Preparing for rises to the minimum wage

Jason Ennor, Co-founder and CEO at MyHR
by, Jason Ennor, Co-founder and CEO at MyHR

All employers will be affected in some way by rises to the minimum wage, not just those employing minimum wage workers. Planning and budgeting should being ahead of time as there will be a knock-on effect for most NZ employees and employers.

On 1 April 2018, the New Zealand adult minimum wage went up by 75 cents to $16.50 an hour (and by a further $1.20 on 1 April 2019).

The government has set indicative rates of $18.90 from 1 April 2020 and $20 an hour from 1 April 2021 (rates will be subject to each year’s annual review).

As far as I can recall, this is the first time we have had a fixed minimum wage increase, scheduled 4 years in advance. The advantage to this is that businesses can prepare for the increase well ahead of time.

Coming ready or not!

Whether you agree with the increases or not, they are happening and employers with minimum wage people must simply budget accordingly.

However, it is not only the lowest paid workers that you need to consider - the impact of these increases will go beyond the lowest paid workers and factors such as internal wage relativity and external benchmarking are critically important.

Internal wage relativity

Internal wage relativity defines the pay-rate relationships between your workers. As the minimum wage jumps, there is a risk that the relative difference for more senior positions is eroded, if you don’t plan properly.

For example, if you currently employ Supervisors on a rate of $20 per hour, to supervise a team of workers on the minimum wage, and the Supervisor rate normally increases by 3% each year, in 2020 the Supervisor will be paid $22.50 per hour. The additional money they receive for their extra responsibilities has been eroded to the point they would only earn $2.50 more than the staff they supervise.

Some people may feel it’s not worth an extra $100 per week (before tax and KiwiSaver) to carry the additional workload and stress that comes with the more senior position.

As a result, employers will need to consider all pay rates in their business and factor such increases into budgets or potentially risk losing staff. A failure to budget properly could result in employment problems as the statutory pay rate rises. Unprepared employers may get caught out.

External benchmarking

While internal wage relativity is a big issue for hierarchical, wage-based organisations, these are not the only workplaces that will be affected by this change. The issue of external benchmarking will also come up.

When considering salary and wage rises, organisations should consider a range of factors, which generally include all or some of the following:

  • The organisation’s own remuneration strategy.
  • External market rates.
  • Average industry pay rise percentage.
  • Internal relativity.
  • Business performance.
  • Individual performance.
  • Value of the role.
  • Length of service.
  • Rate of inflation.
  • Resourcing needs.
  • Resource availability.
  • Business / growth strategy.

The minimum wage increases will have an impact on the external benchmarked factors on this list, which in turn will flow on to the internal factors.

People in NZ’s lowest paid jobs will be getting more money and receiving pay rises at a rate that is twice the normal rate of wage increase.

Expect Unions to use this as a benchmark when commencing bargaining, they will likely argue that a 6% pay increase across the board can be justified due to the minimum wage rise.

Employee’s may also use this to request more money at pay review time.

How to respond to a personal grievance

Employers who already pay above the minimum wage to attract and retain staff will clearly have to adjust to maintain this position.

In professional services graduate, entry-level positions will also be affected. Companies will likely need to pay a bit more to remain competitive and also do a much better job at promoting the medium to longer term advantages of starting in a grad role.

The implications and knock-on effects of the coming minimum wage rises will have an impact on almost all workers in NZ, so be prepared. Employers who act early and factor this in will be at an advantage in this tight labour market.

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