'It is not going to be straightforward,' says James Warren, citing complexity, uncertainty of legislation being reviewed by government
New Zealand’s Holidays Act is a creaking artefact that is easily misinterpreted even by large, sophisticated HR teams, according to a legal expert. The government is finally doing something about it.
The Ministry of Business, Innovation and Employment has selected 100 organisations for submissions on how simplified legislation should be designed. A consultation exposure draft of the bill is expected week commencing 9 September.
It’s been a long road, said Dentons Partner James Warren.
“The Holidays Act is characterised by its complexity and significant areas of uncertainty,” Warren told HRD. “Many employers struggle to adopt a compliant approach. Even large employers often get it wrong.”
The dilemma is so entrenched that even the Ministry of Business, Innovation and Employment unwittingly underpaid its own staff. A six-year remediation exercise followed.
“That’s the experience of a number of employers. They just fail to get it right, and when they’re audited and find out they have to do it differently, they may end up having to pay large sums,” said Warren.
These genuine underpayments can arise because it is so difficult to get the calculations right.
Legislation overhaul
The legislation has been reformed in patches since it was enacted in 2003 but never overhauled. Its architecture is arcane, Warren said, where two different methodologies are applied to various types of leave, such as annual leave, sick leave, bereavement leave, working on public holidays and public holidays leave. Within those methodologies, there are different calculations for entitlements.
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“For annual leave, it’s either the higher of your average weekly earnings or your ordinary weekly pay, which are two different calculations,” Warren said. “There are two different methodologies, depending on the complexity of the employee’s working pattern.”
It gets murkier, with a definition of gross earnings that includes certain types of commission bonuses but excludes others, depending on whether they are contractual or discretionary, and on the regularity of payment. “And that’s just one element of the situation,” Warren said.
Huge complexity
Payment for public holidays depends on whether an employee would otherwise be working that day. “The tests are very complicated,” Warren said, especially about deciding on hours for a worker with an irregular roster and pay scale. “Even modern payroll systems struggle to do that – there is no easy way to do it.”
Accrual is an obvious area for improvement. Under the current system, leave is accrued every 12 months, not throughout the year, and sick leave is accrued after six months of employment and a further entitlement each 12 months after that.
“That leads to huge complexity when it comes to dealing with people who leave partway through their leave year,” Warren said. “Every leave year is different, because it depends on the day you started employment.”
Underpaid employees
If the rules are so obscure that employees are underpaid, they had better hope funds are available when the mistake is uncovered. If the problem is years old, the remittance bill may be crippling. “[An employer] may not have put aside the money,” Warren said.
Underpayments can be discovered at large operations such as fast food or retail chains, for example, when they change payroll processes, are going over contracts or following audit by a labour inspector. It may add up to $100 a year for each worker but, multiplied by a thousand staff over a six-year period, things get serious. “It’s potentially huge money,” Warren said.
The employer is obligated to tell staff about a problem, without the option to offset underpayments against overpayments. “It is a pretty direct and expensive obligation which arises immediately,” he said.
Changes to Holidays Act
Former staff must also be remediated and potential claims are likely to arrive from employees who feel they should have been paid more. Some will want to understand what the calculations mean and how they’ve been worked through.
“The calculations depend on what has happened in the previous period and when you took annual leave and what you should have been paid,” Warren said. “There’s no easy way to work it out. You pretty much have to run the whole payroll process again from the date when it went wrong.”
For HR managers, change to the Holidays Act can only be a good thing. But HR teams must prepare now, whether they use a payroll provider or do their own payroll, according to Warren, who expects it will take at least 18 months for processes to adjust. “It is not going to be straightforward,” he said. “Everyone’s going to have a new way of calculating leave and leave entitlement, not just in one area.”
Fixing holiday pay legislation
The policy paper from Workplace Relations and Safety Minister Brooke van Velden and exposure draft bill follow efforts by a task force made up of unions, business and government which identified 22 recommendations in 2019 that were approved by the ruling Labour government but never came to fruition.
With a switch to a National Party parliamentary majority in November 2023, van Velden hopes change is possible. “I have heard loud and clear from employers and workers that fixing this legislation is a priority for them and it is also a priority for me,” she said in a statement recently.
Warren is optimistic. “I think the focus will be more on ‘Let’s make this simple.’ We’re not trying to do employees out of particular entitlements, but if it means a minor change downwards or a slight difference, that’s the price worth paying in order to achieve better legislation which is easier to understand and easier for everyone to administer.”