Holiday Pay

28 March 2019

Over the last couple of years, organisations' reliance on Payroll systems has left them with widespread underpayment of their employees and significant legal claims.

The Holidays Act 2003 provides minimum leave entitlements for all employees. The entitlements must be calculated in accordance with processes set out in the Act. Failure to provide the full amount owing to the employee under the Act is a breach of the law, even if an underpayment was the result of an accidental miscalculation.

Most employers use payroll systems to calculate entitlements and payments owing to employees. While this reduces human error, some payroll systems are inherently flawed and do not calculate entitlements as required by the Act.

Widespread miscalculations

In recent months we have seen several major public sector organisations get into hot water as a result of flawed Payroll systems. The Police, the Department of Corrections, MBIE and the Auckland Council have all found themselves to have miscalculated and underpaid holiday pay to their employees, resulting in back-payments totalling tens of millions of dollars.

Last month, there was news coverage of the difficulties facing New Zealand District Health Boards, as they try to untangle how much they owe in underpayments under the Holidays Act. In 2018 the Auditor-General reported on its 2016/2017 audit of District Health Boards and found there was significant risk that some staff had been underpaid, given the 24-hour nature of their operations.

However, after three years of trying to understand this issue, the District Health Boards are still unable to say how many staff have been underpaid and how much they are entitled to now be paid. This highlights the importance of calculating pay correctly at the outset, rather than having to straighten out a huge problem.

The basics of the Holidays Act

Under the Holidays Act, employees are entitled to 4 weeks of annual leave at the completion of 12 months of continuous work with their employer. Importantly, the entitlement of 4 weeks will not equate to 20 days in some cases. An employee's entitlement to leave must be based on what genuinely constitutes a working week for the employee. For example, an employee who works 6 days per week would be entitled to 24 days' annual leave each year under the Act.

When an employee wants to take some of this leave, the rate they are paid at while on leave must be calculated at the time the holiday is to be taken. Their pay must also be the greater of two calculations. The first calculation is the employee's ordinary weekly pay, which is the amount of pay that the employee receives under their employment agreement for an ordinary working week, at the time of the holiday. The second calculation is the employee's average weekly earnings over the 12 months prior to the holiday, this is calculated as 1/52 of the employee's gross earnings for those 12 months.

Conversely, payroll systems generally calculate employees' leave entitlements as accruing gradually over 12 months at the hourly rate and number of hours the employee works throughout the year. Accordingly, payroll systems can calculate employee's annual leave payments incorrectly, particularly if they have received a pay rise, as payroll would calculate much of their leave entitlement to be paid at the employee's previous, lower rate of pay.

In addition, payroll systems often measure leave entitlements in hours while the Act expresses entitlements in days and weeks. This balance of hours may not accurately reflect an employee's lawful entitlement, particularly if the nature of their working week changes. Manual adjustment may be required to ensure that the hours recorded by the payroll system accurately translate into the weeks and days of leave the employee is entitled to under the Act.

Preventing issues

Compliance with the Holidays Act is important. Holiday pay entitlements are a key minimum standard and the Labour Inspectorate has the power to investigate, promote and enforce compliance.

The best way for an employer to prevent holiday pay issues is to be proactive about their compliance with the Holidays Act by ensuring that their employees are being provided the correct amount of holiday leave, and that the rate of pay for any leave taken is calculated at the time of the leave. Employers should check employees' 'ordinary weekly pay' and 'average weekly earnings' before making leave payments.

It may also be worth seeking assurance from your payroll provider that your annual leave payments are calculated in the manner set out in the Holidays Act, rather than overseas law.

Annual holidays are given to all employees to provide the opportunity for rest and recreation which is vital to a productive workforce. While the complexities of correctly paying leave have created headaches for many major employers around New Zealand, employers can avoid these headaches by checking the calculations rather than relying entirely on payroll software.

The difficulties of calculating holiday pay has been thrown into sharp contrast by the major miscalculations across the public sector and reflects broader concern that the Holidays Act 2003 is overcomplicated. A review of the Holidays Act is being undertaken by the Holidays Act Taskforce, which is expected to report back in mid-2019.