Pay Rises in New Zealand

Pay rises can be one of the most effective ways to retain great people and keep your team motivated.

But if you run a small business in New Zealand, you’ll know pay rises aren’t just a “nice-to-have” conversation. They can quickly become a legal, operational and cashflow issue - especially when you’re dealing with minimum wage changes, different types of employment agreements, and expectations around performance and fairness.

This guide breaks down how pay rises work in practice, what your legal obligations are, and how to build a simple, legally sound process for reviewing wages. We’ll keep it practical, with the small business employer perspective in mind.

Why Pay Rises Matter (And Why Getting Them Right Protects Your Business)

When you’re thinking about pay rises, it’s easy to focus purely on the numbers: what you can afford, what competitors pay, and what the market is doing.

From a legal and risk perspective, pay rises also matter because they can affect:

your compliance with minimum employment standards (including minimum wage rates);
your ability to attract and retain staff without disputes;
your payroll processes and record keeping (especially if you change hours, overtime rates, allowances or bonuses); and
your exposure to personal grievances if pay decisions create discrimination risks or are handled unfairly.

Handled well, pay rises can strengthen your culture and reduce turnover.

Handled poorly - for example, increasing pay informally without updating documentation, or letting someone fall below minimum wage due to a change in hours or salary structure - they can create real compliance issues.

What Your Employment Agreement Should Say About Pay Rises

In New Zealand, most pay rise issues come back to the employment agreement and the good faith obligations in the Employment Relations Act 2000.

Even if you have a great relationship with your team, your starting point should always be: what does the agreement say about wages and how changes are made?

If you’re not confident your contracts are set up properly, it’s worth reviewing your employment contract templates early - it’s much easier to build good habits from day one than to fix things later.

Is A Pay Rise A “Variation” To The Employment Agreement?

Usually, yes. A pay rise is typically a change to an essential term of employment (remuneration), which means it’s a variation to the employment agreement.

In practical terms, that usually means you should:

confirm the new pay rate in writing (even if both sides are happy);
ensure payroll is updated from the correct effective date;
check whether other clauses should change too (for example, overtime rates, allowances, or salary review wording); and
keep a copy on file.

A common small business mistake is treating pay rises as a casual conversation (“We’ll bump you up to $X from next week”) and never confirming it in writing. That can create confusion later if there’s a dispute, or if someone says they were promised something different.

Do You Have To Offer Pay Rises?

Generally, there’s no blanket legal rule that you must offer pay rises above minimum wage (unless your employment agreement, a collective agreement, or a specific policy creates that expectation).

However, there are legal duties that can effectively require pay changes in certain situations, such as:

minimum wage increases (you must keep employees at or above the legal minimum for all hours worked);
pay equity or discrimination concerns (if pay decisions create inequality based on protected grounds); and
contractual review clauses (if you’ve promised annual reviews or set pay progression steps in the agreement).

So while pay rises might feel optional, you still need a system that ensures your pay remains compliant and consistent.

Performance-Based Pay Rises: Can You Link Them To KPIs?

Yes - performance-based pay rises can be a smart way to reward your best people.

Where employers get stuck is when KPIs are unclear, unrealistic, or applied inconsistently. If you’re linking pay rises to performance, it helps to ensure:

the performance expectations are clear and documented;
you’re giving feedback and a fair opportunity to improve;
the pay rise criteria are applied consistently across similar roles; and
the final decision (and new pay) is recorded in writing.

If you’re already navigating overtime expectations or additional hours during busy periods, it’s also worth checking how your pay structure interacts with overtime entitlements and contracted hours (more on that below).

Minimum Wage, Wage Reviews And The Non-Negotiables

The big “non-negotiable” for pay rises in New Zealand is simple: you cannot pay less than the minimum wage.

Minimum wage changes typically occur on 1 April (but you should always check the latest government announcements). These changes affect small businesses most when:

you have staff currently on or near minimum wage;
you use salary arrangements where hours vary week to week; or
you pay employees different rates depending on duties (for example, training shifts versus standard shifts).

