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Fixing New Zealand’s holiday pay problems

Payments to workers under New Zealand’s Holidays Act have been a significant source of cost and confusion for years. Will a new law be any better?

New Zealand’s law governing holiday pay is so complicated that the nation’s professional payroll body gets questions from employers about it every single day — which is quite extraordinary considering the law was passed 18 years ago.

“Holiday pay is the most complex part of payroll in New Zealand,” says David Jenkins, CEO of the New Zealand Payroll Practitioners Association (NZPPA). “Tax is a breeze by comparison. You could do a tax calculation, I could do a tax calculation, and we’d come to the same answer. But if we are calculating leave, we’d easily come up with totally different answers.”

The Holidays Act of 2003 mandates a minimum of four weeks of annual leave for full-time employees, but its requirements are less clear for employees who work variable hours each week, or who work part-time. These classes of workers are often inadvertently denied their correct entitlements under the law.

About New Zealand

  • Population: 5.1 million
  • Employed people: 2.8 million
  • Average hourly earnings: NZD 35.61 ($24.17)
  • Unemployment rate: 3.2%
  • Underutilization rate: 9.2%

Source: Stats NZ, December 2021

“Essentially, the act is very outdated and complicated,” says Rachael Judge, Senior Associate at the law firm Simpson Grierson in New Zealand. “If you work a 9-to-5 day, five days a week, and you receive an annual salary, then your holiday pay calculations will be fine. But it doesn’t account for modern work practices, or situations where people work part-time or work different rosters that don’t align with an ordinary week.” 

Misunderstandings about the rules are causing companies to owe millions in back pay to current and former employees. New Zealand lawmakers are overhauling the leave regime so that calculations can be made simpler — and are removing the ambiguities that riddle the existing law. 

Calculating the issues

Annual holidays are paid at whichever rate is higher: an employee’s ordinary weekly pay at the beginning of the annual holiday, or their average weekly earnings for the preceding 12 months. However, the law doesn’t provide any tools for defining what constitutes a “working week” outside of eight hours a day, five days a week. Pay periods in New Zealand run Thursday to Wednesday.

Furthermore, while annual holiday is accrued in weeks, sick leave and bereavement leave are accrued in days. Meanwhile, the payroll systems are typically based on hours, and employment contracts are often set in days, giving even the most seasoned payroll practitioner a headache.

“Most payroll providers use an hourly accrual methodology, because that’s what works for them. You get a lot of issues when you’re trying to translate hours into weeks and days and then back again,” Judge says.

Some payroll systems have been configured incorrectly by the employer, which presents additional problems — especially when managers refuse to correct course. 

“I’ve had payroll people send me questions saying, ‘We know it’s wrong, but the boss has told us to do it this way.’ They’re forced to do things that are totally wrong,” says Jenkins. 

Miscalculations are bound to occur unless payroll practitioners are constantly updating any changes in working hours for each worker to reflect an “ordinary week.” Even then, a vigilant payroll practitioner could still get it wrong, because so much of the act is open to interpretation.

Payroll practitioners must also constantly update any changes in each employee’s working hours to reflect an “ordinary week.” Over time, an employee may work either more or fewer hours than what is stipulated in the original contractual arrangement. 

“If you just set up a system on day one with someone’s working hours, over time that’s going to change, and unless someone’s really proactive about updating the payroll provider and making those changes each time, it’s going to lead to miscalculations,” Jenkins says. “At what point does someone’s overtime become regular and something that needs to be included as opposed to ad hoc?”

Lawsuits aplenty

Flexible work was less common when the law was drafted in 2003, but even then, a significant proportion of New Zealand’s population was already engaged in shift work or part-time work. By 2006, a quarter of all workers in New Zealand were part-time. So how did lawmakers get it so wrong? Jenkins says a failure to consult with key stakeholders was to blame.

“The act was written by a non-payroll practitioner, and it has been written as though everyone works 40 hours a week, five days a week. As soon as you get employees that work variable hours, the act falls apart,” Jenkins says.

Judge believes the law was always problematic, but it wasn’t until an enforcement blitz in 2016 that the extent of the non-compliance was exposed. A series of audits found that thousands of employees had been overpaid or underpaid while on leave, and were entitled to backpay in the case of the latter.

“For a long time, people sort of muddled their way through and probably weren’t compliant — but no one really realized,” Judge says. Then the Ministry of Innovation, Business and Employment made a big push to enforce the act, auditing companies to check their compliance. 

The ensuing litigation and remediation have garnered significant media attention. Organizations found to be non-compliant include large household-name retailers, the police force and even the Ministry of Business, Innovation and Employment itself.

The act was written as though everyone works 40 hours a week, five days a week. As soon as you get employees that work variable hours, the act falls apart.

David Jenkins, CEO of the New Zealand Payroll Practitioners Association

“A few years ago, the ministry was found to have been non-compliant. They had to remediate themselves, which I think highlights how complicated it has been for everyone,” Judge says.

In 2014, the ministry became aware that mistakes had been made between 2008 and 2018. “Like many organizations, we’re addressing non-compliance with some aspects of the Holidays Act 2003, resulting from a complex mix of process, policy, practice and system configuration factors,” the ministry stated on its website. As of early 2022, the ministry had remediated its current staff for historic payroll issues and was turning its attention to former staff. 

