Skip to main content

Fair Pay Agreements – what you need to know

In this article wirtten exclusively for HRNZ Susan Hornsby-Geluk (Managing Partner) and Megan Vant (Senior Associate) from Dundas Street Employment Lawyers discuss key considerations for HR professionals...

Early last month the Government unveiled its proposal for delivering Fair Pay Agreements (FPA) in New Zealand and at least at this stage, it leaves many significant questions unanswered.

The concept is simple – the ability for employers and employees across an entire occupation or industry to bargain for an FPA that creates new minimum standards for that occupation or industry.

In practice, the challenges are likely to be immense.

The new system is based on Australia’s modern awards system and the intention is to improve pay and conditions for workers, especially those in low-wage sectors such as cleaning and security.

What is an FPA?
An FPA is an agreement setting out industry or occupation specific minimum employment terms (pay and conditions) that will be binding on all employers in the industry or occupation. FPAs will have to include minimum wage rates, ordinary hours, overtime and penalty rates.

The parties will also be required discuss other topics although they are not required to form part of the FPA. These ‘mandatory to discuss’ topics include redundancy, leave requirements, skills and training, health and safety, and flexible working.

In covering an industry or occupation, an FPA could cover every single cleaner in the country or every supermarket employee; or have a narrower focus such as all supermarket cleaners.

There are a number of significant gaps in the Government’s current proposal. In some instances, these are challenges that are already being felt in the pay equity system provided for by the 2020 amendments to the Equal Pay Act 1972. The pay equity scheme can be seen as a small-scale test run for the sheer size and complexity of the proposed FPA system.

The Government proposes that a union with at least one member within coverage can initiate an FPA if it can satisfy either the representation test or the public interest test. The representation test would require that at least 10% of the covered workforce or 1,000 employees in coverage support the initiation of an FPA. The public interest test would require the union to demonstrate that an industry or occupation faces certain labour market issues such that an FPA would be in the public interest. This alternative test is intended to ensure that sectors or industries with a limited union presence, which may struggle to reach the representation test threshold, can nonetheless initiate an FPA process.

Only unions, not employers, can initiate bargaining for an FPA. The initiating union has control over setting the scope and coverage of the proposed FPA, although ultimately such matters remain open to negotiation.

Once bargaining for an FPA has been initiated, an FPA must result. This will occur either through ratification of agreed terms and conditions or by having terms fixed by the Employment Relations Authority following two dissenting ratification votes.

Ratification votes are frequently used during collective bargaining as a way to test the proposed agreement with employees. Given the large number of employers and employees that will be involved in the FPA process, it is likely that ratification votes would likewise need to be used to gauge whether the parties are supportive of the proposals the bargaining sides have come up with.

However, with only two failed ratification votes allowed before the Authority will fix the FPA, this is not an option available to the parties under the current proposal. Rather, both bargaining sides will be compelled to take a cautious approach to putting an offer to ratification by testing it through communications and consultation so that they can be reasonably comfortable that the outcome will not result in any decision being taken out of their hands and given to the Authority.

Employers voting on a proposed FPA will have one vote per employee within coverage of the FPA, with a slight weighting for employers with 20 or fewer employees. However, this weighting for small employers is so minimal as to be inconsequential. In a situation where the largest employer in the industry votes ‘yes’ to an FPA, the ‘no’ votes of small employers will be unlikely to have any meaningful impact, effectively disenfranchising them and potentially putting them out of business if they cannot afford the new minimum FPA rates.

Once an FPA is initiated, the union initiator will be obliged to notify employers and other unions within the coverage of the FPA. This can obviously only include employers which the union knows about. Notified employers must notify other unions and notified unions must notify other employers that they are aware of as being within coverage. MBIE will also publish a notice of the initiation.

Despite this phone-tree type system, it is easy to imagine that there will be some, or even many, employers who do not receive direct notification or become aware of MBIE’s published notice. There is no one database or register of employers within a certain industry or occupation – such as a database that can extract the details of all employers of cleaners to ensure that they can be notified of the initiation.

This means that there will be employers who are not made aware of the initiation of an FPA and who therefore take no part in the bargaining or ratification of that FPA, but nonetheless ultimately find themselves bound by minimum standards which they had no part in setting. The employees of those employers will likely be similarly unaware of the FPA and similarly unable to participate in the process.

Bargaining representatives
Employers within an industry are often in competition with each other. Even so, they will be expected to form a cohesive bargaining side to represent the interests of the employers in the industry. If the employers cannot choose who will represent them on their bargaining side, the Government has proposed that Business New Zealand will take on this role. There are real challenges in this space as there are not the current employer associations with the necessary expertise and resources to bargain with experienced unions for FPAs.

In addition, employers on the bargaining team will be expected to act towards each other in good faith, despite their potentially competing interests.

Mandatory terms
FPAs are likely to cover workforces with a significant number of different collective agreements. As FPA terms will be minimum terms, they will serve to lift any term in a collective agreement that is below the minimum FPA term. Given that collective agreement terms are negotiated as a package, there is a significant issue with the concept that FPA minimum terms can be inserted into the existing collective agreement to replace some terms but not others. The employee will be able to receive the best terms from both their existing collective agreement and the FPA.

Take for example the employer who has a collective agreement where there has been an historical understanding between the parties that the agreement provides for a lower base rate in return for a high overtime rate. The setting of a minimum base rate in an FPA (if higher than in the collective agreement) will result in the employer being required to apply the higher base rate as well as the already agreed high overtime rate. Base rates and overtime rates need to be negotiated and applied in tandem as they generally involve a trade-off. The current proposal for the FPA system will enable employees to receive the best of both.

Although the Government’s intention in introducing FPAs is to improve wages and conditions for employees, encourage businesses to invest in training, and level the playing field, the proposed system is cumbersome and likely to have significant challenges in implementation such that it may create more injustices than it resolves.

Written by Susan Hornsby-Geluk (Managing Partner) and Megan Vant (Senior Associate) from Dundas Street Employment Lawyers discuss key considerations for HR professionals. For more information please contact Dundas Street directly -