Does it pay to invest in a payroll system?

Calculating employee entitlements in New Zealand can be complicated

BY payroll systems, holiday pay, compliance 29 Jul 2023

The New Zealand Holidays Act 2003 (Act) is notorious for its complexity, directing employers on what to pay, how to pay and when to pay. Why? Its purpose is to provide employees with a base set of entitlements, allowing for adequate paid time off for rest and relaxation – and while a worthy cause, it gets tricky when attempting to navigate the myriad of formulas, definitions and exceptions contained in the Act.

While relatively straightforward if an employee works 9 to 5, Monday to Friday, the more unconventional the working pattern, the harder it gets to keep track of things. Think ordinary weekly pay, average weekly earnings, relevant daily pay, average daily pay, annual leave, alternative days, public holidays, otherwise working days… the list goes on and there is no one-size-fits-all answer.

Some employers rely on themselves to get the job done. This involves manual calculations and paperwork (either physical, or computer-based; for example, on an excel spreadsheet). This isn’t necessarily a bad idea in and of itself, but it is important to remember the Act doesn’t simply require payments. It requires a solid backlog of wage, time, holiday and leave records for all employees spanning six years back (and IRD requires a seven-year record).

When the Labour Inspector comes knocking and looking for comprehensive records, employers may find themselves in hot water if their records are incomplete, facing an improvement or infringement notice, a penalty of up to $20,000 for each breach or, worse, a banning order barring the employer completely from employing employees for a set period of time.

Payroll managers have high job satisfaction and opportunities, according to a survey.

Payroll considerations

So, what about payroll systems? Sometimes touted as a “set-and-forget,” payroll systems are lauded as an easy way to manage your employees’ records – it does the calculations for you, automates the payments, and even uploads all the information to an online cloud, ensuring records doesn’t get lost in the ether.

However, you’d be justified in wondering why large employers who rely on payroll systems, including government agencies like the police and the Ministry of Business, Innovation and Employment (the watchdog of all things employment) have been caught up in the news making remedial payments to employees. Simply put, payroll systems can, and do, get it wrong. Examples include:

Accruing annual leave on the basis of hours or days, and not weeks as per the requirements of the Act. This is fine if the employee works regular hours and days, but if their work pattern varies, or if their hours change from part-time to full-time, their leave entitlement won’t accurately reflect their actual balance. For example, if an employee works six hours a day, five days a week, their annual entitlement is 120 hours (30 hours a week x four weeks’ leave entitlement) – but if they were to switch to working five hours a day, their entitlement drops to 100 hours. In practice, the employee should simply be getting four weeks’ annual leave, with pay based on however many hours they are working at the time they take leave. Recording the leave balance in hours complicates matters and could end up short-changing the employee.
Inaccurate logs of times worked. The system may malfunction or round up or down start and finish times. Although it may only be a minute or two here and there, for employees on or near the minimum wage, such treatment can cause employees to drop below the minimum wage and, accidental or not, this does constitute a breach of the Minimum Wage Act 1983.
Using the wrong formula to pay out leave. The Act sets strict rules for calculating leave payments, but if the payroll defaults to making payment under one particular formula (for example, average daily pay, rather than relevant daily pay), employees won’t be paid correctly when they take a day’s sick leave.

One in five payrolls in the US contains errors and the average organization makes 15 corrections per payroll period, a survey found.

Cautionary approach to payroll systems

We think payrolls are a worthy investment, but always suggest employers use these with caution and monitor these systems from time-to-time, to catch any issues before they become a legal liability. We also strongly recommend employers make use of New Zealand-based payroll systems where possible, as overseas payroll systems are not tailor-made for our legislation.

The reforms suggested by the Holidays Act Taskforce will simplify the Act and likely go a long way to fix some of those common issues, but we recommend a cautionary approach nonetheless.

Joseph Harrop is a senior associate specialising in employment law at Lane Neave in Auckland. Abby Shieh is a senior solicitor with the Employment Team at Lane Neave in Auckland.