‘Averaging out’- Why it’s unlawful and how to get around it

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Many New Zealand employers are currently breaking the law, and may not even know it. Under the Minimum Wage Act 1983, every employee (with the exception of those aged under 16 or those on the Starting Out Wage) must receive at least the minimum wage, currently $15.75 per hour, for every hour worked.

Averaging out is common, for example, for farm labourers who receive a salary. Both the employer and the employee want the salary paid out weekly/fortnightly at the same amount throughout the year. The problem is, during the peak season the employee might work 60 hours per week and in the low season only 20 hours per week. When the employee is working 60 hours per week, they are usually being paid well below the minimum wage for every hour worked, even though when they are working only 20 hours per week, they are being paid well above the minimum wage. The law does not allow an employer to “average” it out over the year, even if both the employer and employee want it that way.

The same problem appears to be common in early childcare centres, where many employees want to take the whole of the school holidays off but, rather than take the school holidays off as leave without pay, prefer to have the same amount paid to them each week throughout the year. By equally spreading the payments across the year, there is a risk that the employer will be breaching the minimum wage when the employees are working their regular hours.

From 1 April 2016, employers have been required to keep records of hours worked even for salaried workers pursuant to s 130(1D) of the Employment Relations Act 2000. Where an employee works ‘usual hours’ (the same hours every week) it should be sufficient to show that the employee’s usual hours and payment for those hours are agreed to in the employment agreement. However, where you have employees working regular hours some weeks and irregular hours other weeks, then an employer needs to keep records (and produce them to a Labour Inspector if required) to show the hours the employee worked each week and the remuneration received for those hours. That is where the averaging out issue will catch some employers out.

Despite the fact that both the employer and the employee prefer the employee’s salary to be paid evenly throughout the year, that does not change the fact that the law does not allow it. So, is there any way to get around this issue? Sometimes, we just need to think outside the box a little!

My suggestion to a client (an ECE Centre) recently was to ask the employees to sign an ongoing authorised deduction from their pay each week (when they are working) and then pay those deducted funds out to them weekly during the school holidays (when the employee is not working) to avoid breaching the averaging out/minimum wage dilemma. However, the deducted money would clearly need to be held on trust for the employees, given they have already earned it, it belongs to them and to avoid problems if the company went into receivership.

This suggestion would require the employer to set up a separate trust account, where the funds in the account are specified to be held on trust for the company’s employees. Employers should discuss this option with their bank and find out what the bank requires to make this happen.

In conclusion, even where both an employer and an employee are happy with a system that is technically unlawful, that will not be any comfort if a Labour Inspector visits. Employers who have salaried workers working irregular hours need to ensure that every hour is still paid at the minimum wage, and setting up a trust account for employees, may be one way that an employee can still receive equal payments throughout the year.

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About Author

Erin Burke

Employment Lawyer and Director at Practica Legal
Email: erin@practicalegal.co.nz phone: 027 459 3375

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