Employment Settlements NZ
A personal grievance settlement is usually written as one number, and the number is what people focus on. What decides how much of it you keep is something else entirely: how that total is split between two very different kinds of payment.
Compensation for lost wages is taxed, because it stands in place of wages that would have been taxed. Compensation for humiliation, loss of dignity and injury to feelings is not, because Inland Revenue treats it as reparation for a wrong rather than payment for work. On a middling settlement the difference between getting that split right and getting it wrong runs to thousands of dollars.
The three things to remember
Lost wages are taxable. Payments under s123(1)(c)(i) for humiliation, loss of dignity and injury to feelings are not. And the split has to be genuine, not a label applied afterwards.
You cannot take a settlement that is really compensation for lost income, call all of it humiliation, and avoid tax on the lot. Inland Revenue looks at what the payment is genuinely for, and a record of settlement that does not reflect reality is evidence against you rather than protection. The allocation has to be defensible on the facts of your grievance: how long you were out of work, what actually happened, and what harm followed.
Why the two are treated differently
Income tax attaches to income, which broadly means something that flows from your work. Wages are the clearest example, and compensation replacing lost wages inherits that character.
A payment for humiliation is different in kind. Inland Revenue's ruling reasoning is that such payments are reparation for a wrong done, not remuneration for services. They are not paid regularly, they do not recur, and they are not sufficiently connected to earning income. So they fall outside gross income under ordinary concepts, and outside the tax net.
What a grievance can award
| Head of remedy | Taxed? |
|---|---|
| Reimbursement of lost wages or other remuneration | Yes |
| Compensation for humiliation, loss of dignity, injury to feelings, s123(1)(c)(i) | No |
| Compensation for loss of a benefit you would have received | Depends on the benefit |
| Reimbursement of legal costs | Generally not income to you |
| Notice paid out, holiday pay, final pay | Yes, ordinary employment income |
What the split is worth
Take a settlement of $30,000 and a person on a 33% marginal rate.
That is why the allocation is negotiated rather than assumed, and why agreeing a total without agreeing the split leaves money on the table. It also explains why an employer may resist: the lost wages portion carries PAYE obligations for them, so the split is not costless on their side either.
On the taxable portion the employer deducts PAYE in the ordinary way, so what lands in your account is already net. Check the record of settlement says whether the figures are gross or net, because a settlement expressed in gross terms and understood in net terms is a common and painful misunderstanding.
The record of settlement
Most grievances settle rather than being decided. The document that records it is where all of this becomes real, and it is worth reading slowly.
That last point matters more than anything else on this page. Once certified, a record of settlement is binding and very difficult to reopen. You cannot come back later for something you forgot, and you cannot raise the same grievance again. Take advice before signing, not after.
What a grievance is worth in practice
There is no tariff, and anyone quoting you a figure without knowing the facts is guessing. What drives the number is how badly the employer's process failed, how much you lost financially, how long you were out of work, and how much of the harm you can evidence. Compensation for humiliation in particular turns on evidence of actual effect, so medical records, counselling notes and a contemporaneous diary matter.
What also drives it is time. Both sides are paying for representation, and both are usually better off settling than running a hearing. That is why most grievances resolve at mediation, which is free through Employment New Zealand.
Timeframes that end your claim
A personal grievance must generally be raised with the employer within 90 days of the action complained of, or of when you became aware of it. For sexual harassment the period is longer. Miss the deadline and you need the employer's consent or the Authority's leave, and neither is guaranteed.
People commonly spend the first month deciding whether to make a fuss, another month hoping it resolves itself, and then discover the window is nearly closed. Raising a grievance is not the same as suing anyone: it can be a letter. Raise it in time and decide later whether to pursue it, rather than the reverse.
Before you sign anything
To sanity check the money side, the personal grievance compensation calculator models the components, and the lump sum tax calculator shows the tax on a taxable payment. Neither replaces advice on whether the split you have been offered is defensible.
What this guide does not cover
Redundancy compensation, notice periods and final pay each have their own rules. Discrimination and harassment claims can also run through the Human Rights Commission, which has different remedies and timeframes. Contractors are not employees and generally cannot raise a personal grievance at all. This is general information rather than legal or tax advice, and the allocation between taxable and non-taxable heads is exactly the point on which advice earns its fee.
Related guides and tools
- Redundancy rights and money guide, for what is owed when a role is disestablished.
- Reading your employment agreement guide, for the clauses that decide what a settlement can contain.
- 90-day trials guide, for where a dismissal can and cannot be challenged.
- IRD penalties and interest guide, for what happens if tax on a payment is got wrong.
- Tools: Notice period calculator and holiday pay calculator.
- Relocation packages guide, for the other employer payment with its own tax treatment.
Test Your Knowledge
Ten questions on settlements and what you keep.
Sources: Inland Revenue public rulings BR Pub 06/05 on the assessability of payments under the Employment Relations Act for humiliation, loss of dignity and injury to feelings, and BR Pub 06/06 on awards for lost wages, together with the Employment Relations Act 2000 and Employment New Zealand guidance on personal grievances and mediation. This is general information rather than legal or tax advice.