Over the last few months, a number of high profile New Zealand businesses and government departments have discovered issues with their calculation and payment for their employees’ holidays and leave.  The problem is widespread and growing, as the Labour Inspectorate focuses on Holidays Act compliance issues.

Calculations for payment of annual leave, public holidays, sick leave and bereavement leave are set out in the Holidays Act 2003. The calculations are designed to provide an employee with the amount of pay they would have received if they had worked their holiday or leave day – for salaried employees this is relatively simple, but for workers with variable pay structures or hours of work, getting the payment right, as has been discovered during this high profile investigations, is fraught with difficulty. 


Annual Leave

Employees are entitled to four weeks annual leave per year.  Annual leave payments are made on the basis of an employee’s Ordinary Weekly Pay (what they usually receive in a week) or Average Weekly Earnings (their average, based on the 52 weeks prior to the period of leave), whichever is greater. 

The calculation of Ordinary Weekly Pay can often trip employers up, as it doesn’t just refer to an employee’s contracted hours of work and base wage rate.  Calculations must also take into account regular overtime, allowances and incentive payments, and for an employee with variable hours, it may be necessary to look at their earnings in the four weeks prior to make the proper assessment.  There is then the requirement to pay the greater of Ordinary Weekly Pay or Average Weekly Earnings, which requires both calculations to be made during each period of leave. 


Sick Leave, Bereavement Leave and Public Holidays

Sick leave, bereavement leave and payment for working on a public holiday is based on an employee’s Relevant Daily Pay (what they would have been paid on that particular day), or Average Daily Pay if the Relevant Daily Pay can’t be calculated.  As with annual leave, the calculation should take into account any overtime the employee would have expected to work, and other payments they would have received.

If an employee works on a public holiday, they are entitled to be paid 1.5 times their usual hourly rate and if it is an “Otherwise Working Day” (i.e. a day they would have worked anyway even if it wasn’t a public holiday) they are also entitled to an Alternative Holiday, to be taken at another time.  Assessing what is “otherwise a working day” is also proving difficult for some employers although we are starting to see some guidance now from the case law developing in this area. 


Shouldn’t the payroll system work it out?

Many employers have simply relied on their payroll system to automatically calculate the correct payment amount. This is a key contributor to the widespread issue of non-compliance, as many systems do not perform the calculations properly.  Some payroll systems are certainly better than others at getting it right, but in general, whether the calculations are correct will depend on the way the system has been set up for a particular employer and the information being input by the person in charge of payroll.  What is clear is that all payroll staff should have some working knowledge of the Holidays Act to ensure they get things right. 


What if we’ve been getting it wrong?

Where the Labour Inspectorate identifies that an employer has not been complying with the Holidays Act, they will issue an Improvement Notice requiring the employer to re-calculate employees’ entitlements and pay any arrears, going back for a 6 year period.  After 6 years, the Limitation Act prevents a claim for arrears being made.


Upcoming Review

In May, the government announced a review of the Holidays Act.  A working group has been set up to consider simplifying the law to better meet the needs of businesses, and to provide a framework that works for modern workplaces and new working arrangements.  The working group will spend a year consulting with business, unions, government and workers, and is expected to report back around mid-2019. 

Unfortunately any changes are several years away, and in the meantime, employers must ensure compliance with the current law.


At Simpson Western, our employment team regularly assists clients with understanding the requirements of the Holidays Act, auditing payment records to assess compliance, and remedying any breaches identified.  If you are concerned about your own compliance, or how to mitigate any potential exposure, contact us today.