‘Pay When Paid’ Clauses: What Are They?

A ‘pay when paid’ clause prevents someone from receiving their earnings until payment has been given by another party. You may be thinking, Hang on, this doesn’t sound right? That’s because pay when paid clauses are technically illegal. 

These clauses are typically found in construction contracts, where subcontractors are utilised. However, some employers have also attempted to use pay when paid clauses in their employment agreements. 

Paying your workers is one of the main obligations you have towards your hardworking staff. As a result, there’s a number of strict regulations around payment that have been put in place for their overall protection. It’s your duty to make sure you adhere to these strict regulations and ensure that your Contracts aren’t in breach of any New Zealand regulations. 

Keep reading to know more about pay when paid clauses and how you can avoid using them.  

What Is Pay When Paid Clause In New Zealand?  

As we noted, pay when paid clauses determines that a person is to be paid when the business hiring them receives payment from another contract. Generally, pay when paid clauses have been seen in construction contracts, although this doesn’t mean other industries don’t try and utilise them.

Let’s take a look at this in more detail. 

When a business signs a contract to do a particular job, they may hire contractors to help complete that task. In this context, they’ll agree on an amount the worker is to be paid for their labour. However, instead of giving a date for payment, the contract will state the worker will only be paid when they client they are doing the job for, has paid. 

Are Pay When Paid Clauses Legal?

No, pay when paid clauses are strictly illegal. If these clauses are found to be in a contract, they will be considered void. That means, the pay when paid clause will not apply at all. As a business owner, you can not withhold payment and wait for someone else to pay you. Rather, your contracts with any workers should clearly state how much they will be paid and when. 

On top of this, all employment contracts are required to cover other matters such as superannuation, overtime pay and award entitlements. If you’re an employer, it’s imperative you take a look at your employment contracts to make sure they are covering everything necessary. If you’re not sure what to look out for, our legal experts would be happy to help.  

What If My Contract Says Pay When Paid? 

If your contracts say pay when paid, you need to get this fixed immediately. Having an illegal clause in your contracts is an open invitation for trouble. 

Your employment contracts need to clearly follow Employment New Zealand standards. Remember, a signed contract isn’t necessarily legally enforceable under all circumstances. New Zealand legal principles still apply and contractual clauses cannot override them. So, a contract that is based on something unlawful such as a pay when paid clause will likely not be upheld, as the law comes before the contract.   

Ensuring your contracts are legally compliant is the best way to ensure they are enforceable. As such, it’s important to assess your employment contracts for other clauses that may not be in line with the law. Just like pay when paid clauses, having illegal clauses in your contracts can make those clauses void or lead to harsher legal consequences- not to mention a loss of reputation for your business. It’s best to have your Contracts Reviewed by a legal expert. 

When Does A Final Pay Have To Be Paid?

A question we get asked often when it comes to paying employees, is their final pay. When you’re an employer, you need to be prepared in case your employees decide to leave your business. This means, tying up a work matters and ensuring they have received everything they are entitled to in a timely manner. 

The final pay of an employee is usually paid by their final pay day. This refers to the latest possible time however, this can vary based on other factors like a previous agreement. It’s best to check with a legal expert to ensure you’re doing your best to be legally compliant towards your employees.  

Next Steps 

Pay when paid clauses are strictly illegal. It’s important to have your Contracts Reviewed by a legal expert to ensure they don’t contain any clauses that resemble pay when paid clauses. Additionally, it’s crucial that your contracts are legally compliant in all ways, so you can avoid legal troubles down the line. To summarise what we’ve discussed: 

• Pay when paid clauses delay payment until the employer receives payment from a client
• These clauses are illegal and void in New Zealand
• Business owners must adhere to strict regulations for paying workers
• Pay when paid clauses are often seen in construction contracts
• Contracts should specify the payment amount and date without relying on client payments
• If your contract contains a pay when paid clause, you should rectify it immediately 
• Employment contracts must follow Employment New Zealand standards 
• Legal principles take precedence over contractual clauses 
• Reviewing contracts with a legal expert is recommended 
• Final pay for employees is typically due by their last pay day
• Timelines may vary depending on legal agreements
• Ensure your contracts are legally compliant to avoid legal issues and maintain your reputation
• Consult a legal expert for a thorough contract review and compliance check

If you would like a consultation on your options moving forward, you can reach us at 0800 002 184 or [email protected] for a free, no-obligations chat.

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