The true cost of a holiday

Why the Holidays Act is landing so many businesses in hot water

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Described by government ministers as “tricky”, “complex” and “fiendishly difficult”, the Holidays Act is a longstanding problem.

With large government departments like MBIE and New Zealand Police facing compliance difficulties, the hurdle is high for smaller New Zealand businesses without sophisticated IT systems or specialist payroll departments.

Most New Zealand businesses want to pay their employees fairly and comply with their legal obligations. But non-compliance with the Holidays Act is widespread in both the public and private sector. 

Why is this legislation so difficult to comply with and which types of businesses are most at risk?

The primary issue is a mismatch between the Act and the practicalities of the New Zealand labour market. The Act works well in calculating holiday pay and entitlements for workers with a regular working pattern.

But the labour market is increasingly resourced by shift workers, casual workers and on-call workers. In addition, the use of flexible working arrangements and performance-related remuneration is growing. This mix sits poorly with the current leave calculation formulae set out in the Act.

Bewildering complexity

The Act responds to different market conditions with a bewildering number of leave calculation methods. 

Calculating annual leave involves three different methods and the additional difficulty of working out what an “ordinary working week” looks like for each employee. Calculating bereavement, alternative, public holiday and sick leave involves another two potential calculation types, along with consideration of what is “otherwise a working day”. 

Termination payments of annual leave are also calculated differently, depending on whether the employee is entitled to the leave, or has simply accrued it since their last anniversary date. The sheer number of different calculations increases the scope for error and confusion, particularly where different employees within the same business require different calculation types.     

Only as good as the data entered

Accuracy of source data is another crucial issue. Most payroll software is capable of performing the calculations correctly if the correct data is entered and the required functions activated. But many businesses do not give specific consideration as to whether allowances, commission entitlements or bonuses ought to be included in ordinary weekly pay or gross earnings figures. 

Others do not keep (or do not load into their payroll system) a record of all days for which an employee is paid. For employees working rotating shifts or on-call shifts, this is likely to alter their leave calculations. Changes to employee circumstances, such as casual employees whose work becomes more regular, or regular workers who start working extensive overtime, are often not updated in the payroll system.   

While third party payroll services or software can assist in payroll processing, the business is ultimately accountable for meeting the minimum statutory requirements. A system is only as good as the data entered into it and many businesses do not utilise fully the training and support offered by payroll providers. 

And, like many business support functions, payroll has grown in complexity and now involves legislative and financial knowledge as well as IT skills and institutional knowledge around employee benefit packages. 

Are payroll staff the forgotten employees?

In dealing with employee remuneration, payroll managers and administrators control both a significant financial spend and an issue which is of key importance to employees. This is often not reflected in an organisation’s commitment to training and remunerating payroll staff or in auditing the way these functions are managed. 

Training for line managers around the effects of remuneration and work pattern changes on holiday pay is also often missing. This can have significant financial ramifications. For example, an incorrect assessment of whether a bonus is discretionary or non-discretionary can add 8% to the overall bonus pool.    

The issues at MBIE are said to have been ongoing for up to 10 years. Because of the complexities of the Act, it is often difficult for employees to tell whether they have been paid correctly. As a result, payroll problems are often not discovered for a long time. By the time an error is discovered it has often been applied to a large number of employee calculations. 

A holiday pay issue can come to light in several ways. It can happen as a result of an internal or external audit, through an employee complaint or through an investigation by a labour inspector. Where a breach has been identified, the employer may rectify it informally with the employees concerned, or may enter into an agreement or sign an enforceable undertaking in favour of the labour inspector. 

Where a breach is not rectified, a claim may be brought in the Employment Relations Authority by either the relevant employee or by a labour inspector. In addition to paying the relevant amounts, penalties can be imposed. From 1 April 2016, penalties will increase and several other sanctions will be available to discourage serious or persistent non-compliance.  

Liabilities quickly accumulate

Employees may be forgiven for thinking that identifying a holiday pay error in their workplace will lead to a windfall. Often the difference in pay for individual employees will be small. But when these differences are extrapolated over a wide employee population, a significant former employee population and a six-year timeframe, small errors can lead to a significant financial liability. The costs involved in identifying and remediating any issues can often be as high, or higher, than the repayment amounts involved. 

The combination of a significant financial commitment, complex legislation and heightened risk means organisations should actively manage payroll calculations.

Regular audits, training for payroll staff and line managers and increased knowledge around the flow-on effects of changes to remuneration or working patterns will help business to ensure small errors do not turn into large problems. 

Christie Hall is the Employment, Health & Safety and Privacy Law Leader at Ernst & Young Law New Zealand (EY Law); Zena Razoki is a solicitor at EY Law.