Retention tools and some risks

Since 2021 and the lessening of the effects of the Covid pandemic, many countries have experienced an increase in staff turnover and lost productivity. This is informally referred to as ‘the great resignation’, ‘the big quit’, ‘brain drain’ and ‘quiet quitting’.

 

These trends are concerning as turnover and lost productivity present further challenges to businesses that may already be struggling in a weakening economy.

 

Employers can implement retention tools to minimise turnover and ensure employee engagement. As with all employment contractual changes, care needs to be taken to ensure that these do not result in unexpected consequences for either party. We look at the most common retention tools that employers might consider along with some alerts when using these incentives.

 

Incentives are variations to the employment agreement

All incentives are a variation to your employee’s individual employment agreement. When considering any form of incentive, you must ensure that all changes are consulted on, and agreed to, by your employee. The agreed changes should be documented appropriately, usually with your lawyer’s assistance, and signed by both parties.

 

You must document and record all changes to employment terms and benefits. When employment variations are made and you don’t keep accurate records and act in accordance with those records, you are at risk of a personal grievance claim from your employee. In addition, inaccurate recordkeeping can attract penalties from the Labour Inspector for not complying with the Employment Relations Act 2000 and the Holidays Act 2003.

 

When considering an incentive for your employee, consultation regarding tax consequences, including fringe benefit tax (FBT), with your accountant or tax advisor is essential.

 

Cash and performance-based bonuses

The most commonly used, and arguably most straightforward tool to increase employee engagement and performance short-term, is a cash bonus. This payment can be made as a lump sum for existing performance, or it can be a bonus based on agreed and documented requirements for future performance.

 

If you pay a discretionary cash bonus, one costly mistake you could make is to unintentionally increase your employee’s ‘gross earnings.’ If a payment is not correctly identified as a discretionary additional payment, then the increase to their ‘gross earnings’ can also affect payment required for their other entitlements such as annual leave.

 

In landmark cases in 2020 and 2021^[1], the court considered whether or not a bonus scheme was part of ‘gross earnings’ for an employee. Originally the bonuses were considered part of the ‘gross earnings’ and the company had to pay out significant additional annual leave entitlements. On appeal, this was overturned.

 

Ultimately, the court decided that a primary indicator as to whether a bonus counted as ‘gross earnings’ was whether the employer retained discretion to not pay the bonus, even if the performance targets had been met. Importantly, the law was clear that the payment needed to be a true ‘discretion’, and merely labelling or titling it as ‘discretionary’ did not suffice.

 

Being careful on how this payment is documented and ensuring it is ‘truly discretionary’ will help prevent unnecessary increased annual leave payments. If it is discretionary, you will need to ensure it’s recorded as such in your payroll system.

 

Retention bonus

Another common tool is a retention bonus where your employee is guaranteed a lump sum cash payment at the end of a retention period (often between 12-36 months).

 

All agreements should contemplate what happens if your employee decides to leave during their retention period. This could be a resignation, dismissal due to poor performance or, if the market required, your employee’s role/position may be made redundant. The nature of the event giving rise to the dismissal will likely determine whether the bonus is paid or not, and if paid, whether partially or in full.

 

Retention bonuses can also become payable on the occurrence of a prescribed event. Regardless of when payment is made, the impact on annual leave must be considered in the same way as for a performance bonus.

 

Bonding clauses

Another way to retain your employees is to provide payment for further education or formal qualifications in exchange for your employee staying for a period of time after the training or further education has been completed. If your employee leaves, they might be asked to repay some, or all, of the training costs covered.

 

While bonding clauses can increase employee engagement as well as enhancing the value of your employee to your business, when considering bonding clauses you should seek specific legal advice to ensure the bonding clause is enforceable. The enforceability is dependent on many factors including fairness to your employee. If the bonding clause is deemed to be unfair, you may not be able recover the training costs already paid when your employee leaves earlier than their bonded term.

 

Shares or equity in the business

One of the most effective long-term retention tools for key employees is to offer shares in the business. These shares can be restricted so that the value the employee receives for the shares is minimal if they leave within a prescribed period. If they stay longer than the prescribed period, they can sell the shares for their actual value. This is an excellent tool as not only does it provide a good incentive for your employee to stay, but it also incentivises them to grow the value of the business during their tenure.

 

This process should always be guided by your lawyer; there are several steps and the requirements will be unique to each business. For new shareholders, a shareholders’ agreement should be prepared that covers all shareholder rights such as pre-emptive rights for the majority shareholder (the main business owner) to buy back the shares and voting rights of all the parties. Often this process will require a valuation of the business, and there will be significant considerations regardless of the structure implemented.

 

Meeting the market

Looking at the wider labour market and demands for particular roles will help you identify employees who are most at risk of leaving. Often, if employees are in short supply, the market remuneration will have increased and you should consider meeting the market rates to reduce staff temptation to leave.

 

Other incentives that can make an employer competitive are increased annual leave, wellbeing payments, health insurance, allowing personal use of work phones or vehicles, flexible working and interest-free or low interest loans (some of which have FBT consequences).

 

Have a highly engaged culture

Ultimately, retaining staff is a complex area that involves much more than just financial incentives. Ensuring your workplace has developed a highly engaged culture that supports your employees’ individual needs and that your employees feel valued will all help with your overall retention strategy.

 

With the rapidly changing employment market it can be understandably challenging to retain key staff. If you have an employee you think you are at risk of losing, think about what retention tools will mean the most to that person; and remember to talk with us about what steps you should take before offering any incentives.

 

^[1] (Metropolitan Glass & Glazing Limited v Labour Inspector, Ministry of Business, Innovation and Employment [2020] NZEmpC 39 and subsequent appeal of that decision in Metropolitan Glass & Glazing Limited v Labour Inspector, Ministry of Business, Innovation and Employment [2021] NZCA 560).

 

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