Author: David Jenkins, NZPPA CEO
On an ongoing basis, I receive questions coming through to the NZPPA PayTech adviceline on the application of the minimum wage in payroll. The majority of questions are not driven by payroll but by other parts of the business wanting to create new ways to manage and pay employees who are getting the minimum wage. In this post, I want to make it clear: Don’t muck around with the minimum wage in payroll!
So, to start, there are two rates: the adult rate of $23.15 per hour and the starting wage rate of $18.52 per hour. There is also a training rate based on $18.52 per hour.
Now, in a nutshell, the minimum wage must be paid for every hour worked and must be paid in relation to the period the employee works.
For example:
1. Peter is a minimum wage worker paid weekly at $23.15 per hour. He works variable hours Mon to Fri. Last week, he worked: Mon 7.5 hours, Tue 5.5, Wed 8.5, Thu 8, and Fri 9.5 for a total of 39 hours. Based on the minimum wage, Peter is paid 39 x $23.15 = $902.85 (it’s not rocket science).
Now, let’s use similar examples but applied in different ways.
2. John is a minimum wage worker paid weekly and works variable hours Mon to Fri. Last week, he worked: Mon 7.5 hours, Tue 5.5, Wed 8.5, Thu 8, and Fri 9.5 for a total of 39 hours. He is paid $20.50 an hour and receives a taxable shift allowance in addition to their hourly rate of $2.75 per hour. So, 39 x $20.50 = $799.50 and 39 x $2.75 = $107.25 for a total of $906.25 ($3.50 more than the minimum wage provides), which is above the minimum wage, so all good. This is compliant as long as the allowance in this example tops the employee up to be the same or better than the minimum wage rate.
3. Mary is a minimum wage worker paid weekly and works Mon to Fri. Last week, she worked: Mon 8 hours, Tue 8, Wed 8, Thu 8, and Fri 8 for a total of 40 hours. She is paid $16.50 an hour, so $660.00 per week. She also gets commission payments that vary but, on average, would bring the employee well above the minimum wage. The employee is paid weekly, and the commission earned is paid once a month. This would be non-compliant because the minimum wage must be paid in relation to the period of work, and a catch-up period at a later date undermines this. So don’t do this!
4. Shane is a piece-rate worker making widgets at $1.25 for each widget made. Shane works standard hours, and last week he worked: Mon 8 hours, Tue 8, Wed 8, Thu 8, and Fri 8 for a total of 40 hours. For the 40 hours of work, he made 625 widgets for a total cost of $781.25. If Shane had only been paid this for 40 hours of piece work, then his hourly rate for the week would have been $19.53. This is non-compliant with the minimum wage. To make this compliant, as long as the employer tops him up $144.75, this would then be $926, and that would meet the requirements of the $23.26 per hour ($926/40 = $23.15).
5. Geoff is a salaried employee working a 40-hour week that is based on the minimum wage. The employment agreement states his salary is an all-inclusive rate (he won’t get paid for additional hours worked). Geoff works 42 hours, but as per the employment agreement, he is paid the agreed salary of 40 hours at the minimum wage, so $926.00 for the week. $926.00 for the week divided by the actual hours worked means his hourly rate is $22.05 per hour, which is non-compliant with the Act. It does not matter if the next week the employee works fewer hours but gets paid their 40 hours for the week when they worked 42 and gets paid less than the minimum wage – that is non-compliant. Take the hint. It is stupid to have a minimum wage salary when you expect employees to work additional hours that still need to be paid so they don’t drop below the minimum wage. Just call them what they are: a wage worker!
6. Wendy is another salaried employee with a salary based on the minimum wage. However, she has agreed that ESCT will be included in gross earnings as part of a total remuneration agreement (ESCT is paid through PAYE). The annual salary is: 52 x $926 = $48,152.00 + 3% employer contribution of $1,444.56 for a total of $49,596.56 (this becomes the employee’s taxable gross earnings). Being part of a total remuneration agreement means the employee has agreed that any changes to tax or contribution rates to KiwiSaver will be taken from the agreed total remuneration agreement and that the employer does not need to increase the employee’s gross earnings. This is a very simplistic example as there can be many different variations.
So, for example, if the employer contribution base rate was increased to 4% by law (there are no plans to do this), it would mean the extra 1% would come out of the $48,152.00. The employer does not need to increase the employer contribution by the extra 1% as the employee has agreed to this. The result would mean there is the potential, once ESCT is deducted, for the employee to drop below the minimum wage rate. Now, this actually happened when the employer contribution rate was 2% and increased to 3%, and the employer had an employee under a total remuneration agreement while paying them the minimum wage. So, here is another hint: don’t do total remuneration with minimum-wage employees!
I could keep going, but the point is there are several ways an employee can be paid the minimum wage. However, the focus for the business and payroll is to always ensure the employee is paid the minimum wage for each hour worked and are paid as such in the pay period it relates to.
For the payroll practitioner, you must be the gatekeeper in your business. When any alternative way is promoted in managing minimum-wage employees that appears not to meet the minimum wage rate at any time, as a payroll professional, it is important to highlight and fight (in a non-threatening way but please be loud) to ensure employees (especially the lowest-paid) are paid correctly. Payroll must stand up for something, and this is one of the essential areas to make that stand.