How Employment Compensation Is Calculated

New Zealand employment law recognises several distinct categories of compensation, each calculated differently and serving different purposes. Understanding these categories is essential for assessing the full value of your potential claim.

Lost wages form the most straightforward component, covering the income you would have earned from dismissal until resolution or re-employment. This includes not just your base salary but also regular overtime, bonuses you would have received, and employer contributions to KiwiSaver. The calculation period typically runs from your dismissal date until you find comparable employment or the case concludes.

Compensation for hurt and humiliation addresses the personal impact of your employer's actions on your dignity, mental health, and wellbeing. This isn't about financial loss but recognises that employment disputes often cause significant emotional distress. Awards can range from hundreds to tens of thousands of dollars depending on the severity and duration of the treatment you experienced.

Consequential losses cover other financial impacts flowing from the employment problem. This might include counselling costs, job search expenses, loss of benefits like health insurance, or the financial impact of having to accept lower-paid work. These losses must be reasonably foreseeable consequences of your employer's actions.

Lost wage calculations start with your regular remuneration at the time of dismissal, including salary, regular overtime, and any guaranteed bonuses or commissions. The calculation period typically begins from your last day of work and continues until you find comparable employment or the case is resolved, whichever comes first.

However, you have a legal duty to mitigate your losses by actively seeking alternative employment. This means the compensation may be reduced if you haven't made reasonable efforts to find work or if you've turned down suitable job offers. The Employment Relations Authority will consider what constitutes 'suitable' employment based on your skills, experience, and the local job market.

If you do find new employment during the claim period, any wages earned will typically be deducted from your lost wage claim. However, if the new role pays less than your previous position, you may be able to claim the difference for a reasonable period while you seek work at your previous level.

The calculation also includes lost benefits like employer KiwiSaver contributions, health insurance premiums, and other employment benefits you would have received. These often-overlooked elements can add significantly to the total compensation amount.

Hurt and humiliation compensation recognises that employment disputes often cause significant personal distress beyond mere financial loss. The amount awarded depends on several key factors that the Employment Relations Authority and Employment Court consider when assessing your case.

The severity and nature of your employer's conduct is the primary factor. Deliberate, malicious, or discriminatory behaviour typically attracts higher awards than conduct that was merely procedurally unfair. Sustained patterns of bullying or harassment generally result in higher compensation than isolated incidents.

The personal impact on you is equally important. This includes effects on your mental health, self-esteem, relationships, and general wellbeing. Medical evidence of stress, anxiety, or depression can support higher awards, as can evidence of how the treatment affected your family life or social relationships.

Your vulnerability and the power imbalance also matter. Junior employees or those in precarious positions may receive higher awards than senior managers, reflecting their greater vulnerability to workplace mistreatment. The duration of the conduct and whether you complained internally before it was addressed are also relevant factors.

Awards typically range from $500 for minor procedural breaches to $25,000 or more for serious cases involving sustained discrimination or bullying. The most serious cases, particularly those involving sexual harassment or systematic discrimination, can result in even higher awards.

Beyond lost wages and hurt and humiliation, you may be entitled to compensation for other losses that flow from your employment problem. These consequential damages can significantly increase your total compensation but require careful documentation and clear causal links to your employer's actions.

Medical and counselling expenses are commonly claimed where the employment situation has affected your mental health. This includes costs for GP visits, counselling sessions, and any medication prescribed for stress or anxiety related to the workplace issues. You'll need to keep receipts and obtain medical evidence linking these costs to your employment situation.

Job search costs can include expenses for CV preparation, interview travel, recruitment agency fees, and retraining costs if you need to develop new skills for alternative employment. These costs must be reasonable and directly related to finding replacement employment after your dismissal.

Loss of career prospects is harder to quantify but can be significant in some cases. If the dismissal or treatment has damaged your reputation in your industry or forced you to accept lower-level positions, this can be factored into the compensation calculation. This requires evidence of how your career trajectory has been affected.

In some cases, you may also claim for the loss of specific benefits like share options, pending bonuses, or professional development opportunities that you would have received if the employment had continued normally.

Several factors can significantly increase or decrease your compensation award, and understanding these can help you better assess your case's value and make strategic decisions about how to proceed.