Minimum Wage Compliance Isn’t Just About The Hourly Rate

One trap for employers is assuming that if someone is “on salary” you don’t need to think about minimum wage. In reality, minimum wage obligations can still apply because you need to ensure the way pay is structured meets minimum wage requirements for the agreed hours (and, in practice, you should also be alert to patterns of regular additional hours that could indicate the arrangement no longer reflects what’s actually being worked).

This issue often comes up when:

a salaried employee regularly works extra hours;
the business becomes busier and workload increases without adjusting pay; or
an employee takes on additional responsibilities (without a clear change to remuneration).

If you have employees doing additional hours, you should be clear on whether those hours are included in salary, paid as overtime, or managed as time off in lieu. For many businesses, a written policy (and correct contract wording) is crucial - especially if you’re offering time off in lieu as an alternative to paying cash overtime.

Overtime And Pay Rises: Check The “Flow On” Effects

Not every employee is entitled to overtime rates by law (it depends on the agreement), but many employment agreements include overtime, penal rates, or special rates for certain shifts.

So when you implement pay rises, don’t forget to check whether you also need to update:

overtime rates (e.g. time-and-a-half clauses);
public holiday pay calculations (which are tied to relevant daily pay / average daily pay under the Holidays Act 2003);
allowances (tool allowance, uniform allowance, travel allowance); and
any commission or bonus structures that reference base pay.

If you’re unsure how your agreement handles extra hours, it’s worth reading up on working overtime obligations and making sure your documentation matches what you’re actually doing in the business.

A Quick Warning About “Cash In Hand” Pay Increases

Sometimes small businesses feel pressure to give a pay rise “off the books” to help an employee take home more money without increasing payroll costs.

This is risky and can create serious tax, employment, and record-keeping issues (including problems with PAYE and other IRD obligations, and KiwiSaver where applicable). If you’re tempted to go down that path, don’t - it’s far safer to structure remuneration properly and transparently. If you need a sense check on the risks, see illegal cash in hand concerns and why it can become a bigger problem than you expect.

How To Implement Pay Rises The Right Way (A Practical Process For Small Businesses)

There’s no single “perfect” process, but there is a reliable approach that reduces disputes and keeps your records clean.

Here’s a practical step-by-step method many small businesses use.

1. Decide What Type Of Pay Rise You’re Offering

Before you communicate anything, be clear internally about the structure:

across-the-board increase (e.g. annual cost-of-living adjustment);
performance-based increase (linked to performance outcomes);
role-based adjustment (e.g. market alignment for a particular position);
promotion or expanded duties (new responsibilities, new pay); or
minimum wage “catch-up” (required to maintain compliance).

Each type has different communication and documentation needs. A promotion, for example, often requires more than a pay change - it may need updated duties, reporting lines, and possibly a probationary or review period.

2. Check The Current Employment Agreement (And Any Policies)

Look at what the agreement says about:

current pay rate and pay frequency;
any remuneration review dates;
overtime / penal rates / allowances;
deductions (and whether you have written consent, relevant under the Wages Protection Act 1983); and
how variations to the agreement are confirmed.

If you have a staff handbook or internal policies, make sure your pay rise process aligns with them too. Consistency is your friend if a decision is ever challenged.

3. Communicate The Pay Rise Clearly (And In Good Faith)

In New Zealand employment law, “good faith” is a big deal. It doesn’t mean you have to agree to everything an employee asks for - but it does mean you should be honest, responsive, and not misleading.

For pay rises, good faith communication usually looks like:

being clear about the new rate and when it starts;
explaining whether the change is discretionary, performance-based, or linked to minimum wage changes;
giving the employee a chance to ask questions; and
avoiding vague promises like “we’ll review it soon” unless you genuinely have a process and timeline.

4. Confirm The Pay Rise In Writing

This doesn’t need to be complicated. In many cases, a short variation letter or email confirmed by both parties is enough, as long as it clearly states:

the employee’s name and role;
their old pay rate and new pay rate;
the effective date; and
any other impacted entitlements (if relevant).

Keep this on file with the employment agreement.

5. Update Payroll And Keep Proper Wage And Time Records

Pay rises aren’t just a “people” issue - they’re also a systems issue.

