How to Reduce Payroll Costs in New Zealand

Payroll costs can be a significant expense for organizations. This means that reducing payroll costs is a priority for businesses, and makes efficient and cost-effective payroll management essential for organizations' profitability. In this article, we'll explore some of the main factors that determine payroll management costs in New Zealand, and outline proven cost-saving strategies, common employer errors, and legal considerations.

Understanding the factors that contribute to payroll costs in New Zealand is vital for any employer looking to implement effective payroll cost reduction strategies. Organizations must navigate industry-specific and regional variations and meet compliance and reporting requirements to effectively manage the following mandatory employer contributions and taxes, and employee withholdings.

Social Contributions:

• Accident Compensation Corporation (ACC) levies: Employers must contribute to the ACC to cover the cost of work-related injuries. The levy rate varies depending on the industry and the employer's claims history. Employers must also withhold and remit ACC contributions from employees' wages.
• KiwiSaver is a work-based savings scheme to help New Zealanders save for their retirement. Employers are required to contribute a minimum of 3% of the employee's gross salary to KiwiSaver, provided the employee is a member of the scheme.

Tax Obligations

• Pay As You Earn (PAYE): Employers must deduct income tax from employees' wages or salary and pay it directly to the Inland Revenue Department (IRD) through the PAYE system.
• Fringe Benefit Tax (FBT): Employers are responsible for paying FBT on benefits provided to employees, such as company cars, low-interest loans, or free accommodation.
• Goods and Services Tax (GST): Businesses registered for GST must collect the tax on behalf of the government and can claim back the GST they pay on business expenses. GST returns are typically filed every one, two, or six months, depending on the business's turnover.
• Employer Superannuation Contribution Tax (ESCT): Employers must pay ESCT on their contributions to employees' superannuation schemes, including KiwiSaver. The tax rate depends on the employee's income.

Compliance and Reporting

• Employer Monthly Schedule (EMS): Employers must file an EMS with the IRD each month, detailing the PAYE, KiwiSaver, student loan, and child support deductions made from employees' wages.
• GST Returns: Businesses must file regular GST returns, as mentioned earlier.
• Annual Returns: Companies must file annual income tax returns, and employers may need to file additional returns related to FBT and ESCT.

Industry-Specific and Regional Variations

• Unions and Collective Agreements: Industries with strong union presence or collective agreements may have higher payroll costs due to negotiated wage rates and benefits. This is common in sectors like education, healthcare, and some areas of manufacturing.
• Demand for skilled labor: Industries requiring specialized skill sets such as Technology and IT, Healthcare, and Construction often experience high payroll costs, especially in regions with skills shortages.
• Regional variations: Payroll costs vary between regions, with employees in major cities such as Auckland and Wellington often earning higher wages to compensate for higher living costs.

Proven Strategies to Reduce Payroll Costs in New Zealand

To reduce payroll costs effectively, employers in New Zealand can implement several strategies to meet their specific needs:

• Optimizing workforce structure: Analyzing the workforce composition and optimizing it can lead to significant savings. This might involve restructuring roles, implementing part-time or flexible work schedules, and hiring freelance or contract workers to avoid long-term financial commitments associated with full-time employee benefits.
• Offering flexible work options: By supporting remote work or flexible hours, companies can reduce payroll costs associated with office upkeep, and attract talent willing to accept lower salaries in exchange for flexibility.
• Outsourcing tasks: Businesses can consider outsourcing non-core activities, such as IT support or administrative services, to agencies that can perform these tasks more cost-effectively.
• Payroll automation and software: Implementing advanced payroll software solutions aids in streamlining payroll processes, reducing administrative errors, and saving on payroll costs. Many services offer integrated global payroll solutions that are tailored for cross-border compliance, such as Deel's platform.
• Government incentives and tax breaks: The New Zealand government offers many payroll incentives and support schemes to encourage employers to hire and retain employees, particularly in areas of skill shortages, or for specific demographics. For example:

