It’s a truism that things have a tendency to move quickly in politics.  Recently, news broke of problems understanding and implementing the provisions of the Holidays Act 2003 (“Act”).

Perhaps of more concern was that these “problems” weren’t limited to small and medium-sized enterprises.  Large Government departments have been snagged as well and it seems that thousands of employees may have been underpaid as a consequence of payroll errors.

The extent of the problem isn’t yet known.  Currently, all we know is that the Labour Inspectorate – a division of the Ministry of Business, Innovation and Employment – has been aware of potential issues with payroll systems since at least 2010, and that it has already conducted 20 investigations into potential breaches.

So far, these investigations have identified 24,000 employees that have been underpaid, with amounts ranging from between $70 to $1,800 per person.  The faults seem to have occurred as a consequence of differences interpreting the Act’s provisions and are primarily related to the payment of holidays and the rate of payment for annual, sick and bereavement leave.

Ensuring the integrity of your payroll system is essential if you’re an employer.  This is because complying with statutory entitlements is expected, and failing to do so will leave an employer vulnerable to both grievances and penalties.  

However, to describe the Act’s provisions as complicated is not an unfair criticism and consequently, many employers rely heavily on payroll systems to do the number crunching for them.

The purpose of this article is to provide employers and payroll practitioners with some useful information on ensuring their payroll system is up to scratch.  It’s by no means an exhaustive account of the law, and in some places, may raise more questions than it answers; the complex nature of this area of law can be blamed for that. 

Consequently, we always recommend both obtaining advice if you have any doubts and regularly auditing your systems to ensure that you are calculating employee entitlements correctly.

Holidays Act 2003

The Act is underpinned by three broad principles, which are:

  • firstly, employees are entitled to four weeks paid annual holidays each year;
  • secondly, that an employee who works on a public holiday should be entitled to a special reward; and 
  • thirdly, that the employment relationship is both financial and human and that, after a period of employment, employees should be entitled to sick and bereavement leave as required.

For a payroll system to balance these principles and apply the law correctly, it needs to be able to accurately record an employee’s relevant time worked and use the Act’s myriad of definitions correctly.  

These definitions include terms like “ordinarily weekly pay”, “relevant daily pay” and “otherwise working day” and are made more complicated when you factor in a business’s unique operating environment (like any particular contractual requirements and the period or nature of work for employees), as well as other externalities, like paid parental leave.

Entitlements to annual holidays

Employees who work “continuously” for one year are entitled to four weeks’ annual holidays (sections 16 and 17 of the Act).  Easy, right?

But what constitutes four weeks of leave will inevitably vary between employees with different work patterns, making the job of ensuring that a payroll system is correctly calculating entitlements problematic.

Notwithstanding these difficulties, it is essential employers get it right, particularly given the fact the Courts have consistently referred to this entitlement as a “basic provision” and “fundamental human right” (Labour Inspector v Cook [1994] 2 ERNZ 473).

Working out what continuous means is made more difficult by the fact that it can include periods of leave - both with and without pay - including periods of voluntary service, sick leave, or parental leave.  

Periods of unpaid leave agreed between employer and employee will affect annual holiday entitlements in that the divisor employed to calculate the entitlement is required to be adjusted to take account of any unpaid periods of leave.  So, for example, assuming an employee works a standard five-day week but takes two weeks of unpaid leave, the divisor used to calculate their annual holiday entitlement becomes a factor of 50 and not the usual 52.  Confused yet?!  

A further complicating factor is what exactly constitutes a working week for any one particular employee.  The Act is predicated on the Judeo-Christian concept of a seven-day week, which includes a day of rest on the seventh day: otherwise known as the Sabbath.  

This concept is becoming increasingly irrelevant as it fails to take account of modern working conditions, where employees may work intensively for periods of time before then stopping work for a time until resuming it again.  In these cases, the Act simply expects employers and employees to agree on a method of calculating the working week (s 17).  If they don’t (or can’t), an Inspector can be called upon to do it for them.

Alternative holidays

“Alternative holidays” are more commonly referred to as “days in lieu”.  They are triggered where an employee either works a public holiday or is “on call”.  Depending on that employee’s contractual entitlements and provided the public holiday in question is an otherwise working day, the employee may be entitled to either an alternative holiday for working on a public holiday, time and a half payments (at their “relevant daily pay”) for being on call, or both.

An “otherwise working day” is determined by reference to the relevant employment agreement, the employee’s work patterns, and whether, but for the day in question being a public holiday, the employee would have been expected to work (s 12).  

Ultimately, the Act expects employers and employees to agree on what constitutes an “otherwise working day” and, if that’s not possible, to call on the assistance of a Labour Inspector.

Sick and bereavement leave

The general rule of thumb is that employees who have completed six months’ current continuous employment are entitled to five days sick leave, as well as access to bereavement leave.  

However, employees who have worked for less than six months may still be eligible for sick leave, provided they have worked for at least an average of 10 hours per week and no less than 1 hour in every week or 40 hours in every month (s 63).  

Casual and fixed-term employees

It’s a mistake to assume that casual employees are automatically excluded from the Act’s holiday and leave entitlements.  Casual and fixed-term employees are entitled to leave, but ordinarily these entitlements are paid as part of their pay on the basis of their gross earnings (s 28).  

However, this can only occur with the employee’s agreement (generally indicated by a clause within the employment agreement) and any payment must be an identifiable component of the employee’s pay (and not consolidated into some composite rate).

It’s also important to remember that only fixed-term agreements of less than 12 months’ duration are captured by the Act’s provisions permitting “pay as you go” leave.  If the fixed term is any longer, the employee is entitled to accrue leave as any other employee would.   

Auditing your payroll system

If you’re an employer, making sure your payroll system is fit for purpose is the best way to protect yourself.  With the frequency and speed of changes in this area of law, it’s a good idea to ensure these audits are undertaken regularly.  Getting an independent person with the necessary experience to complete the audit is also advisable.

The key steps in any audit will involve checking the system is using the correct formulae and definitions, ensuring that it accurately records each employees work patterns, satisfying yourself that it is calculating remuneration correctly, and making sure it can carry out the necessary functions.  This is particularly important if a business is using a universal system that requires particular calibration.

Conclusion

In 2014, the New Zealand Law Society published an article which called for the Act’s complete repeal and replacement with a new “plain English” statute.  Underpinning that call was feedback from 196 human resources specialists obtained as part of a survey which identified the potential for errors because of the Act’s complexity and the fact that it did not suit today’s modern working environment.  

Whether the errors identified to date will strengthen the case for repeal and replacement remains to be seen.  What is clear is that care needs to be taken to ensure entitlements are calculated correctly.  

For an employer, this will involve taking reasonable steps to ensure a payroll system is fit for purpose, and calling for professional assistance where necessary.  For employees, it means studying entitlements and remaining communicative with employers if there are any questions.


Further information