Your conduct during the employment and the dispute process can impact the final award. If you contributed to the situation through poor performance or misconduct, this may reduce your compensation even if the dismissal was still unjustified. Conversely, exemplary service records and professional conduct throughout the dispute can support higher awards.

The size and resources of your employer can influence compensation levels. Larger employers with greater resources may face higher awards, particularly for hurt and humiliation, as they're expected to have better HR processes and should know better. Small employers with limited resources might face lower awards, though this doesn't excuse poor treatment.

The strength of your case affects not just whether you'll succeed but also the compensation level. Clear-cut cases with strong evidence typically result in higher awards than borderline cases where the employer's conduct was questionable but not clearly wrong.

Your efforts to resolve the matter internally before raising a personal grievance can be relevant. Employers who ignore complaints or fail to investigate properly may face higher awards, while those who make genuine efforts to address issues might see some mitigation in the compensation amount.

The way your case is resolved significantly affects both the compensation amount and how it's calculated. Understanding the differences between settlement and formal determination can help you make informed decisions about your case strategy.

Settlement negotiations, often through mediation, typically result in faster resolution and lower legal costs. However, settlement amounts may be lower than what you might receive through formal proceedings, as both parties compromise to avoid the uncertainty and expense of a hearing. Settlements also offer more flexibility in structuring compensation, such as providing references or other non-monetary benefits.

Formal determination through the Employment Relations Authority or Employment Court can result in higher awards, particularly for hurt and humiliation, as these bodies apply established legal principles and precedents. However, the process takes longer, costs more, and carries the risk that you might receive less than a settlement offer or even lose your case entirely.

The strength of your case influences which approach makes more sense. Strong cases with clear evidence might benefit from formal proceedings, while weaker cases or those where you need quick resolution might be better suited to settlement. Your financial situation and ability to fund ongoing legal proceedings also play a role in this decision.

Many cases start with attempts at settlement and only proceed to formal hearings if negotiations fail. This approach allows you to test the waters while preserving your right to seek formal determination if needed.

Successful compensation claims require comprehensive documentation to support each element of your claim. Poor record-keeping can significantly reduce your award or even jeopardise your entire case, making thorough documentation crucial from the outset.

For lost wage claims, you'll need employment contracts, payslips, tax summaries, and records of any bonuses or overtime payments. If your income varied, you'll need sufficient records to establish your average earnings. Bank statements showing regular salary deposits can help establish your income pattern, particularly if payslips are incomplete.

Evidence for hurt and humiliation claims includes contemporaneous records of incidents, emails or messages showing poor treatment, witness statements, and medical evidence of the impact on your health. Diary entries made at the time of incidents carry more weight than recollections prepared months later for legal proceedings.

Consequential loss claims require receipts for all expenses, medical certificates linking health issues to workplace problems, and evidence of job search efforts including application records and interview correspondence. If you've had to accept lower-paid work, you'll need documentation showing the pay difference and evidence that you're continuing to seek better-paid employment.

Character references and performance reviews can support your case by showing you were a good employee who didn't deserve the treatment received. These can be particularly valuable in hurt and humiliation claims where your employer might try to justify their actions by attacking your character or performance.

Understanding the tax treatment of different compensation components is crucial for assessing the real value of any settlement or award. The tax implications can significantly affect the net amount you receive and should influence your negotiation strategy.

Lost wages are generally treated as taxable income, meaning you'll pay income tax and ACC levies on these amounts just as you would on regular salary. However, the tax treatment can be complex if the payment covers multiple tax years or if you're in a different tax bracket when you receive the compensation.

Compensation for hurt and humiliation is typically not taxable as it's considered damages for personal injury rather than income. This tax-free status can make hurt and humiliation awards more valuable than equivalent amounts paid as lost wages, which is worth considering during settlement negotiations.

Reimbursement of expenses like medical costs or job search expenses is generally not taxable, as you're simply being repaid for money you've already spent. However, if these expenses were tax-deductible when you incurred them, the reimbursement might be taxable.

The timing of payments can also have tax implications. Large lump sum payments might push you into higher tax brackets, while structured payments over time might be more tax-efficient. Your lawyer should work with you to structure any settlement in the most tax-effective way possible.

Consider getting advice from an accountant familiar with employment compensation to ensure you understand the full tax implications before accepting any settlement offer.