Don’t Be Caught Out Under Paying Leave: Holidays Act 2003 Breakdown

If you have been seeing the news headlines on Stuff.co.nz recently, you will have noticed that there have been some scary big backpay figures in the millions of dollars being reported for businesses who have been underpaying their staff under the Holidays Act 2003.

 These aren’t just small businesses or one-off issues either.  It’s the big players. McDonalds, NZ Police, Bunnings, the list goes on.   Even the Ministry of Business, Innovation and Employment (MBIE) who are the government department who monitors employment practices.  Yup, even the superpower MBIE had to review and backpay!  If the big businesses are getting it wrong, what hope might there be for your business?

 SO, WHAT IS THE PROBLEM?

The Holidays Act 2003 is a complicated mess of legislation which covers pay and entitlements surrounding leave and public holidays.  There are a ton of reasons why there needs to be an overhaul! (It’s in the pipeline but likely some years away).

 The main issue relates to the multiple options of Leave Rates under the Act and how the “Higher-of” rule is being applied.  There is also issues with the payment of Public Holidays and entitlement to Alternative Holidays but these are less of a widespread issue than the Leave Rate fiasco.

 There are three possible rates for what Annual Leave should be paid at:

(a)           Normal Hourly Rate

(b)           Ordinary Weekly Pay (OWP) Rate – Average weekly earnings for the four (4) weeks prior

(c)            Average Weekly Earnings (AWE) –Average weekly earnings over the last twelve (12) months

 Each time someone takes leave, each of these rates need to be calculated and then the employee needs to be paid at the HIGHEST of these rates.

 Hard work.  Payroll programs SHOULD calculate this, but the payroll program is only as good as how it is set up for each employee.  AND not all payroll programs are created equal and aren’t calculating this correctly (And their terms and conditions place the responsibility squarely on you as the employer!).

 For the current non-compliance issues (i.e. significant underpaying of staff), there are two main problems:

1.     When people work varied hours

The Act is straightforward if an employee works the same hours each day and same days each week.  When the hours are varied, it gets complicated.  The Act doesn’t translate well in the payroll programs which we desperately rely on.  If you haven’t set the employee up correctly (or haven’t updated details when their working pattern change) then your payroll program has no hope of calculating the leave rate correctly

 If an employee works varied hours’ then their average rate will vary depending on their historical hours.  You can be 99% sure that their Leave Rate is likely to be higher than their Normal Hourly Rate. 

 2.     When people receive other gross earnings payments

A person may be salaried, or work a consistent pattern, but they receive other earnings which will mean their Leave Rate will be higher than their ordinary rate.  Again, each time someone takes leave, the employee needs to be paid at the HIGHEST of the three rates.

 Employees who have just been paid their quarterly / annual bonus (or any other gross earnings payment) will likely have a significant spike in their Leave Rate, as their Ordinary Weekly Pay (OWP) Rate (Average weekly earnings for the four (4) weeks prior) would be much higher.

 Many employers, or payroll programs, continue to pay the employee at the same rate if they are on a salary, assuming this is correct and forgetting about incentive payments.  While for some, this is an innocent omission, some unions and employee representatives are accusing employers of purposely ignoring the “higher of” rule to avoid paying more.

 PLUS - The Double-Banger:

Then there is the double-banger, employees who work varied patterns AND receive additional incentive payments.  Mind Explosion!

 SO, WHAT IS HAPPENING TO FIX THIS?

Enterprise employers are being investigated by Unions or the Labour Inspector to ensure their payroll practices are correct and to rectify past issues.  Its likely attention will soon turn to the small, medium and large employers. 

 Proactive (and smart!) employers are conducting their own audits to find out if they are compliant and / or if they owe any amount to their employees.  These proactive employers are able to get ahead of the game and avoid any additional penalties for non-compliance to the Act.

 The government has also appointed a taskforce to review the Holidays Act 2003.  It is expected that the taskforce will return a report with recommendations and changes. While many employers, lawyers and unions are calling for a complete re-write of the Act, its unlikely any change will occur in the immediate future.

 SO, WHAT DO I NEED TO DO?

Firstly, you need review your business operations and employment relationships to identify where you may have practices which would mean you could fall into one of the risk areas.

 Secondly, you need to find out if you have been paying your employees correctly.  You need to conduct a sample audit of your wage and leave records to ensure you have been paying at the correct rate.  The audit should be undertaken by someone different to who reviews your payroll, such as another person in the business (with relevant payroll knowledge), your accountant, your bookkeeper, an external payroll consultant or your friendly neighbourhood HR consultancy (hint hint).

 Thirdly, if you haven’t been paying staff correctly for their leave, you need to do something about it.  Yes, its potentially a lot of money.  But it could be much MUCH more if you are subject to penalties.  Conduct a full review of the leave and wage records for at least the last six (6) years (this is the minimum number of years you are required to keep time and leave records for).   If you absolutely can’t afford to backpay your staff then you need to seek advice about alternative solutions.

 Finally, write to the employee to confirm anything which is owed and what you are doing to resolve it.  Remember, employees talk to each other, so even if some employees aren’t owed anything, you should let them know what has been happening and that they are not impacted.