The Employment Relations Amendment Bill represents the most significant reform to New Zealand’s employment law in nearly a decade.  This is the second article in our series on the reform. Read our first article here. We explore the implications of a key change, which prevents employees earning above an annual income of $180,000 from raising a personal grievance for unjustified dismissal. The purpose of this change is to provide employers with greater certainty and flexibility when managing high-income employees, as these individuals often have a disproportionate impact on workplace performance.  

Will the change allow employers to fire high income earnings at will? In short, the cap will not be a 'get out of jail free card'.  Employers will still need to consider the risk of claims and take steps to mitigate those risks before terminating the employment relationship.

In this article, we explore what the change means for employers and high-income employees, as well as the practical implications that will likely flow from the change.

The cap on grievances

Under the proposed reform, employees who earn a base wage or salary of at least $180,000 annually will no longer be able to raise a personal grievance for unjustified dismissal or unjustified disadvantage (to the extent that the disadvantage claim relates to the dismissal). The income threshold only applies to base salary, excluding bonuses, benefits, and other alternative forms of remuneration.  

High-income employees will still be able to raise personal grievances on other grounds such as discrimination, bullying, or harassment. Importantly, there is also an opt-out mechanism where employers and high-income employees can agree to contract back into the unjustified dismissal protections if both parties agree to this.  

Approximately 3.4% of employees in New Zealand earn above the $180,000 threshold currently. The Government intends to review the income threshold annually on 1 July and adjust it based on changes in average weekly earnings reported by Statistics New Zealand. This could create some uncertainty, as employees may fall above or below the threshold from year to year, which would in turn affect their eligibility for protection against unjustified dismissal.

When does this change come into effect?

Once the Bill becomes law:

• Any news employees earning above the threshold will be immediately subject to the new rules, unless the parties mutually agree to opt back in to the unjustified dismissal protections.
• Existing employees will have a 12-month transition period before the change applies to them. During this time, high income employees will need to consider the impact of the cap on them and they may try and negotiate opt-outs or alternative protections (like longer notice periods or compensation if their employment is terminated without cause). Employers will need to consider what their approach to the cap will be.

There are important exceptions:

• If an existing employee changes roles with the same employer (e.g. through promotion or lateral move), the transition period will end early, and the threshold will apply.
• However, if the role change occurs due to restructuring, the employee will remain protected by the entirety of the transition period.
• Employers and employees can also agree to opt out of the transition period by mutual consent.

The Impacts

On the face of it, this reform appears to signal a reduction in the legal protection afforded to high income employees. As a result, we anticipate that these employees will want to negotiate contractual safeguards, such as:

• opting back into the unjustified dismissal protection;
• a higher overall remuneration package;
• pre-agreed exit payments;
• redundancy compensation;
• extended notice periods; or
• structuring their pay to keep base salary below the $180,000 threshold, while supplementing income with bonuses or other benefits that would not form part of their base remuneration.

Given high-income employees generally have a higher level of bargaining power, they are well-positioned to negotiate these terms. For employers, this may require them to offer more attractive employment terms or accept that some high-income staff will retain dismissal protections.  

Pay rises that put employees over the 180k threshold will now require a bargaining process and that the employee accepts the pay increases and the change in employment protections that flow from the higher salary.

Lessons from Australia and New Zealand’s Trial Period Reform

New Zealand’s approach now mirrors Australia’s, where a similar income threshold prevents high-income earners from making unfair dismissal claims under the Fair Work Act. Anecdotally, this has resulted in an increase in alternative personal grievance claims, particularly on grounds like discrimination, harassment and health and safety. We expect a similar trend in New Zealand, as high-income employees reframe their grievances to align with permitted grounds. Closer to home, the 2023 expansion of trial periods to all employers provides a relevant precedent. In response to this change, the Employment Court adopted a narrow interpretation of the new provisions, especially where they conflicted with the good faith principles central to the Employment Relations Act. We anticipate the courts make take a similarly cautious approach with the high-income threshold - applying it strictly, and only where clearly justified.  

Does this change go far enough?

The change is intended to give employers greater flexibility in managing high-income earners. In practice, however, we expect the practical impact to be limited which is consistent with what we’ve seen in with the same cap in Australia. Employers will still need to exercise care, procedural fairness, and good faith in managing and terminating employment relationships.

What should employers and employees do?

We encourage employers with high income employees to proactively review employment arrangements, consider how the changes will affect them and what position they will take in negotiations. It’s important to seek legal advice early, particularly if employment agreements may need to be updated to reflect the new legal landscape.

High income earning employees or people close to the threshold who may be likely to receive an increase soon, should seek advice on their options and consider what protections they need and want to negotiate for.

If you have any questions about how these changes could affect you or your business, please reach out to Anne Wilson or Rebecca White for a confidential discussion.

Coming up next

The next article in our series on the Employment Relations Amendment Bill will examine the reduction in remedies available to employees - including compensation caps and reinstatement changes.

This article was prepared with assistance from Angus Cuthbert, Law Clerk.

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