KiwiSaver - time to review your employment agreements

Matt McGoldrick, Solicitor and Naomi Cervin, Senior Associate | Thursday 5 July 2007

KiwiSaver went live on the weekend – have you reviewed your employment agreements?

Why employers should review employment agreements now

KiwiSaver heralds both new obligations and opportunities for employers. There are certain issues with KiwiSaver that can be turned into opportunities – but to do so employers will need to ensure their employment agreements are both compliant with the law and accurately record the terms of their company’s approach to KiwiSaver.

Employers should consider these issues:

• how they are going to deal with the compulsory employer contribution which takes effect next year;
• whether to move to setting remuneration on a “total cost to the company” approach, so that employees who do not participate in KiwiSaver are not disadvantaged;
• whether employees will be able to "salary sacrifice" in favour of increased employer contributions (this impacts on the level of tax benefits);
• whether the employees will be allowed to have employer contributions count toward their contribution rate of 4% or 8%;
• how KiwiSaver fits in with any existing company superannuation scheme; and
• how remuneration packages can be structured to attract and retain key staff by providing KiwiSaver benefits over and above the minimum.

A “total cost to the company” approach to remuneration

Compulsory employer contributions kick in on 1 April 2008 at 1% of an employee’s gross salary or wages, rising by 1% each year up to 4% from 1 April 2011.

In light of this change, employers may wish to consider setting an employee’s remuneration on a total cost to the company basis, i.e. irrespective of whether the employee participates in KiwiSaver they will still receive the same total remuneration package.

This approach can avoid disparity between employees who choose to (or can afford to) participate in KiwiSaver and those who don’t. Setting an employee’s remuneration on a total cost to the company basis could, for example, involve topping up an employee’s salary if they choose not to participate in KiwiSaver.

For existing employees, employers may wish to shift to a total cost to the company approach as part of their employee’s next pay review.

For new employees, employers may wish to include a 4% employer contribution to KiwiSaver as part of all new offers of employment to avoid the ratcheting effect which the proposed new compulsory employer contributions will entail.

Care needs to be taken in drafting clauses which set remuneration on a total cost basis to avoid the possibility of an employee’s salary being inadvertently increased in the event that the employee elects to opt out of KiwiSaver in the first instance (and thereby receives a salary top-up), and then later decides to opt-in, or to restart contributions.

“Salary sacrifice” and “setting off” employer contributions

Salary sacrifice where an employee’s salary is reduced and the employer agrees to pay an amount equivalent to the reduction into a superannuation scheme as an employer contribution.

Salary sacrifice of a sort is available under KiwiSaver and the employer contribution qualifies for a zero percent tax rate under the tax changes introduced in the last budget.

It is also possible, prior to 1 April 2008, for an employee to count employer contributions towards the employee’s total KiwiSaver contribution, subject to certain transitional arrangements. Where such an agreement is entered into before 1 April 2008, employees can continue counting employer contributions towards their contribution rate to a limited extent up until 2011.

Employers offering salary sacrifice or wanting to count employer contributions toward the employee’s total KiwiSaver contribution should seek advice on the appropriate way to achieve this and ensure the arrangement is properly provided for in the employee’s employment agreement.

Existing superannuation schemes

An employer with an existing scheme needs to make an important choice – whether to continue to offer this in addition to KiwiSaver, and, if not, whether it is practicable to wind up the existing scheme.

Employers also need to consider whether to become an exempt employer – which means that new employees are not subject to the automatic enrolment rules.

Employers should seek advice on what contributions they will need to make for employee participating in both an existing scheme and KiwiSaver. Proposed amendments to KiwiSaver provide that, in certain circumstances, an employee with an entitlement to participate in two such schemes will not be entitled to seek full contribution from the employer for both.

Practical matters

We recommend employers take the following steps for new employees who are automatically enrolled into KiwiSaver:

• Employees should be given a covering letter enclosing their employment agreement – which also contains information in relation to KiwiSaver. The letter should outline the new employee’s options in respect of joining KiwiSaver, and the employer’s approach to KiwiSaver.
• As part of the workplace induction process, KiwiSaver options should be outlined and information necessary to complete payroll obligations should be collected.
  
  Put simply, those with HR and payroll responsibilities need to be familiar with KiwiSaver so they can meet their obligations as employers.

For further information, please contact your usual Bell Gully advisor or:

AUCKLAND

Rob Towner
Partner

WELLINGTON

Andrew Scott-Howman
Partner

Maria Berryman
Senior Associate

Matt McGoldrick
Solicitor