1. Apprenticeship Boost: To support employers to retain and take on new apprentices, employers can receive up to $1,000 per month for first-year apprentices and $500 per month for second-year apprentices, for up to 20 months
2. Manu Kōkiri: Māori-owned businesses that meet specific criteria can access funding to hire and train new employees.
3. Flexi-Wage: Employers who hire job seekers referred by Work and Income receive a wage subsidy to cover the cost of employing a job seeker who may need additional support to enter the workforce, for a specified period.
4. Regional Apprenticeships Initiative: Employers receive funding to take on apprentices in targeted regions with identified skill shortages.
5. Targeted Training and Apprenticeship Fund (TTAF): Covers the costs of vocational training and apprenticeships for learners enrolled in eligible programs.
6. Wage Subsidy Scheme: Businesses that meet specific criteria, such as a significant decline in revenue, can receive a wage subsidy to cover a portion of employees' wages for a specified period.
7. Youth Employment Success: Employers receive a wage subsidy for a specified period to cover the cost of employing a young person aged 16-24, referred by Work and Income.
8. Mana in Mahi: Employers who hire and train long-term unemployed individuals referred by Work and Income receive a wage subsidy and funding for training and pastoral care. Employers should verify the latest information and eligibility criteria on official government websites.

Legal Considerations for Employers Cutting Payroll Costs

When considering cutting payroll costs in New Zealand, it's crucial to navigate the legal landscape carefully to ensure compliance with employment laws and regulations. Here are some key legal considerations:

• Employment Agreements: Review existing employment agreements to understand the terms and conditions related to pay and benefits. Any changes to payroll must be in line with these agreements. Employers are generally required to consult with employees before making significant changes to their employment terms, including pay cuts.
• Minimum Wage: Ensure that any pay cuts don't reduce an employee's wage below the national minimum wage, set at NZ$23.15 per hour in 2024. Exceptions apply for the training wage and starting-out wage. Non-compliance with minimum wage laws can result in penalties and legal action.
• Redundancy and Restructuring: If considering redundancies, follow the legal process outlined in the Employment Relations Act 2000. This includes providing a valid reason for redundancy, consulting with affected employees, and offering a fair process. Ensure that the notice period for redundancy is in line with the employment agreement and legal requirements.
• Collective Agreements If employees are covered by a collective agreement, any changes to payroll must be negotiated with the union. Employers must engage in good faith bargaining and consultation with union representatives.
• Discrimination Laws: Ensure that pay cuts don't disproportionately affect certain groups, as this could be seen as discriminatory under the Human Rights Act 1993.
• Employee Well-being: Consider the impact of payroll cuts on employee well-being and morale. Employers have a duty of care to ensure the health and safety of their employees.

By carefully considering these legal aspects, employers can navigate payroll cost-cutting measures in a compliant and fair manner, minimizing the risk of legal disputes and maintaining a positive work environment.

Common Payroll Mistakes Employers Make in New Zealand

Employers in can be subject to significant fines and legal repercussions if they make the following common payroll mistakes:

• Misclassifying employees as independent contractors, to avoid full-time payroll costs.
• Failing to correctly calculate or pay overtime.
• Failing to update payroll processes to comply with changes to tax laws, collective agreements, or social contributions.

Industry-Specific Payroll Reduction Tactics

Different industries in New Zealand employ sector-specific strategies to manage payroll costs effectively:

• Tech: Technology firms often embrace remote work and international talent, hiring freelance IT specialists to optimize costs.
• Manufacturing: Implementing lean staffing models, multi-skilled employee roles, and automation can boost productivity without inflating payroll costs.
• Retail: Retailers may benefit from hiring seasonal workers or offering commission-based pay structures to align payroll with performance metrics.

Outsourcing Payroll Services to Reduce Costs in New Zealand

Outsourcing payroll operations to specialized firms can significantly help businesses reduce their payroll expenses. By outsourcing, companies gain access to expert insights, advanced software, and streamlined processes, all while ensuring compliance with local regulations.

Optimize Payroll with Deel

Deel offers a comprehensive global payroll management platform that simplifies and automates payroll for companies operating or hiring talent across multiple jurisdictions, including New Zealand.

With Deel's global people platform, companies can centralize their payroll operations, efficiently manage global teams, and reduce their payroll costs by minimizing error and administrative burden. By automating key payroll processes and utilizing in-house experts, Deel helps businesses save time and money without compromising on compliance.

In summary, effective and compliant payroll cost reduction in New Zealand involves strategic workforce management, claiming any government incentives you're eligible for, and investing in innovative technology such as Deel's integrated payroll solution.