Company reduces payment despite own payroll showing higher balance, worker fights pay cut
The Employment Relations Authority (ERA) recently dealt with a case involving a worker who claimed her employer breached a settlement agreement by failing to pay the correct amount of holiday pay.
The worker argued that after signing a Record of Settlement following her redundancy, the employer conducted an unauthorised audit that reduced her leave entitlements from what was recorded in the payroll system at the time of signing.
The worker sought a compliance order against the logistics company, claiming she was entitled to holiday pay based on what the employer's own payroll system showed when both parties signed the settlement agreement.
She argued the employer had no right to retrospectively alter her leave balance after a binding agreement was already in place.
The case raises important questions about the finality of settlement agreements and whether employers can conduct post-settlement audits that reduce worker entitlements below what was recorded in their own systems at the time of signing.
The worker was employed by a logistics company until her employment ended by redundancy on 16 August 2024.
An employment relationship problem arose between the parties, leading them to enter into a Record of Settlement (ROS) on 21 August 2024, which was signed by a mediator under section 149 of the Employment Relations Act 2000 on 27 August 2024.
The ROS contained specific provisions regarding the worker's final payments. The first clause stated that the worker's employment would end by redundancy on 16 August 2024.
The second clause required that "Within 7 days of the Termination Date, [the company] Shall pay the Employee her final pay and all accrued holiday pay as required by the Holidays Act 2003."
When the ROS was signed by a mediator under section 149 of the Act, its terms became final, binding and enforceable.
The worker's payslip for the period including her final day of employment recorded her as having 4.1 weeks of annual leave available.
A copy of this payslip was generated on 21 August 2024, the same day the ROS was signed by the parties. Under the second clause of the ROS, the employer was required to pay the worker's accrued holiday pay by 23 August 2024.
On 4 September 2024, the employer paid the worker the equivalent of 1.7 weeks' pay, significantly less than the 4.1 weeks shown in the payroll system.
The employer asserted this was the correct amount because it claimed the worker had not properly recorded her own holiday pay entitlements during her employment.
Prior to paying the worker's holiday pay, the employer engaged its external accountant to advise on how much the worker was due to receive in holiday entitlements.
The accountant stated that she undertook a review of the worker's holiday and pay entitlements "upon the termination of her employment."
In her affidavit, the accountant correctly observed that the worker was entitled to 4.1 weeks at the end of her employment but made no mention of the ROS.
The accountant's methodology involved reviewing the worker's employment agreement and payroll records, before deducting a range of days from her leave balance dating back to 30 December 2022.
However, the affidavit did not adequately explain why it was correct to reduce the worker's final holiday pay entitlement from 4.1 weeks to 1.7 weeks.
The worker contacted the accountant on 4 September 2024 disputing what she said was an incorrect reduction in her holiday pay entitlements.
After the worker raised her concerns, the accountant reviewed the company's accounting system to assess whether the worker had accessed the company's banking and accounting system on certain dates.
The worker claimed she was entitled to receive payment for her annual holidays as recorded in the employer's payroll system as at the date the parties signed the ROS.
By contrast, the employer's position was that it was entitled to conduct a further audit of the worker's entitlements after the termination of her employment and after the ROS was signed by the parties and a mediator.
The ERA preferred the worker's position, stating: "It is not reasonable or consistent with the purpose of s 149 of the Act for [the employer] to sign a full and final settlement agreement and to then purport to review the accuracy of [the worker's] leave balances."
"This is particularly the case when that review unilaterally reduced her leave balance over an extended period, utilising less than probative methodology, and without consulting with her."
The ERA emphasised that both parties should have enquired into the holiday pay owing to the worker when entering into the ROS.
The Authority noted: "Both parties should have enquired into the holiday pay owing to [the worker] when entering into the ROS, given the ROS dealt with the date on which [the worker's] employment would end and on how issues of liability would be resolved. Failure to do so could be said to be a lack of due diligence before entering a binding agreement."
Although the employer argued that the worker was the most senior employee responsible for administering holiday entitlements, including her own, the ERA noted that "directors are ultimately responsible for ensuring leave is managed correctly. This includes in respect of the business' most senior employees."
The ERA found that if the employer had any reservations about the value of leave to be paid to the worker on termination, "it could have raised these with her prior to signing a full and final settlement agreement."
The company director had stated his wish to pay the worker the correct amount of holiday pay and that he sought external advice to be fair in calculating her entitlements.
However, the ERA determined this did not change the fact that "a readily ascertainable figure should have been available to both [the employer] and [the worker] when the ROS was executed by both parties and signed by a mediator."
The Authority noted there was no suggestion from either party that the leave balance was incorrect owing to a technical or system error, but rather a dispute regarding whether leave was correctly recorded and taken.
The ERA emphasised it was sensible for employers to regularly review leave balances and discuss any issues with employees so they could be resolved: "This could have avoided the situation at hand where an inquiry was undertaken too late."
For these reasons, the ERA concluded the worker "was entitled to her leave balance as it was when both parties signed the ROS, being 4.1 weeks."
The ERA ordered that the employer had breached the ROS and issued a compliance order under section 137 of the Act to prevent further non-compliance.
The employer was ordered to pay the worker $5,076.91 gross by 27 June 2025, representing the unpaid 2.4 weeks of annual holiday pay owing under the ROS.
