set in those agreements. Such an approach is similar to our current collective bargaining model which allows employers (collective agreements) and groups of employers (multi-employer collective agreement) to negotiate and enter into collective agreements with a group of employees. This is often referred to as “enterprise-level” bargaining. These types of agreements however do not apply to non-parties, which often form a large number of the employees working in a particular type of industry or occupancy. This is the gap the Fair Pay Agreement system seeks to plug. Unlike these collective agreements, the Fair Pay Agreements would cover all employees across an industry or occupancy, regardless of whether they are a member of the union and regardless of whether the employer signs up to a collective agreement.

At this stage, the system is proposed to only cover employees, not contractors, although the government is looking to extend it to contractors in due course.


How will the Fair Pay Agreement system work?

There is no doubt unions will have a monopoly in the new system. To initiate the process unions must do so after meeting a minimum threshold of support or “representation” test (10% of workers within the scope of the agreement proposed Fair Pay agreement or 1000 worker within the scope of the bargaining/proposed Fair Pay agreement). Alternatively, the union can instead meet a (current undefined) “public interest test”. One can envisage that the recent Wellington bus-driver pay issues would fall within this “public interest” definition.

Once the union commences bargaining and demonstrates that it has met the “representation” or “public interest” test, the bargaining process commences. People who will be covered by the bargaining and FPA must then be notified, which should occur through employers, unions, government and business representatives. Although the specific bargaining rules for FPA are as yet unclear, it is likely they will mirror some of the current enterprise-level bargaining level rules, such as a requirement for the parties to deal with one another in good faith during the bargaining process, including using best endeavours to reach an agreement.

If parties reach an impasse with bargaining they will then be referred to mediation in an attempt to resolve the difficulties. If the parties resolve the difficulties they will continue with the bargaining process until they reach an agreement or reach another impasse (in which case they appear to again go back to mediation). If further to a mediation the parties remain at an impasse/stalemate, the Employment Relations Authority will resolve the impasse by unilaterally setting terms. This is where it gets tricky from a legal perspective as there is a lot of ambiguity arising from how the Employment Relations Authority will fix a term. For instance, if the Authority is being asked to fix a certain minimum rate of pay, how does it go about doing so? Will the parties bring competing expert witnesses? Will we look to Australia and other overseas jurisdictions for the rates of pay they have set? Will industry-wide remuneration surveys be conducted and will they be influential? Will recruitment companies that conduct these surveys have a large part to play? Will the Authority take a balanced, pro-employer or pro-employee approach to fixing terms in practice? Will there be a standard approach between Authority members who will it be a lottery which depends on which Member you get on the day?

It would be interesting to hear from the Authority and Employment Court as to how they see their role playing out practically when they are asked to fix terms.

If the parties do reach an agreement during bargaining, the proposed Fair Pay Agreement is then sent to the Employment Relations Authority who must then “vet” it to ensure the terms are lawful before it goes to a vote. If it passes this vetting process the proposed FPA will then be put to vote by the employers and employees within its coverage. To pass this vote it must have 50% or more support on both sides (ostensibly from both employers and employees). The government is proposing to weigh the voting for employers (1 vote per employee of theirs covered by the proposed FPA with higher weighting for employers with less than 20 employees in coverage). The rationale behind weighting the voting appears to make sense. It means that those large employers that will be heavily impacted have a vote proportionate to that impact while it also recognises that small employers have less bargaining power and often less financial ability to increase, for instance, rates of pay.

Once the agreement passes this vote, the FPA is considered to be finalised. If the proposed agreement fails to pass this vote, the parties then revert back to bargaining. If a second vote fails, the Fair Pay Agreement then goes to the Employment Relations Authority for determination who will then (presumably) fix the terms of the agreement regardless of any of the parties agreement (i.e. it does not go back for a third vote and is considered finalised).

Once the Fair Pay Agreement is in finalised, MBIE will then enact secondary legislation to bring the Fair Pay Agreement into force. It is this step that will allow the Fair Pay Agreement to be enforced against an entire industry or occupation (including those that voted “no” or didn’t vote at all), which in our view represents the most controversial part of the process. It reflects a rare opportunity for employers and employees to be the creators of employment law, as opposed to it coming through the usual parliamentary channels. It represents a contrary approach to what is ordinarily an established and logical rule of law – agreements should only apply to those that agree to them. From a jurisprudential point of view, this is fascinating. Essentially parliament is delegating its law making responsibilities to employers, employees and in the last instance (if it fails a second-majority vote) the judiciary (the Authority and Employment Court).

