Termination Essentials

NZPPA Certificate in Payroll Termination Essentials (Level 4)

Restrictive Covenant Payments

These are payments made in return for a person agreeing to restrict their ability to perform services.

This includes payments made to an employee when their employment is terminated, and they agree not to carry on business in competition with their former employer. It also includes payments made when an employee enters into a restrictive covenant with a wholly owned company and then sells the shares in that company to their employer.

These types of payments are classed as source deduction payments, so PAYE must be deducted.

For example:

This could be a payment made to an employee while employment has been terminated, stating that they will not work in the same industry for a period of time after termination.

CE 9 Restrictive covenants When this section applies (1)

This section applies when — (a) a person ( person A ) gives an undertaking that restricts, or is intended to restrict, their ability to perform services as an employee, office holder, or independent contractor, whether or not the undertaking is legally enforceable; and (b) a person, whether or not person A, derives an amount for the undertaking. Income (2) The amount is income of person A.

© New Zealand Payroll Practitioners Association, Mar 2026, Ver 9

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