As we enter a new calendar year, and with the government proposing to increase sick leave entitlements, now is a great time to review your organisation’s current payroll systems and processes, and ensure that your business is compliant with the relevant legislation.
Compliance with the Holidays Act 2003 (the act) has historically been difficult for some organisations to achieve. Figures from the Ministry for Business, Innovation and Employment (MBIE) show that organisations with arrears (arising out of non-compliance), has contributed to a total of $139.8 million in arrears payments, affecting over 190,000 employees (between Jul 2012 and March 2020). These figures relates to case that MBIE have been directly involved in, the actual figures across New Zealand will no doubt be much higher.
Issues with employer non-compliance have been further propagated via well publicised issues with a number of high-profile payroll systems in use by thousands of New Zealand Businesses.
Failing to pay staff correctly, even if this is unintended, can lead to significant negative outcomes including:
- Financial – The cost of any arrears that may be payable, time and cost associated with calculating and paying arrears, and development costs needed to ensure their systems and processes are compliant moving forward
- Reputational – Increased publicity of employers falling afoul of the act are often reported in the media and can undermine the view of the organisation
- Operational – The impact of prolonged and significant non-compliance can undermine the relationship between employees and employers and lead to unwanted friction in the workplace
The ultimate responsibility for paying staff correctly, and liability for any remedial payments arising out of non-compliance, lies with the employer. Because of this, organisations are encouraged to check and ensure that they are meeting their full obligations under the act.
Some of the key issues for businesses to understand are:
- When an employee becomes entitled to leave and how these entitlements might be impacted when an employee changes their pattern of work
- The level of payment an employee is entitled to when they take a period of annual leave (i.e. the higher of Average Weekly Earnings or Ordinary Weekly Pay)
- The level of payment an employee is entitled to when they take a period of sick leave, bereavement leave, or an unworked public holiday (distinction between Relevant Daily Pay or Average Daily Pay)
- Situations where an employee may be paid out their holiday pay entitlement as they go
- Situations when an employee may cash out a portion of their annual leave entitlement
- What/how much an employee is entitled to when they leave their employment
- How periods of unpaid leave can impact an employee’s entitlement to, and payment of, leave
- The payroll system is a tool for employers to help them meet their obligations, however there will always be cases were manual intervention and adjustments will be required. Understand the situations where this may occur (i.e. entitlement to public holidays after last day of employment)
While these items can be complex, it is essential that employers understand the obligations they have to their employees. Many employers implicitly trust that their payroll system is doing everything correctly and adopt a “set and forget” mentality.
To help mitigate any issues they may have with their payroll, employers could undertake some of the following steps:
- Educate themselves and their employees on leave entitlements and pay (www.employment.govt.nz has a wide range of resources for this purpose)
- Ensure complete and accurate records are being kept that are compliant with the act and the Employment Relations Act 2000
- Ensure employees are receiving (and opening) their payslips, so they can see how their payments are formulated
- Ensure all employees are provided with an employment agreement detailing how a week is defined for annual leave purposes, and that any variations to employee working arrangements are formally detailed in writing
- Ask questions of your payroll staff or providers to ensure compliance, and regularly check the payroll results and calculations
We encourage you to contact your employment lawyer if you have any questions or concerns about your compliance with the Holidays Act 2003.
For assistance with reviewing historic annual leave calculations or any other payroll software queries, please contact your local BDO Adviser.