Fair Pay Agreements – What Do Employers Need to Know?

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Litigation, Disputes and Employment

Fair Pay Agreements – What Do Employers Need to Know?

Parliament recently passed the Fair Pay Agreements Bill, which gives employees the right to seek industry-wide changes to baseline working conditions and pay. With fair pay provisions taking effect from 1 December 2022 (to be known as the Fair Pay Agreements Act 2022), it’s time to unpack what these changes, and their ramifications, could mean for you.  

What is a Fair Pay Agreement? 

A Fair Pay Agreement (“FPA”) is an agreement reached through collective bargaining between employees and employers which, by law, sets a new minimum employment standard across an entire industry. The FPA process is separate from the current collective bargaining framework under the Employment Relations Act 2000 insofar that employees don’t need to be Union members in order to reap the benefits of an FPA.

An FPA must capture base pay rates, working hours, penalty rates for overtime work, arrangements for training, and leave entitlements. It’s mandatory that within FPA negotiations parties discuss health and safety, redundancy, and flexible working arrangements, although these terms don’t necessarily need to be included in any final agreement.

Terms within an FPA cannot be contracted out of. Employees can still negotiate for remuneration that exceeds an FPA, but they cannot be paid less than what is outlined in the agreement. An FPA will be valid for three to five years.

Who will be affected?

While there is no prohibition on any particular occupation creating an FPA, the legislation is geared toward low paid industries. Preparations are already underway for Union in sectors such as hospitality, security, and bus drivers with a view to agreeing an FPA.

The extent of an FPA’s coverage is up to the initiating party. For example, in hospitality, coverage could include “all chefs in hotels and cafes” which would be an industry-type approach, or simply cover “all chefs” which is a far broader term that could include factories or hospitals and beyond.

Who can initiate an FPA?

Only a Union may initiate bargaining for an FPA, so long as it has members who would be covered by the eventual FPA. The initiating Union (“Initiating Party”) must collect evidence to meet either the Representation Test or Public Interest Test and submit an application to the Ministry of Business Innovation and Enterprise (“MBIE”) for approval to commence bargaining. MBIE may ask for public submissions on the robustness of evidence submitted to support the application.

  • Satisfying the Representation Test requires the Initiating Party having support from 10% or 1000 of covered employees of the associated industry to enter FPA bargaining.
  • Satisfying the Public Interest Test involves the Initiating Party establishing that covered employees receive low pay and either have a lack of pay progression, little bargaining power, work antisocial hours or have contractual uncertainty i.e., seasonal work.

As soon as MBIE approves an FPA application, the clock starts with both employees and employers having three months to form their respective bargaining parties.

Representation in Bargaining

Employees must be represented in negotiations by an Employee Bargaining Side. This will typically be comprised of the Initiating Party, plus any other Unions with covered employees that apply to MBIE join the negotiations.

Employers must be represented by an Employer Bargaining side, comprised of at least one Employer Bargaining Party. The Public Service Commissioner must be an Employer Bargaining Party when coverage of the proposed FPA includes an employee of a public service agency or education service.

Bargaining sides must appoint a Lead Advocate to negotiate on its behalf.

Bargaining sides must endeavour to have Māori representation in bargaining.

If no-one steps forward to bargain for the Employer Bargaining side after three months, the Bill provides that the role will be offered to the “default” bargaining party that is the “most representative organisation of [Unions or employers] in New Zealand”. Business New Zealand has already opted out of the FPA regime.

In the case of there being no appropriate default party, the Initiating Party can apply to the Employment Relations Authority (“Authority”) after a three-month notice period for it to determine the FPA’s terms.

The Bargaining process and ratification of an FPA

If an agreement is reached at the bargaining stage, the lawfulness of the FPA is reviewed by the Authority. The FPA then goes to a ratification vote, where a majority vote from both covered employees and employers is required to achieve ratification. Sides have two opportunities to achieve the requisite majority vote. MBIE then assesses the voting process to ensure proper process was followed and verifies the result. Following this, the FPA is now law.

Australian Inspiration

FPAs work similarly to the industry Awards system in Australia. Awards set minimum entitlement to pay rates, hours of work, breaks, etc. within specific industries or occupations. Almost all businesses employ Award-covered employees. Employers must be aware of which Awards apply to each employee. Employment contracts must be consistent with the applicable Award. Australia has 112 Awards currently.

What steps should employers take from here?

The impending commencement of the FPA scheme means prudent employers should consider the potential implications for their businesses today.

If you would like more information about Fair Pay Agreements, please contact a member of our Employment Law Team.

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