Don't use a 'set and forget' payroll system

It is widely accepted that there is nationwide confusion around aspects of the Holidays Act 2003 (the Act) with many employers, often unknowingly, falling into non-compliance because they misinterpret the Act’s entitlement and payment rules. Employers with employees who work irregular hours are particularly susceptible given the complexity of the calculations required under the Act.

‘Set and forget’ payroll

There are over 90 different payroll systems in use around the country. Many employers use a ‘set and forget’ payroll software system, which calculates holiday and sick leave entitlements based on their employees’ contracts. Some of these payroll systems have been developed for use in other countries, yet are in use in New Zealand. It’s simply not good enough for an employer to rely on their payroll software system without actually making sure as an employer, they are fulfilling their responsibilities and complying with the Act.

Non-standard situations require employer judgement

Under the Holidays Act, employers have a legal duty to make sure their employees’ holiday and leave entitlements comply with the legislative minimum entitlements including when and how to make payments using either relevant daily pay (RDP) or average daily pay (ADP) calculations. In many situations, correctly implementing the Act requires a judgement to be made by the employer based on the specific facts of an employee’s working arrangements and pay. Because parties to an employment relationship are required under the Act to deal with each other in good faith, employers should take a principled, consistent and transparent approach as to whether they make payments to employees using RDP or ADP. Employers should not take the easy way out by simply relying on their payroll software. This can result in an employer systematically underpaying their employees. So, how does this work in practice?

An example of what can go wrong

We recently advised an employer about calculating public holiday and sick leave payment entitlements for a part-time employee, whose contract provided for a minimum of 20 hours per week on certain days of the week, with the possibility of further work in the weekend. There were no fixed or minimum hours for any of the specified days as this was dependent on the needs of the business’ clients and remuneration was set at an hourly rate. The employer initially used payroll software that offered options for sick leave calculations, but which resulted in an incorrect irregular daily rate being applied. Immediately on becoming aware of this, the employer correctly took action to review the employee’s historical payroll records and manually recalculate the employee’s public holidays and sick leave entitlements as required under the Holidays Act and, also got rid of the software’s leave functionality.

What if RDP won’t work?

If an employee works variable hours it may still be possible to determine RDP, for example by looking at the reasons for the variation within the context of the employee’s work patterns. Where distribution of an employee’s “hours during the pay period” follows a clear and regular pattern, then employers are required to use the RDP calculation is used. In most cases, determining RDP is straightforward, as it will be clear what the employee would have received on the day in question. The employer who consulted us, however found it was impossible and impracticable to determine what the employee would have earnt because of the actual daily variation in the hours worked, and equally because the employee’s daily pay varied within the pay period when the holiday or leave fell. Because the employer was unable to calculate the employee’s relevant daily pay, the employer correctly calculated payments under the Act for the employee’s entitlement to public holidays and sick leave using the formula set out in the Act for average daily pay calculations.

The law in this area is currently under review by a Government task-group which is set to make recommendations to change the Holidays Act in mid-2019, with the intention that any law changes will be in effect in 2020. Until then, employers must comply with the current requirements of the Holidays Act and should also be wary of relying on non-compliant payroll software to calculate holiday and sick leave entitlements.