What are Bonding Agreements and s12A of the Wages Protection Act 1983.
Bonding agreements are a tool for Employers to recoup training costs from employees. There are specific criteria’s that need to be met to ensure these are both appropriate for each situation, of benefit to both parties and are therefore enforceable.
When not used properly however, bonding agreements may actually be the employer attempting to receive a premium for employing a person which is a breach of section 12A of the Wages Protection Act 1983 (WPA). Wages Protection Act 1983 – Section 12A of the WPA states that an employer may not ‘seek or receive any premium’ for employing a person.
What is a bonding agreement?
A bonding agreement must be a benefit to both parties and usually consists of the Employer agreeing to pay all or subsidising work-related costs for training in return for an employee agreeing to remain employed with the organisation for an agreed period of time once the training is completed; this can be anywhere from 6 months to two years, but in some situations has been longer.
The benefit is the employer gets an upskilled more valuable employee, and the employee obtains more transferable qualifications for future employers, but both the employer and the employee benefit from the bonding agreement.
Bonding agreements must be agreed to in writing, can be included in a Collective and or Individual Employment Agreement, or a separate document as a formal variation to the original employment agreement in place.
Sample Case: Labour Inspector v Tech 5 Recruitment Limited [2016] NZEmpC 167 EMPC 114/2016.
Employment Court – Meaning of “premium”
A Full Court of the Employment Court discussed the meaning of “premium” as in s 12A of the Wages Protection Act 1983. The employment agreements in question contained a clause allowing the employer to recover the cost of trade testing. This money was deducted from each employee’s wages.
The Court held that a premium involves a situation where “a price is paid either by an employee, or potential employee, or is paid on that person’s behalf to secure employment” (see para 54). However, it could also include situations where an employer recouped, or attempted to recoup “recruitment-related costs or other expenses that would ordinarily be borne by an employer” (see para 54). The Court did note that there would be situations where employers and employees could arrange for the employee to reimburse the employer for “appropriate costs incurred” without it constituting a premium (see para 57). Any bonding agreement for the cost of hiring, inductions, testing or orientation, training for the job or work uniforms would likely be considered a breach of the WPA.
Appropriate Criteria for a bonding agreement.
Bonding agreements are work and situation specific, there is no simple rule appropriate and enforceable and even when a bonding agreement is enforceable, there is no guarantee you will be able to recover the funds from an employee who then leaves their employment.
Three basic criteria for consideration when entering into a bonding agreement.
- Consultation: The training and costs should be discussed in detail, including how and when those costs will be repaid if your employee leaves during the bonded term.
- Notice: The employee should be given reasonable notice of any cost, if these cannot be determined up front, before it is incurred and be given the opportunity to opt out or propose cheaper alternatives.
- Mutual benefit: the training is normally in addition to the role requirements currently being undertaken by your employee and is of a mutual benefit to you both or at the least the employee.
- Reasonability: the bonding terms; 6 months to 24 months, and repayment schedule should be reasonable in consideration of the costs incurred by the business, and the salary of the employee, repayment of no more than 20% of their gross salary is considered reasonable but again, each situation needs to be considered and agreed.
If you are considering a bonding agreement, whether you are an employer or an employee, contact Ira Consulting Ltd to discuss your specific needs.