Unpaid wages claims are not only about repayment. In many cases, penalties can also be awarded where the breach is serious, repeated, or deliberate. Penalties change the leverage in settlement negotiations.
What employers and employees should understand
- Wage arrears repay what should have been paid.
- Penalties are separate and can be ordered where the conduct justifies it.
- Records matter: timesheets, pay slips, rosters, and employment agreement terms.
- Related reading: IRD late-payment settings can turn PAYE and rolling GST arrears into a very expensive cashflow strategy - see Leighton Associates (Peter Drennan) - IRD debt approval is easy, but what does it cost?.
Awarding a penalty against a party
Section 133A of the Employment Relations Act 2000 requires the Authority to have regard to the object of the Act, the nature and extent of the breach, whether it was intentional or not, the nature and extent of any loss or damage, steps to mitigate effects of the breach, circumstances of the breach and any vulnerability, and finally previous conduct.
Cashflow pressure: do not treat employee money or IRD as a lender
Many unpaid wages matters start the same way: the business has a cashflow squeeze, and wages (or holiday pay, or lawful minimum entitlements) are delayed to keep the lights on. That approach creates legal exposure in an employment claim. It can also create compounding cost elsewhere if the same cashflow pressure causes PAYE or GST arrears.
What Leighton Associates found (in plain terms)
Leighton Associates recently published a practical insolvency-law analysis of the "real interest rate" on IRD debt if you default and do not enter an arrangement. The author modelled a $10,000 default left unpaid for 12 months across GST, PAYE, income tax, and an SBCS loan. Read it here: IRD debt approval is easy, but what does it cost? (Peter Drennan, Leighton Associates).
- In that modelling, a one-off GST or income tax default added roughly $1,500 in interest and penalties over 12 months, while the SBCS loan was slightly lower.
- PAYE was the outlier: the modelled PAYE balance grew beyond $25,000 from a $10,000 starting point over 12 months.
- The analysis also modelled a "rolling GST" pattern (chronically about one return behind), which produced an effective annualised cost around 71% per year.
The key reason PAYE behaves differently is that PAYE is treated as withheld money that should be passed on. The penalty settings for PAYE include ongoing monthly penalties that do not apply to GST and income tax in the same way.
If you are dealing with unpaid wages, holiday pay disputes, deductions, minimum wage issues, or penalty exposure, contact us.
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