American multinational food company KraftHeinz has an open call on its website to anyone who worked there between 2011 and 2020 to help determine whether they are entitled to back payments.

“For employers, it’s a very costly, time-consuming and complicated process to remediate,” Judge says. It not only requires going through historical records with a fine-toothed comb but also working with the payroll provider to ensure compliance going forward.

“Small businesses are dropping like flies at the moment because of all the Covid-19 restrictions limiting trade, and having staff with the virus having to isolate,” Jenkins says. “And when we’re talking about potentially tens of thousands, if not hundreds of thousands, of dollars of underpayments being owed, that can usually put a small business under.”

A spokesperson from a company undertaking holiday pay remediation spoke to ReThink Quarterly on condition of anonymity, due to sensitivity around the issue. 

“Like a majority of businesses in New Zealand, we have been found to be non-compliant with the act,” the spokesperson said. 

They added that pay for the company’s 1,000 employees has been calculated according to hours rather than weeks. Determining what constitutes a “week” becomes complicated, though, when employees change their hours to fit around their studies, for example.

“We spend a considerable number of hours every week working through remediation that goes back six years,” the spokesperson said. “A complicating factor during the remediation period has been using different payroll systems, and on top of that we have a franchise structure, which adds further complication. We are still working through what is definitely a substantial issue across the business and for each individual franchise.” 

The company has already been working on the issue for three years.

The ministry acknowledges that the current law is lacking. “The lack of certainty and prescription in the Holidays Act is a significant contributory factor to the difficulties employers have in correctly applying its provisions,” says Chris Hubscher, manager of employment standards policy for the Ministry of Business, Innovation and Employment. “We need fit-for-purpose holiday legislation that provides certainty to both employers and employees, so that employees receive their correct entitlements.”

Bringing business to its knees

Once the ministry’s labor inspectors have audited a business and found non-compliance, a business will generally enter into an enforceable process to remediate the issue. Judge regularly works with employers during the remediation process. 

“In my experience, employers have been acting in good faith and the errors have been very much inadvertent due to the complexity of the law,” Judge says. Some employers have issued back payments that go well beyond the mandatory six-year period as a gesture of goodwill.

In one high-profile case, the ministry stated that holiday pay must also be paid for discretionary bonuses, which were included as gross earnings. A manufacturing company challenged the rule, but in a 2020 decision, the Employment Court sided with the ministry. The company appealed. 

“It was an issue that would have led to very significant liability for a lot of New Zealand employers, and particularly businesses who pay significant bonuses,” Judge says. “Often these are high-paid executives; they’re not vulnerable people. It would have been a massive windfall for them if bonuses were found to be non-discretionary.”

At the end of last year, the Court of Appeal overturned the Employment Court’s ruling. It found that discretionary bonuses are not part of gross earnings, saving employers hundreds of millions of dollars in potential back payments.

Searching for a solution

The law’s shortcomings are so legion that it needs a total overhaul, Judge and Jenkins say. In 2018, a Holidays Act Taskforce was created with representatives from unions, law firms, business groups and payroll bodies. 

In February 2022, New Zealand’s government announced it would accept all of the task force’s 22 recommendations. They include a simplified definition of gross earnings and mandatory payslips (employers currently do not have to provide employees with any payslip, on paper or electronically, unless it has been agreed in the contract). Eligible employees will also be entitled to one day of leave in the event of illness, bereavement or family violence upon their first day of work. Currently those entitlements reset to zero upon joining a new company. (​​In practice, most employers allow an employee to take up to two weeks of leave after six months on the job, Judge says.)

The new law is expected to be passed by the end of 2022, but Judge does not believe that the draft as it stands is capable of solving all the existing problems.

“The recommendations from the review definitely address some of the issues, and it has come some way towards improving it,” Judge says. “But I think the members of the task force had such diverse views that to reach a consensus they all made various compromises. I think that has produced a solution that doesn’t actually go far enough.” 

Employers should try to fix their payroll systems now.

David Jenkins, CEO of the New Zealand Payroll Practitioners Association

According to Jenkins, NZPPA was only given a week to provide input during the review, calling the organization’s involvement “lip service.” He says the ministry sat on the task force report for a year and failed to respond to NZPPA’s questions. He shares Judge’s concerns about the new law’s ability to provide relief to payroll officers.

Hubscher says that the ministry has been running a highly consultative process to turn the task force’s recommendations into detailed and prescriptive rules and methodologies. 

“This involves the direct participation of payroll software providers and payroll officers, employers, unions and other specialists. By specific invitation, the NZPPA is part of this process and has been afforded every opportunity to participate,” Hubscher says.

Jenkins urges employers to get their houses in order before the new rules take effect.

“We’ve got a bit of time before the new law comes into place. Employers should try to fix their payroll systems now,” Jenkins says. “Otherwise there could be the perfect storm of trying to fix past problems while learning about the different calculations under the new law.”

Jessica Mudditt

Jessica Mudditt is the author of Our Home in Myanmar and a Sydney-based freelance journalist covering business, technology and lifestyle. Her articles have been published by The Economist Intelligence Unit, BBC, CNN, GQ, Australian Geographic, Marie Claire and Westpac Wire. She is an accredited newspaper journalist and spent seven years reporting from Myanmar and Bangladesh.