Holidays Act 2003: Is your business compliant?

The Holidays Act 2003 is one of the single hardest pieces of legislation for businesses to comply with. Using a major system or outsourcing this function doesn’t necessarily guarantee compliance. Some payroll providers are still non-compliant many years later, while others have taken shortcuts and pushed extremely manual compliance processes to their clients.

Miscalculations have led to back payments ranging from a few dollars to well into tens of millions; for example:

• District Health Boards owe $1.15 billion in underpayments
• NZ Police identified $39 million in underpayments across 15,000 staff
• Hamilton District Council was caught out by the complexity of the legislation to the tune of $560k

The list goes on. Even the Government agency tasked with ensuring compliance with the Act miscalculated its holiday pay and had to backpay employees.

MBIE is now focussing on SMEs struggling with the rules

MBIE’s Labour Inspectorate has been focused on Holidays Act non-compliance since 2016. It started by reviewing the largest employers first and is now looking at SMEs in industries struggling with the Act. Over the past three years, non-compliance cases brought before the courts have resulted in tighter definitions of the rules. Add to that the configuration issues for payroll systems and processes, and the result is substantial non-compliance.

Who is likely to be affected?

The holiday pay calculation is straight-forward for staff consistently working 9-to-5, especially when they don’t have allowances, commissions or bonuses. Underpayments in those situations are unlikely or immaterial. But this is where the simplicity stops.

Where employee work patterns vary, the calculation becomes harder, and non-compliance is much more likely.

Similarly, if an employee usually works overtime, gets a commission, or a periodic bonus, in most cases the Act requires inclusion of these additional payments in the calculation for annual leave payments. Shortcuts often cause non-compliance when a staff member doesn’t have set hours or often changes their hours.

It’s important to note some payroll systems can’t calculate holiday pay accurately without consistent working hours.

What to look for

Here are the major root-causes of non-compliance.

1. Accruing annual leave at 8% or at Standard rate

These situations represent major divergence from the calculation defined in the Act and almost certain non-compliance. Holiday pay must be paid based on an employee’s gross earnings and proportional to their work pattern. This method values the leave at the time it is taken, not when it is accrued. Annual leave value, as outlined in the Act, may be significantly more than a calculation of Standard rate x typical hours.

2. Recording leave balances in hourly or daily units

Recording annual leave entitlements in hours or days (or accruing over the year) is a common root-cause of non-compliance. While it is possible to stay compliant to the Act when recording leave in hours or days, the Act defines entitlement in weeks, making it difficult to remain compliant when calculating using these alternative methods. Really robust processes, monitoring and significant manual effort is required to avoid any breaches when leave units are recorded in hours or days.

3. Complex or variable renumeration structures

The more pay components an employer or staff member has, the more likely it is there is non-compliance. The Act tries to ensure employees are not disadvantaged by taking leave, no matter their remuneration structure. If an employee has allowances, commissions, bonuses or overtime these probably need to be included in the holiday pay calculation; they can only be excluded in a few defined circumstances. In these cases, the holiday pay calculated will be higher than an employee’s Standard rate. Configuration of payment codes in payroll systems is therefore important for compliance. Even changing the use or setting of a payment type can result in non-compliance.

4. Variable work patterns

Industries with variable work hours or completely inconsistent work patterns have had the largest underpayments. These industries have also been the focus of the Labour Inspectorate’s recent reviews. Annual leave must be valued as a portion of a typical working week. Mistakes here include averaging actual hours over a full year, assuming a five-day working week, or using actual hours for that period. Many system providers have taken shortcuts to try and comply with the Act. These often require customers to manually update work patterns and entitlement balances whenever a pattern changes to stay compliant. For some companies this is a massive compliance overhead and for others it is impossible.

5. Weekend shifts and working public holidays

Even companies with dedicated HR and payroll teams struggle to accurately determine statutory holidays and alternate days entitlements. Many also don’t have a policy in place to define what an ‘otherwise worked day’ actually is, so statutory holiday entitlements can be determined, leaving accuracy to chance. The devil is in the detail. Alternate holidays must be recorded as whole days, and the day it is taken in lieu must be relevant daily pay on the day taken, not the public holiday.

Take action now to minimise risks in your payroll

If this sounds overly complicated, that’s because it is. Grant Thornton’s payroll assurance experts have conducted many payroll reviews using a streamlined process that makes the resolution of any potential errors as quick and painless as possible. Talk to us if you feel there may be systematic areas of non-compliance in your payroll or you’d like more confidence in your current set up.

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