The Attorney-General says union demands for a collective agreement for actors in The Hobbit are potentially anti-competitive and could breach the Commerce Act.
A standoff between the Australia-based union Media Entertainment and Arts Alliance, the parent union to Actor's Equity, is continuing with no resolution in sight.
The union is calling for world-wide boycott of the film until the producers enter into a collective agreement. The actors want better pay and conditions with union coverage.
A call for a meeting with executive producer Sir Peter Jackson has not drawn a response.
Attorney-General Chris Finlayson, who is also the Arts, Culture and Heritage Minister, says he has sought advice from Crown Law on the matter, which has producers threatening to film the movie overseas.
Mr Finlayson says he is not taking Sir Peter's side and the demands by the union do appear illegal.
Actor's Equity disputes Mr Finlayson's view, saying there are lawful means consistent with the provisions of the Commerce Act which can be used to move the issue forward.
Government accused of siding with Jackson
The Council of Trade Unions is accusing the Government of siding with Sir Peter Jackson over the employment conditions dispute.
CTU president Helen Kelly says Mr Finlayson should speak to the union representing actors before drawing conclusions.
Ms Kelly says the Media, Entertainment and Arts Alliance wants to reach a lawful agreement and the minister's comments have simply added fuel to the fire.
Ms Kelly says New Line Cinema, which produced the Lord of the Rings trilogy, is using excuses the union regularly hears from employers.
The Green Party believes the New Zealand economy will suffer if The Hobbitt is made overseas.