Fixing the Holidays Act 2003 – A way forward, Part 1

Over the next month, I will put forward what NZPPA believes should be done about the Holidays Act 2003.  NZPPA does not believe the act will change in the near future as there is no will or conviction from any political party to do so.  We doubt it will even be mentioned in this election year.

But, we need to keep talking about the act and the in-built issues that will not go away until we get a government that listens to the needs of payroll and employers.  All we want is an act where we can actually pay employees correctly and it is as easy as paying the employee their wage or salary.

Get rid of Ordinary Weekly Pay (OWP)

To get annual holidays the employee must complete 12 months of continuous employment.  This is a qualifying period based on an annual period.  When annual holiday entitlement is calculated, it is based on the greater of Average Weekly Earnings (AWE) (52 weeks/52) and Ordinary Weekly Pay (there are three different ways to calculate this).

NZPPA’s position is that if the qualifying period to be eligible for 4 weeks of annual holidays is 12 months, why does OWP need to be used at all to determine the value of the leave?  The only calculation needed is AWE for leave entitlement as it reflects the qualifying period to get the leave in the first place.

Issues with OWP:

Please note: At present annual holidays is always the greater of AWE and OWP. Below we are just talking about the issues with OWP.

  1. There are three different ways to determine OWP (this is stupid).
  2. These are not dynamic calculations so if an employee’s work pattern changes it may mean the calculation setting will need to change to another option under OWP (meaning payroll has to go back into the payroll system and change the configuration to now suit the calculation that is needed to be compliant with OWP).
  3. Nothing changes in payroll unless authorised so to make the adjustment outlined in 2. above, there must be sign off from a manager or HR staff member and in the real world (not MBIE’s world), this does not happen.  The result can mean that OWP is not compliant from one pay period to another.
  4. Having to constantly make changes to a payroll system in regard to its configuration of OWP creates increased compliance costs for payroll and the employer.  It also creates risk as any change done incorrectly undermines payroll.  Furthermore, there are some payroll systems that are not automated and so to make this change requires a substantial amount of additional work using manual workarounds.  If there are a number of employees to change this creates a higher workload for payroll thus increasing compliance costs.
  5. Over 95% of payroll systems are not in weeks but in days or hours. There is, therefore, a real disconnection with the act in terms of what the employer has agreed for a week and what can actually be stated in the payroll system.  OWP is all about the week and this is the problem.
  6. Section 8(1) of the act says that for OWP the agreed rate for the week is based on “now” – what the week is worth, whereas leave entitlement was earned over a period of 12 months, this does not fit the period it represents.
  7. In OWP the 4-week average (Section 8(2)) is a period of time that can easily distort the actual work pattern for an employee.  A 4-week period does not reflect what the employee has worked to qualify over 12 months to get 4 weeks of annual holiday entitlement. A 4-week period is not an ideal period to do an assessment of work for an employee. A 12-month period is more effective as it can include seasonal variations, work and shift patterns and is fair to both the employee and employer.
  8. OWP can be determined by an agreed special rate for OWP (section 8(3)) but it still has to relate to a week so as soon as the week does is actually more than what was agreed it would not be compliant.
  9. OWP is about the week or alternatively a 4-week period and includes payments in relation to that period.  If a 12-month period uses (AWE) it includes all agreed payments over the 12-month period that the employee worked.  This again is fair as it represents payments made in the qualifying period to get 4 weeks of annual holidays.
  10. A number of payroll systems are not even doing OWP correctly as NZPPA sees through its auditing that there is a total disregard for the requirements set under OWP even though it has been in place for more than 12 years.
  11. OWP uses the term “regular” to define what is included in the week under OWP, but there is no definition of what regular means.  This means there is no direction or a wide range of variations of what has been included or excluded as regular payment from OWP.
  12. The bottom line is that if OWP were not used and AWE was the only calculation to determine the annual holiday rate, this would make the processing of annual holidays straightforward for payroll, easy to understand by all, and employers could finally be compliant with the act.  For payroll suppliers, this could easily be changed and implemented.

NZPPA’s focus is always on making legislation simple so payroll processing and compliance can be achieved. I do expect comments about the employee getting less by only using AWE and in some situations that will be the case, but it is a balancing act where in some cases the employee would actually get more.  It is far better to make the act workable, employers compliant and to reduce the additional work and compliance costs for payroll than have an unworkable act going forward.

I welcome your constructive comments. Let’s get talking about fixing the Holidays Act 2003!

NZPPA supporting payroll since 2007!

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