“Thought piece” on the new rem cap legislation

Please find below a “thought piece” on the new rem cap legislation introduced in the Employment Relations Act on 21 Feb 2026.  (personally, I think the rem cap concept is completely ill-conceived because an employee may find themselves above or below the line (cap) at any time depending on when the receive a bonus or commission). The thought piece discusses this issue.

 Navigating the $200,000 Remuneration Cap: Thresholds, Timing and Practical Risk

The introduction of the $200,000 remuneration cap on unjustified dismissal rights represents a significant shift in New Zealand employment law. While the policy intent of section 67I of the Employment Relations Act 2000 is relatively straightforward, its practical application is far more nuanced particularly for employers with variable remuneration structures. Two features create most of the complexity: the rolling nature of the remuneration threshold, and the operation of the 12‑month transition period.

Threshold volatility: a rolling and inclusive remuneration test

The threshold is assessed by reference to PAYE‑taxed remuneration paid by the employer. This includes not only base salary or wages, but also discretionary bonuses, allowances, overtime, cashed‑up annual leave, restraint‑of‑trade payments, gratuities, back pay (including holiday pay), lump‑sum holiday pay, and employee share scheme benefits. In practice, this means base salary alone is often an unreliable indicator of whether an employee sits above or below the cap.

Critically, the threshold is tested continuously. The calculation looks at total remuneration earned in the 364 days immediately preceding termination. As a result, it is possible that an employee’s position can change from one day to the next depending on when bonuses or other lump‑sum payments fall within that rolling window. Employees who appear safely below the threshold on salary alone may cross it once a discretionary bonus is paid, while others may fluctuate above and below the cap where bonus timing varies year to year or where two bonuses fall within a single 364‑day period.

For employers, this creates a degree of unpredictability that is reminiscent of Holidays Act compliance issues. It also raises the uncomfortable prospect that dismissal rights may depend on timing rather than substance.

A sensible response is proactive identification. Employers should identify roles where variable remuneration is likely to push employees above the threshold at any point and clearly communicate the legislative position. In many cases, offering employees the option to opt back into unjustified dismissal protections particularly during contract renegotiations will provide clarity and reduce risk. In practice, many employees are likely to elect to retain protections, so they are covered regardless of how their remuneration fluctuates.

The transition period: a limited window to act

The legislation provides a 12‑month transition period from 21 February 2026. Existing employees who earn, or could earn, more than $200,000 retain their current unjustified dismissal protections until 21 February 2027. This is not automatic protection in perpetuity; it is a window for employers and employees to review, consult on, and amend employment agreements. If no changes are made by the end of the transition, the cap applies and unjustified dismissal rights fall away.

For new employees who commence on or after 21 February 2026, the cap applies immediately unless there is an express agreement to opt back in. Importantly, standard grievance clauses may not be sufficient to preserve dismissal protections unless they clearly and expressly do so. While higher‑earning employees will still retain rights to bring other personal grievances such as discrimination, and harassment, the loss of unjustified dismissal claims is a material change.

Conclusion

The $200,000 cap is simple in concept but complex in operation. Employers who rely on variable pay should treat this as a structural risk issue, not a technical footnote. Early identification, clear drafting, and proactive communication will be key to avoiding disputes driven by timing rather than fairness and ensuring that both parties understand where they stand before the line is ever tested.