If an FPA gets to this stage there will no doubt be an enforcement date (within the legislation or the agreement itself) which will provide employers covered by the agreement a fair opportunity to lift their terms and conditions of employment to meet those minimums set out in the FPA. For some employers that are already paying their employees above these rates and/or meeting the terms of the FPA, they may need to do nothing. Other employers may need to make significant changes, including to the way they structure their business and the business model they operate under.

BuckettLaw is concerned that although lifting minimum standards and tailoring those minimum standards to industries and occupations is great in principle, how will the current judicial system cope with the additional legal work arising from the new FPA system when it is already overburdened? The Employment Relations Authority has been in the news in recent months for having a huge back-log of cases which it is struggling to clear with its current resourcing levels. If the FPA system is enacted, not only should the government be providing additional resourcing to the interested parties, but it should also be providing the institutions such as the Authority additional funding to ensure it can cope with the additional influx of work it is creating for them.


What will it mean for you as an employee or employer?

The first thing to be conscious of is that we are still some considerable time away from the system being put in place. The government will now draft the legislation which is anticipated to be introduced into parliament later this year with an expectation it will pass into law in 2022. From there unions will seek to initiate bargaining. It could be months or even years before we start to see the first few Fair Pay Agreements put in place. It is likely to be a slow process with those industries and occupations that are already heavily unionised getting in first and being prioritised. Take for example Australia’s system – it has only last year established a modern award for the Ministry Industry and for Clerks in the Private Sector despite having had the system in place for over 10 years.

For both employees and employers, it is important to take a deep breath. The legislation to establish this new system has not yet been passed (or even introduced) and may go through some significant changes as it makes its way through the law-making process in parliament. BuckettLaw will provide a further update once the legislation is passed, hopefully with some more clarity about some of the system’s ‘grey’ or ‘difficult’ areas.

For employees watch this space – you get a say in whether a FPA is put in place and your vote matters. Parliament clearly envisages a democratic process takes place where considerable effort is made to ensure that those that may be covered know of the vote and what it may mean for them. Keep an eye on the employment and business sections of whichever news media platform you engage with. If you’re concerned that may miss out then job, then join a union as they will no doubt play a very active part in communicating that bargaining and voting is taking place.

For employers, it is never too early to start anticipating an increase in your labour costs. It is safe to say that if you aren’t paying your staff fairly for the type of role they occupy (a subjective assessment which is unclear how it will assessed), you are likely facing a situation where you will have to increase certain staff’s wages. If you are an employer that operates in industries where there are vulnerable workers or low-wage income earners (hospitality, transport, food services, cleaning etc) you are in the category of employers most likely to be impacted first by a FPA. More well-paid industries (such as professional services – lawyers, accountants, doctors etc) are likely to be the last effected. It is vital therefore that as an employer you engage in the democratic voting process and you start to prepare your business, not only financially for a possible increase in wage costs, but also for an increase in your HR costs as you vary your employment agreements. It is also vital that once an FPA has been ratified and MBIE creates the legislative instrument that makes it binding, you promptly take legal advice regarding your employer obligations. This is especially important as employers who breach the terms of an FPA may be fined and even banned from employing people. It could have a serious and potentially deadly impact on your business. As an employer if you wish to have an active part to play in lobbying for or against an FPA, you may wish to become a member of an advocacy organisation that has a voice in New Zealand on behalf of employers, such as Business NZ.

Both employers and employees should note that once the draft legislation is introduced it will go through parliament’s select-committee process. You have a right, and the ability, to engage in this process and potentially influence what the new system may look like.


Why is it a “win” for the Unions and Non-Union Members?

Unions will have a central role in raising awareness about the new system and FPA, bargaining for the FPAs and enforcing them. In fact, it has already been announced that two of the major unions/advocacy groups (New Zealand Council of Trade Unions and BusinessNZ) will receive $250,000 over the next three years to support their role in coordinating FPAs. The government has signalled it will provide more active support than it does for enterprise-level bargaining, including by contributing $50,000 to each bargaining side, providing training and the provision of a government-provided bargaining support person. Giving unions more power and work may have the practical effect of encouraging more people to become union members, which in turn may benefit the unions as they receive more funding and bargaining power, something that has been significantly diluted over the last 30 years.

On the other hand, it may result in very little change to union membership because individual employees will still reap the benefits from the FPAs regardless of whether they are part of a union. This could result in additional work for non-union entities such as law firms and employment advocacy groups, although this is unlikely to change the present landscape which is that collective bargaining is mainly conducted by a select few groups of lawyers habitually acting for the unions or employers. In other words, it is difficult to see how this will result in much more work for the “individual” employee or employer, at least until FPAs have actually been reached and are in force, which is likely to be some considerable time down the track.