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5 April 2020

Covid-19 - the wage subsidy explained

How the government's wage subsidy works and employer's obligations with it.

The Wage Subsidy is available to employers who have:

  1. Experienced a 30% decline in actual or predicted revenue over the period of a month (compared with the same month the previous year) and that decline was experienced between January 2020 and 9 June 2020;
  2. That decline is a result of COVID-19;
  3. Taken active steps to mitigate the impact of COVID-19; and
  4. Made “best efforts” to retain employees and pay them at least 80% of their ordinary remuneration during the period of the subsidy.

The Wage Subsidy is intended to ease the financial pressure on employers of retaining staff and avoid the need for redundancies. It is being administered on “high trust” although the Ministry of Social Development (MSD) have indicated that it will carry out audits in due course and will penalise employers for breaches and fraud.

What if my business has operated less than a year or has high growth?

Those businesses can still apply for the Wage Subsidy. The comparison should be made against a previous month that is their best estimate of the decline in revenue due to Covid-19, for example, January 2020 compared to March 2020.

How do I show I have taken “active steps to mitigate the impact of Covid-19”?

Keep a record of any actions you have taken to preserve the financial sustainability of your business.

For example:

  • Draft and action a business continuity plan ( click here for a link to an example template available on the Wellington Region Emergency Management website);
  • Engage with your insurer (although the pandemic is unlikely to be covered);
  • Engage with your bank (follow up calls with emails to record your conversations);
  • Engage with your landlord and seek rent relief; and
  • Work with your local Chamber of Commerce or industry organisation.

What does making “best efforts” mean?

Many businesses will have no revenue during the lockdown. If the employer has no revenue, how can the employer make best efforts to pay the employee 80% of their remuneration? Can employers stop paying employees their full remuneration and just pass on the wage subsidy?

Employment law still applies: employers cannot unilaterally reduce their employees’ ordinary remuneration without the employees’ agreement. Employers should have a good faith discussion with their employees first and consult with employees about how to manage work and pay during a period when the employer has no work available (or limited work) and seek agreement of employees to any changes to their working conditions.

Another option to explore with employees is whether they agree to use any accrued annual leave during the lockdown period. Employers could seek agreement of employees to receive the wage subsidy and “top up” their wages from annual leave. However, if using annual leave in this way, the employee would need to receive their full wages rather than 80%, as the annual leave is an entitlement they have already accrued.

If an employer has exhausted these options and still is unable to pay employees at least 80% of their ordinary remuneration, provided the employee agrees, the employer can just pass on the wage subsidy to the employee for the period of the subsidy and the employer will not be in breach of the wage subsidy scheme.

If the employee’s usual wages are less than the subsidy, the employer must pay the employee their usual wages. Any difference should be used for the wages of other affected employees. Any payments not passed on to employees will need to reimbursed to the MSD.

What if my employee does not agree?

If after consultation in good faith, employees do not agree to use their annual leave, and the employer feels they have little alternative, then the employer can compel an employee to take annual leave on 14 days’ notice (under section 19 of the Holidays Act 2003). But this power is only available, once the employer has first attempted to reach agreement with the employee. It is likely that an employer would still be required to pay the employee their ordinary remuneration during the 14 day notice period.

If the employment agreement contains a Business Interruption or Force Majeure clause, then the employer may have the ability to suspend work and pay (after consulting with their employees), where the employer is unable to provide the employee with work due to circumstances beyond the employer’s control. But this will depend on the wording of the clause (see below).

Otherwise, the only legal option for employers, if they are unable to pay their employees at least 80% of their wages, and their employees will not agree to take a pay reduction or use annual leave, is to make staff redundant.

Check to see if there is a business interruption clause in our employment agreements?

The ability to use a Business Interruption provision will depend upon the exact wording of the clause. Most clauses of this kind provide that If the employer is unable to provide work for the employee as a result of interruption to the employer’s business (“Business Interruption”), caused by events beyond the employer’s control (for example health epidemic or pandemic), the employer will endeavour to consult with the Employee before determining whether:

  • the employment relationship can reasonably continue;
  • the employee’s employment will be temporarily suspended; and/or
  • the employee will receive remuneration during the period of Business Interruption.

Even with such a clause, good faith consultation with the employee is required before taking any action. You will need to consult with a lawyer to get guidance on how to safely use such a clause in your particular circumstance, it will depend on your own factual situation and the particular clause in your employment agreements.

Employment law still applies and in order to carry out redundancies, the employer needs to have genuine reasons and follow a fair process. We are publishing a separate article giving redundancy guidelines as part of our Covid-19 series. Look for it in the Resource Centre on our website.

This is just a summary. Individual circumstances may vary and guidance on how the Wage Subsidy scheme applies is evolving. We are keeping up to date with commentary and Government Guidance so if you have questions about how this applies to your unique situation, please do not hesitate to get in touch.

Employment law still applies and the consequences of not meeting your obligations regarding remunerating your employees or following a fair redundancy process could result in further cost to your business.


The above information is of a general nature only. The information contained in this document does in no way constitute legal advice and all readers should contact a law firm for advice relating to your specific circumstances.

Vanessa Baakman

About Vanessa Baakman

Vanessa is an Associate in our Litigation team and specialises in employment and family law.

View all posts by Vanessa Baakman