How to get the Holidays Act wrong and even worse!

Please note: In NZPPA’s experience of working with employers and professional payroll practitioners, their focus is always to do the best for employees by following the law and paying staff correctly and on time.  In relation to how MBIE reports the cases they are involved in and the way in which some political parties promote their agendas (in this election year), it seems all employers are bad, must be controlled and kept in line!  In our view, this is wrong and creates false issues between employees, unions and employers when, in fact, there are none as the vast majority are all working together to resolve the well-known issues with the Holidays Act.

Two employers and two different ways to get the Holidays Act wrong

Since NZPPA was formed in 2007, it has been involved in auditing some of the largest and most complex payrolls in New Zealand. But the last two audits have given me different experiences and a few surprises I had not expected.  In this post, I want to discuss two recent audits and the result for both companies was that their current and ex-employees are owed a substantial amount of outstanding holiday pay and, in some cases, current employees have had leave entitlement credited back.  However, the reasons behind the mistakes made and the motivation of the employers were very different.

Company A

Company A is a medium-sized business of 230 employees that was proactive in wanting to ensure compliance with the Holidays Act (as all employers should be in the current environment).  In the first meeting to scope what information was needed for the audit, I asked in what format could leave information be provided from their payroll system.  The payroll officer left the room and returned with a box containing a complete set of cardboard leave cards for all staff.  

This was a blast from the past for me and to be honest, it brought back memories both good and bad of a time in payroll when we did not have payroll or time and attendance systems that recorded leave balances. Instead, it was recorded on individual leave cards for each employee.  I was impressed by the effort involved in recording leave and there were cards going back ten to fifteen years. The level of detail was greater than most modern systems can provide.  I was a little confused though with these records as I had been told they had a payroll system.  On complimenting them on the quality of the leave cards provided I then asked why they were not using their payroll system as this would be a core function and one of the benefits of having a computerised payroll application.  The reason did not surprise me, but I had not seen an employer reverting to the old and trusted method of leave management and recordkeeping rather than an Excel spreadsheet.  The reason they had continued to use leave cards was because they never trusted the accuracy of the reporting from their payroll system.  On investigating the payroll system, it could be seen that it was not being used correctly and there were some issues, but the major problem with this company was the cashing up of annual holidays.  

Employees in this company are paid close to the minimum wage and the employer would get heart-wrenching requests from staff who were desperate to pay the rent or to sort a family emergency and would make a request for leave entitlement to be paid out. The problem is it was not just the one week permitted under the Holidays Act, but all leave if the employee requested it.  The employer honestly thought they were helping their staff.  This company was more of a family than a business. The employer honestly believed if an employee requested the cashing up of their leave entitlement it was OK (for all leave not just one week of current entitlement allowed under the Act). They saw this as actually helping staff in a time of need.  Yes, this is wrong, but the employer had good intentions and was trying to help employees who had made the request.

The business owner is now facing a liability of over $175,000 for annual holiday entitlement that was paid out over the past six years (they had been paying out leave for as long as the company had been running). This is in an industry where every cent counts and it could mean that the viability of the business and keeping staff employed is now at risk.  

Company B

The second company was the total opposite to Company A and it had over 350 employees (past and present).  After an initial audit from MBIE, Company B was found not to be compliant with the Holidays Act and a full audit was required.  There was no real payroll practitioner present and the decisions as to how and when employees were paid were in the hands of a company director.

The quality of employee records – wage and time and holiday and leave records – were poor if non-existent. This employer had several weeks of work in just trying to build records to meet the minimum requirements for every employer.  In terms of auditing, the issues with the quality of the data were a major concern and meant that most records could not be taken at face value and rework had to be constantly done just to get the record to a basic level where the data could be assessed based on how leave was paid or not paid.

One of the issues with the data provided was with the minimum wage not being paid to employees.  It could clearly be seen that many employees were paid a standard hourly rate of less than $11 per hour going back six years and longer, with no link to the actual minimum wage rate for that year.  This seemed to be done because the employee earned commission and the business was using that to top up the hourly rate, but it could be shown many employees had long periods of no commission being earned.  So, during the audit all hourly rates were recalculated over a period of six years based on the difference between what was actually paid and the minimum wage rate for that year.  For some employees, this has resulted in substantial amounts of money having to be paid.

The flow-on effect to not paying the minimum wage meant that all leave taken – annual holidays and BAPS leave – was underpaid and had to be recalculated over the six-year period the audit covered.  This again resulted in additional monies having to be paid to employees.

But the worst was yet to come (if you can consider not paying an employee less than the minimum wage the worst thing an employer could do). How employees were paid leave on termination was a major issue with this company and from the results of the audit, it could be clearly seen that there was a deliberate undertaking by certain managers present at the time not to pay staff their correct leave entitlements on termination.

This was clearly a deliberate act because it could be seen that two employees doing the same job over the same period were paid quite differently on termination, with one meeting all the requirements of the Act and the other not.

So, some of the issues on termination for these employees were:

  • not being paid outstanding annual holiday entitlement on termination
  • entitlement not included in the 8%
  • 8% not being calculated or paid at all
  • BAPS leave taken which the employee counted as annual holiday entitlement, reducing the actual holiday entitlement the employee had
  • 8% paid to casuals that were not casuals (pay as you go) as they were working continuous hours, in some cases for more than 12 months, and when finally changed to become a permanent employee, no annual holiday entitlement was provided to the employee for that period worked
  • leave on termination was paid below the minimum wage.

So, for this employer the consequence of having poor records and not paying their employees over a period of six years has created a liability of more than $270,000 to be paid to current and ex-employees.  The manager that caused this situation left a couple of years prior to the issues being discovered, and so going forward, the company wanted to fix what had happened and make it right, and that’s a credit to the current management team.

In summary, when issues do happen in relation to the Holidays Act it can be for a range of reasons from not understanding the Act to deliberating not wanting to follow its requirements.  The bottom line is that there is no excuse and employees must always be paid correctly at all times and in all situations.  For a range of reasons, the Act does not help in this respect, but it must always be the focus for payroll and ultimately all employers.

Finally, NZPPA would like to acknowledge all the hardworking employers and payroll professionals that are always trying to do their best in paying employees correctly under the Act.

NZPPA supporting payroll since 2007!

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