How do I use the COVID-19 wage subsidy? (And other questions!) UPDATE March 2021

UPDATE: since the March 2021 wage subsidy was announced, I thought it wise to update this old blog post with some new information

There are a lot of opinions out there on how best to utilise the COVID-19 wage subsidy when you receive it. So I have in this article, compiled some of practices that small business owners have used when it comes to disbursing the wage subsidies to their employees. I will provide a simple explanation for each method and let you know whether such a method runs afoul of the guidelines provided by the Ministry of Social Development. Also, I’ve compiled a short list of questions that most people seem to like asking!

Ok, end of preamble! Let’s jump into it!!!

Option 1: Pay wages at the normal rates on a regular basis using the subsidy (weekly/fortnightly/monthly – whatever you normally do) topping up the difference using your own cash reserves.

The most straightforward option and the prescribed use of the subsidy intended to function. If you have sufficient cash reserves – this option can help you pay your employees longer than the 2 weeks stipulated period. 

It is important to note that the 2 weeks duration used by the MSD is for the calculation of the lump sum you receive per employee. As long as the employees you applied for remain working for you within those 2 weeks, you can still use the subsidy to continue paying your employees beyond the 2 weeks after receiving the lump sum. As long as all the monies from the subsidy end up in your employees’ wages (eventually)- you have nothing to worry about.

Option 2: Pay wages on a regular basis but only at 80% of normal pay.

Much like Option 1 above – but it allows you to stretch the payments out for longer. This option can potentially help you keep your employees on for longer, helping retain them for when your business bounces back (in theory). 

It is VERY IMPORTANT to note that you CANNOT pay your employees 80% of their normal pay without their written consent. Be sure to discuss this option first with your employees before making any decision willy-nilly.

Option 3: Pay each employee their lump sum in full in one shot.

Quite possibly the best way to get your employees to love you – but from a practical standpoint, they might choose to not do their work if you have already paid them upfront (really depends on how much you trust them). But just like Option 2 above – this option requires written consent from your employees before you can proceed. As a general rule of thumb, any change in  payment and/or working hours/terms which deviates from the employment agreement must be agreed to in writing by both parties.

With this method you are still paying each employee their full amount which you applied for. Just remember to make the required PAYE deductions before paying it out. This option can potentially also save you some headache as you can rest easy knowing full well that you have paid each of your employees their subsidy in full, thus ensuring that you are staying within the guidelines set by MSD.

WARNING though: If at any time within the 2-week period you stop being eligible for the subsidy (IE the workers you applied for are no longer working for you, etc.) any leftover monies for the remaining weeks need to be repaid to MSD. So use this method with caution.

UPDATE: Option 4: Use any leftover subsidy from part-timers that work less than 20 hours a week to top-up wages for full-timers whom the subsidy cannot totally cover. 

Based on the rule change last year, MSD continues to hold the opinion that:

You will for the period you receive the subsidy:

• use your best endeavours to pay at least 80 per cent of each named employee’s ordinary wages or salary; and
• pay at least the full amount of the subsidy to the employee; but
• where the ordinary wages or salary of an employee named in your application was lawfully below the amount of the subsidy before the impact of COVID-19, pay the employee that amount.

Ok, so that was a bunch of legalese. Simply put: you should only pay off the normal wages of any part-timer using the subsidy and you can use the excess to pay off the normal wages of a full time employee. So you can pool the subsidy funds received together and pay your staff their normal rates.

In other words, you can use extra funds to pay other employees. 

But what if I don’t have enough funds (even after the subsidy) to pay my workers at least 80% of their normal wages?

Fear not, the Ministry are reasonable folks. As long as you have tried your level best to pay at least 80% of each employee’s regular wages and you have proof to support your claims (bank statements, payslips, etc.) they won’t set their lawyers on you.

Can I make my employees use up their annual leave and use the subsidy to pay off their annual leave?

The Ministry is quite clear on this one, as per the declaration:

You will not unlawfully compel or require any of the employees named in your application to use their leave entitlements for the period you receive the subsidy in respect of those employees.

That being said, employees can choose to use up their annual leave if they wish to not work during the lockdown. So, let’s say for example that you run a cafe – you obviously cannot operate during the lockdown, in which case you can discuss with your employees having them take their annual leave (since they won’t be working) unless they can come up with an alternative working arrangement. If that is the case, the wage subsidy can be used to pay off their annual leave.

It’s worth pointing out that if your employment contract contains specific clauses regarding working arrangements during business disruptions, you may be able to lawfully get your employees to take their leave. Better check that contract and consult your lawyers!

Do I need to pay back any leftover funds from the subsidy back to the Ministry?

The short answer: No.

Provided that you have paid out 100% of the subsidy, in full to each of the employees named in your application (making the necessary PAYE deductions), you should not have to worry about paying the Ministry back the money. The only situation where you have to repay the subsidy is if you are caught being naughty. How does the ministry define naughty? Well (updated):

You agree to repay the subsidy or any part of the subsidy paid to you if you:

• you no longer meet the criteria for the subsidy
• you predicted a 40% decline in revenue that did not eventuate
• you’re not meeting your obligation to use the subsidy to retain and pay your workers
• you’ve received insurance (eg, business continuity insurance) for any costs covered by the subsidy that mean you no longer meet the decline in revenue criteria
• you provided false or misleading information in your application.

If, for some reason, you are unsure or are very certain that you need to repay the subsidy or part of it back to the government, you can fill in this handy form here.

Should I be putting the subsidy funds into a separate bank account?

Totally up to you. If it helps you math better, go for it. I know some accountants out there highly recommend it and there is nothing wrong with being conservative to stay on the safe side of things. Otherwise, as long as you ensure that each employee on your application gets paid out their full entitled ($1,171 for full-timers, $700 for part-timers) amount (less PAYE and other deductions), you are sweet!

Do I have to pay taxes on the wage subsidy?

If you are a company, the subsidy is excluded income (it is non-deductible income) – meaning that you don’t pay income tax on it, but any wages that you pay using that income is not eligible to be deducted against your normal income either (it is a non-deductible expense). That being said, you still need to make the necessary PAYE and kiwisaver deductions on any subsidy amount paid out to your employees.

If you are self-employed, the wage subsidy is treated as income replacement and you still have to pay income tax on it at your personal income tax rate.

There is No GST on the wage subsidy and it is classified as excluded income for tax purposes. However, you must make the necessary PAYE, Kiwisaver, Student loan, Child support and other deductions on any amount from the subsidy that you pay out to your employees (like a regular pay).

Can I still apply for the subsidy for one of my workers when I know they work part-time elsewhere?

Yes for a part-timer who is self employed. Yes for a part-time worker working part-time elsewhere. Yes for a full-timer who is self-employed part time. Yes for a full-timer working part-time elsewhere. In all of the above cases, the employee can receive the subsidies from multiple sources.

Basically, make sure that you are applying for the correct rate at which the employee is working for at your business (part-time or full-time). If you are applying as a self-employed person, make sure that you apply at the correct rate as well.

What does best endeavours mean in paying out the subsidy?

Good question. In fact it is such a good question I’ve written a whole article about it here.