Some of the pitfalls of the Wage Subsidy scheme and how to avoid them.
Covid-19 Government Wage Subsidy - Trouble Shooting for Employers
By Carole Pedder - Partner
April 2020
Some of the pitfalls of the wage subsidy scheme and how to avoid them.
This blog written by Carole Pedder - Partner, contains the views of Withers Tsang, and is not intended as professional advice.
In my work as a chartered accountant for Withers Tsang I have come across employers struggling to understand the rules surrounding the wage subsidy offered by the Government as part of the response to Covid-19.
One of the most common problems is employers applying for the wage subsidy without first ensuring their business satisfies the criteria to qualify for the subsidy. A business must have experienced a minimum of 30% decline in actual or predicted revenue over the period of a month when compared with the same month last year, and that decline must be related to Covid-19. If you are one of the lucky business owners with staff all happily settled at home, working productively, and your business has not gone downhill, or the decline in revenue is, for example, 20%, then your business does not qualify for the wage subsidy.
It’s important to gather documentation to support a 30% or more decline in revenue, for example: emails cancelling orders or suppliers unable to fill orders, or profit and loss reports by period compared to previous years.
An example of a business with a clear drop in revenue would be a business importing car parts for the motorsports industry. With no motor racing happening in New Zealand right now, orders have been cancelled and since early this year the company has struggled to order parts from overseas suppliers in countries ravaged by the virus.
Employers also need to prove they have taken active steps to reduce the impact of Covid-19 on their business. Possible steps are listed on the Work and Income website, such as drawing on cash reserves, making an insurance claim, supporting staff to work from home or talking to your bank and accountant. It will be important that an employer can demonstrate that they have taken active steps. Document these steps through email or make a note of phone calls in your diary.
A key question my clients are asking is how much of their cash reserves or banking facilities do they need to have used before applying for a subsidy?
It would be unreasonable to expect a business to use up all its cash reserves so that it can no longer return to trading after the lock-down is over. To use the motorsport example again: if the company used all its cash reserves to pay staff they may end up in a position where they could not pay for stock when it eventually lands in New Zealand. This would put the company in an untenable position. Employers are required to use their ‘best endeavours’ to both pay staff at a minimum of 80% of their salary and, depending on which declaration they have signed at the time of applying for the subsidy, to keep their team employed during the 12-week subsidy period. Best endeavours has a legal definition which some employers don’t fully grasp. In our view, best endeavours will vary depending on the nature and resources of each business, but could include working from home options, applying to the bank for funding, negotiating with staff for a four day or less working week.
Remember, that normal employment and contract rules still apply as do the rules surrounding the wage subsidy. It is vital that an employer seeks legal advice from an employment lawyer when negotiating changes to terms of employment.
Some common scenarios I’ve come across regarding the wage subsidy:
An IT company with all staff working full time from home but expecting staff to work for 80% of their salary. If staff are working full time then they are eligible to be paid their full salary so the employer needs to pass on the wage subsidy and top up salaries to 100%.
An architecture firm with staff working part-time from home because their work has dwindled as projects are put on hold in these uncertain times. In this situation it is important for the firm to consult with its staff to reduce hours and agree unpaid leave.
A cafe that has been forced to close. It is obvious that staff cannot work from home, and a good employer will pass on the wage subsidy and top it up to 80-100% for the 12-week period, as long as they are financially able to do so, without risking their own capital reserves. If an employer is not able to top up the wage subsidy then they must simply pass over the subsidy to the employee.
Lock-down was swift and some employers struggled to understand the rules surrounding the wage subsidy and the original leave subsidy. The leave subsidy was intended for staff returning from overseas, who were required to self-isolate, for staff sick with Covid-19 or caring for an ill family member. Some employers were confused over which subsidy to apply for and therefore applied for both the wage subsidy and the leave subsidy. This is double-dipping. (Note: On 27 March, the Government collapsed the separate wage and leave subsidies into one wage subsidy.)
If organisations apply for and receive, the wage subsidy incorrectly they will need to repay the subsidies they receive.
For example, I know of a construction company that had employed contractors for so long that the bookkeeper mistakenly thought they were permanent staff members and applied for the wage subsidy for the contractors.
Another company had made a staff member redundant at an earlier date and they were mistakenly counted when applying for the wage subsidy.
There was also the self-employed person who applied for the wage subsidy but then discovered that, in fact, their earnings have not dropped by 30%.
In all of the above cases, the employers need to repay the wage subsidy. To repay a wage subsidy that your business does not qualify for, email: COVID19subsidy_overpayment@msd.govt.nz
When the pandemic is over, those employers that deliberately set out to defraud the Government will be fully investigated. Thankfully, in my experience, the majority of employers are keen to do the right thing and look after their staff through these stressful and challenging times.
For more information:
Work and Income: https://www.workandincome.govt.nz/
MBIE Employment: https://www.mbie.govt.nz/about/open-government-and-official-information/coronavirus-covid-19/
Covid-19: https://covid19.govt.nz/
Government’s Business: https://www.business.govt.nz/covid-19