Make sure your payroll reflects the increase from the right date, and check:

KiwiSaver contributions (employer and employee);
holiday pay calculations (Holidays Act 2003);
any salary packaging or allowances; and
time recording practices (especially for hourly staff, or salaries where hours can vary).

This is also a good time to ensure you’re paying for all hours worked. If you’re regularly changing start/finish times or reducing or increasing shifts, make sure you handle it carefully and lawfully - including when you’re reducing staff hours.

Common Pay Rise Mistakes (And How To Avoid Them)

Most small businesses don’t set out to get pay rises wrong. The issues usually come from moving quickly, being informal, or not realising a change triggers other legal obligations.

Here are some of the most common risk areas.

Accidentally Creating Pay Inequity Or Discrimination Risk

If two employees are doing the same job (or substantially similar work) but are paid differently without a fair, legitimate reason, you can create legal risk.

This can overlap with:

the Human Rights Act 1993 (discrimination on prohibited grounds); and
the Equal Pay Act 1972 and broader pay equity expectations.

You don’t need to pay everyone exactly the same in every situation, but you should be able to explain why pay differs (experience, performance, seniority, responsibilities, qualifications, market adjustment, etc.).

Letting “Extra Duties” Creep In Without Adjusting Pay

A common scenario: a team member starts as a junior, then gradually takes on more responsibility, trains new staff, opens the shop, or handles customer complaints - but their pay never changes.

This can become a culture problem and, depending on hours and expectations, can create compliance issues (especially for salaried staff if actual hours worked increase).

As your business grows, it helps to treat role changes as formal changes: update the position description and consider whether a pay rise (or a clear pathway to one) is appropriate.

Confusing Pay Rises With One-Off Bonuses Or Incentives

Bonuses and incentives can be great tools - but they should be documented clearly so everyone understands whether they are:

discretionary or guaranteed;
linked to individual performance or company performance;
paid regularly or as a one-off; and
included (or not included) when calculating holiday pay.

If you want something to remain discretionary, the wording matters. This is another area where tailored drafting in your employment agreement can save you headaches later.

Overlooking “Termination Costs” When Increasing Pay

It’s not the nicest topic, but it’s a practical one: when someone leaves, their final pay often includes annual leave owed, potentially notice payments, and other entitlements.

If you increase someone’s pay, it can increase your costs on exit (for example, leave is paid based on relevant daily pay/average daily pay, and notice is paid at the employee’s normal pay).

That doesn’t mean you shouldn’t give pay rises - just make sure you understand the downstream effects and keep exit processes consistent. If you need to pay notice out rather than having the employee work it, payment in lieu of notice is an area worth getting right.

Trying To “Offset” Pay Rises By Changing Leave Or Break Entitlements

Sometimes employers think: “If wages are going up, can we tighten leave approvals or force staff to take leave during quiet periods?”

Some flexibility exists, but annual leave and holiday entitlements are regulated under the Holidays Act 2003, and mishandling leave can cause disputes quickly.

If you’re considering changes around annual leave management, it’s worth checking what’s allowed around annual leave before you change your approach.

Key Takeaways

Pay rises are usually a variation to the employment agreement, so you should confirm the new rate and effective date in writing and keep records on file.
Minimum wage compliance is non-negotiable - and for salaried staff, you still need to ensure the salary arrangement (and agreed/recorded hours) keeps pay at or above minimum wage.
Pay rises can affect other entitlements, including overtime rates, allowances, holiday pay calculations, KiwiSaver contributions, and termination-related costs.
Consistency matters: unclear or inconsistent pay rise decisions can create discrimination or pay equity risk, even if that wasn’t your intention.
A simple, repeatable process helps: decide the type of pay rise, check the agreement, communicate clearly, confirm in writing, and update payroll correctly.
Don’t rely on informal arrangements (including cash-in-hand increases) - good documentation and compliant payroll practices protect your business long-term.

If you’d like help reviewing your employment agreements, documenting pay rises properly, or setting up a legally sound pay review process, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.

Pay Rises In New Zealand: Minimum Wage, Employment Agreements And Obligations