As an employer, it’s important ensure staff are being treated fairly and in compliance with legislation. NZ legislation can be tricky, particularly when interpreting the complexities of the Holidays Act (2003) for employee leave / holiday pay entitlements and calculations.
Employment Law Training (ELT) helps businesses across New Zealand understand employment legislation through comprehensive training courses. We spoke with Cathy Pollard, Director and Training Consultant at ELT, about the challenges employers face when it comes to employment law, and best practice for tackling Holidays Act compliance.
I wear two hats: employment law training is a one man band. I run up and down the country and run courses designed for people who are in HR and payroll, focusing on legislative compliance. I deliver training on payroll compliance but also termination of employment, and basic management training.
My training looks at best practice for employment legislation: in a perfect world, this is what the legislation states, and this is what employers need to be mindful of with their systems and processes.
With my other hat, my husband runs a dental practice and I manage everything for the practice from hiring, to contractual negotiations, etc.
I do a lot of stuff manually. One of the reasons for that is because I like to know what’s happening in-house. It’s me who’s held accountable if something goes wrong. It makes me aware of what my debt levels are in terms of leave entitlements that are outstanding. It’s good discipline for me to continuously practice what I preach at my role at ELT.
Understanding what the Holidays Act is trying to do. Often during the training I run, I have to talk to the people on the course and tell them “It’s not about what your system does, it’s about understanding what the legislation does and making your payroll fit”. Not everyone understands the legislation, but once they do, they understand the gaps in the payroll system.
If you work for an employer, you sell your time. The Holidays Act allows you to, in certain circumstances, pull back the time you’ve sold. You shouldn’t be worse off financially for taking the leave; you should be paid like you’ve been at work. So it’s not as simple as paying out 8 hours per day at so many dollars per hour.
So for example, my brother lives in Australia and came to visit me last year. He was considering extending his holiday to stay longer, but decided not to because he would be paid less than if he were to be at work. His holiday pay is based on his base salary, but his base salary doesn’t reflect the hours he usually works. In New Zealand, the Act wants to make it fair for employees and ensure they get paid 100% for what they’d usually be working.
In theory, the Holidays Act is simple: its purpose is to ensure employees aren’t financially penalised for taking leave. But in practice; commissions, bonuses, overtime etc. would be earned while employees are working. It’s not as simple as paying someone their usual hourly rate at their contracted hours. And getting payroll systems to interpret these varying scenarios correctly is really challenging.
I’ve worked with companies with thousands on their payroll. Companies that are internationals, but also very small mum and dad businesses, retailers, manufacturers, tourism; we get the whole spectrum. The main struggles people have with paying annual leave in particular is comparing the average or ordinary calculation.
Average is easy; ordinary is difficult. For example, an employment agreement might say you work for 40 hours a week plus overtime. If I took everything and divided by 52, I’d get the average. But if I compare that to the ordinary, what does that look like to you? You could be someone who works overtime most weeks. You could get bonuses and commission most weeks. Or a monthly bonus. So what’s included in and what’s left out?
Employment NZ who are part of the MBIE put guides out that don’t give clear guidance. The bodies administering and prosecuting for non-compliance are telling employers to do what they think is reasonable in the circumstance. The Act itself says that when you’re calculating OWP, to include overtime, commissions and bonuses. The next section says exclude things that are not regular - such as overtime, commissions or bonuses.
The Act doesn’t define anywhere what ‘regular’ means. Regular has multiple meanings. It could mean consistency: for someone to have regular overtime, they could have it every week. But it could also look at frequency or ‘more often than not’. It’s challenging, which is why we need to come back to the basic principle - is the employee financially disadvantaged for taking this leave entitlement?
With systems, we input data and can end up with information in terms of entitlements which don’t translate nicely in terms of people taking leave. The Act talks about an entitlement of 4 weeks - but if hours change each week, what makes a week?
Employers are wanting more and more flexibility. People often work varying shift patterns, with different rates of pay for different jobs. This is great for the business in terms of getting things done, but makes entitlements quite messy.
With the Act, we’re on a double edged sword. We build flexibility into the legislation because our workplaces want and need the flexibility. But flexibility brings complexity to the interpretation and application of the Holidays Act.
Employers need to understand the purpose of the Act and fit their policies and procedures to this. Too often, they look at what their payroll system will do as opposed to getting their system to deliver according to their policies. The focus should be on ensuring they have adequate staffing levels, but also ensuring employees are getting the breaks they need without being financially penalised when taking them.
In terms of a payroll system, it must be flexible enough to manage leave entitlements and complex calculation scenarios. People with adequate understanding of how the Act works must also be managing this system.
First thing to ask is: do you understand the Act? If you can’t make it work for a salary, get out of payroll now. Have a look for variable hours, casual employees, variable rates. If your casuals are with you once in a blue moon - easy. If you ask them to work every other week, once they’ve been doing that for 12 months they can also pick up annual leave.
Do not pay holiday pay at 8% as you go, unless the employee is truly casual. If the employee is doing 10 hours one week then 15 the next week and they’re regularly coming in, at what point is that employee no longer casual, but a permanent part timer?
Things change, and the employment relationship develops. If they become permanent, the Holidays Act provides an entitlement. A claim for an arrears of wages can be taken up to 6 years later. We’ve seen cases where people start as casual employees and become permanent part time workers over a period of time. They end up with an entitlement to annual leave, despite having been paid 8% holiday pay on each payday. That’s not fun!
Software developers must ensure the systems are programmed to allow the administrator to put in the right data. You also need a trained professional to be able to input the data and ensure it’s correct and compliant. Otherwise, it’s not going to work.
When looking for a payroll software, you should ensure they have really good support and documentation for payroll practitioners. Payroll people may not know how to use the software in its entirety or know about functionality that could make their job easier.
Payroll support teams also need to be able to speak in payroll language; not just tech language.
As I said, the practitioner must know the Act and whether the approach taken by the payroll software is correct. At the end of the day, the question is always: does this decision allow someone to take the time off without a financial penalty?
Navigating the Holidays Act and ensuring payroll complianceGet the white paper