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Fair Pay Agreements: How employers can prepare for the process

Fair Pay Agreements: How employers can prepare for the process

Fair Pay Agreements: How employers can prepare for the process

Thursday 1 December, 2022

Our series on the new Fair Pay Agreements comes in two parts. The first article covers the detail and application of Fair Pay Agreements. This article covers the bargaining process for employers.

The Fair Pay Agreements Act, the biggest employment law change in decades, took effect on 1 December, 2022.

Fair Pay Agreements (FPAs) have the potential to fundamentally change New Zealand’s employment landscape by setting minimum terms and conditions for all employees in a particular job sector.

How will employers know when bargaining starts?

Unions have to apply to MBIE to get approval to initiate bargaining for an FPA. Once MBIE is satisfied that the union has met one of the tests, the union must notify the public of the approval and the proposed FPA. The union has to publish the approval on their website and in daily newspapers in Auckland, Hamilton, Tauranga, Wellington, Christchurch, and Dunedin.

The union also must do its best to identify and notify:

  • All unions with members who are likely to be covered by the proposed FPA
  • All employers that have employees in that occupation or industry.

The union has to tell them that:

  • Bargaining has been initiated
  • Details about the process
  • How the FPA could affect the employee and the work they do

The union will represent all employees, not just its members, but must include an MBIE-approved opt-out form for employees who do not want to be part of the FPA process. Employers cannot opt out of the process. Employers will be required to provide the contact details of relevant employees to unions so that the union can notify them of bargaining.

What should employers do once a union initiates bargaining?

The first step for an employer to work out who the employer bargaining party is. The employer bargaining party is responsible for negotiating with the union on behalf of the employers and is likely to be an employer associations or industry associations.

However, one of the key problems with the new FPA Act is that many employers are not members of an employer association. An employer association must be an incorporated society with a constitution that allows it to undertake bargaining for a Fair Pay Agreement. Potentially, this means that many employers will not have a bargaining party. The Act anticipates that a default employer bargaining party can take over, but so far, the Government has been unable to find an organisation to take on that role.

What can employers without an employer association do?

Business New Zealand initially said it would not be involved in the FPA process but has now agreed to act as the default bargaining party. It has said that it will help its members negotiate FPAs on a case-by-case basis. If Business NZ chooses to act, it will negotiate for all employers covered by the FPA, not just their members. Business NZ’s members employ up to 70% of New Zealand’s workforce, and there are other employer associations in New Zealand, such as Hospitality New Zealand, so employers may be able to find a bargaining representative.

If there is no employer representative, and Business NZ, as the default employer representative, chooses not to represent the employers, the Employment Relations Authority (‘ERA’) will decide the terms of the FPA.

How does the bargaining process work?

The union and the employer association will try to agree on minimum terms and conditions that they can both live with. Throughout the process, both sides must act in good faith towards each other and strikes and lockouts are not allowed.

Another issue with the FPA process, which could arise during negotiations, is that it assumes that the employers will all have the same goals, so will be open to sharing information that could help negotiations. But the employers may actually be in competition with each other, which could prevent them from wanting to share commercially sensitive information, even if it would help negotiations.

What happens if the parties can reach an agreement?

If the parties can agree on the terms of the FPA, the ERA then checks that it complies with the Act. Once it has ERA approval, both sides must vote to ratify the FPA by a majority voting in favour of it. Each side only needs 50% +1 to vote in favour. If both sides vote in favour, MBIE will bring the FPA into force.

Once a FPA is in place, it sets out the minimum terms that employers have to comply with, but there is nothing to stop employers offering, or individual employees negotiating, better terms and conditions. If a term in an Individual Employment Agreement (IEA) is better than a term in the FPA, then the IEA will apply for that term. This applies to IEAs that were in place prior to the FPA taking effect and those signed subsequently.

What happens if the parties cannot reach agreement?

If the parties cannot agree on terms, they can apply to the ERA to fix the terms. The ERA can fix the terms of the FPA if it is satisfied by either of these terms:

  • There have been two unsuccessful attempts to ratify the FPA
  • All alternatives for reaching agreement have been exhausted
  • Both sides have used reasonable endeavours over a reasonable period to reach agreement
  • One side has breached the duty of good faith and that breach is deliberate, serious and sustained or has undermined the bargaining process.

The ERA can fix the terms to be included in the FPA or can fix the terms that the parties must discuss. When fixing terms in an FPA, the ERA can consider:

  • The content of the proposed FPA
  • Industrial or organisational practices and norms
  • The possible impact on employers.
  • Existing employment standards, such as applicable collective agreements and minimum employment standards
  • How easily the FPA can be understood
  • Potential impacts on the economy and/or society
  • Any other relevant matters

Once the ERA has fixed the terms of an FPA may only be challenged on the grounds the threshold for fixing wasn’t met or the Authority applied the criteria above incorrectly.

How does having the ERA set terms encourage the parties to reach an agreement?

Having the ERA fix the terms is likely to require an extensive (and expensive) hearing, with both sides needing to call expert evidence, particularly around potentially impacts on employers, the economy, and society. In addition, taking control away from the parties makes the process considerably more uncertain for both sides.

Why are smaller employers worried about the FPA process?

The impact on smaller employers is one of the main criticisms of the FPA process. 97% of businesses in New Zealand are SMEs, but they only employ 30% of employees. Bigger employers will have more resources, so their interests could dominate the bargaining process, even though FPAs may impact smaller employers more.  When it comes to ratifying an FPA, employers get votes depending on size, so larger employers have more votes than small employers. Small employers, which aren’t necessarily highly profitable businesses, are concerned that they will find themselves bound by a FPA that they had no say in.

What about the election?

National has already said that it will get rid of FPAs if it wins the 2023 election.  However, unions are likely to initiate bargaining shortly after the FPA Act comes into force on 1 December 2022. If enough FPAs are in force before the election, it will be harder to repeal. Employers hoping for a change in government should still understand the FPA process, just in case.

What should employers do to prepare?

Employers should consider whether any of their employees might fall within the sectors who are likely to be first off the block. Indications are that these will be security guards, early childhood workers, clearers, bus drivers, supermarket workers, and hospitality workers. They should look at how the FPA bargaining process works and consider who their employer representative might be.

Employment Partner, Daniel Erickson, has released a two-part podcast to help New Zealand employers find out what they need to know about FPAs, and Tompkins Wake will be running a workshop in February giving employers practical guidance on how to navigate the FPA process.

If you have concerns about how FPAs might affect you or your business, you can contact our experts, linked below.

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