As seen through the media recently, errors within holiday pay calculations are more common than we’d like to think and not just limited to Government organisations. Due to the complexity of the calculations required to monitor and record holiday pay, errors or deviations from the Holidays Act 2003 (the Act) requirements can occur.
This can result in under or over payments to staff.
Common payroll mistakes include:
- Incorrect leave payments for employees returning from paternity/maternity leave.
- Systems incorrectly calculating the amount of leave paid based on hourly rates instead of daily rates (bereavement, alternate, public holiday and sick leave) or weekly rates (annual leave) as required by the Act.
- Previous allowances earned are not included in leave payments (i.e. underpayment).
- Discretionary payments (e.g. bonuses) are included in leave payments (i.e. overpayment).
- Time-and-a-half earned on public holidays is not included in subsequent leave payments (i.e. under payment).
Employee leave entitlements and payment errors are likely to be miscalculated if the information captured within a system is not adequate. Staff members with fluctuations in their normal hours worked are prone to holiday pay mistakes, with the most commonly affected being waged employees.
Often, the correct information within employment agreements, employee master data, hours and type of work is not captured within holiday pay calculations. For example, additional amounts received on top of normal pay (e.g. allowances, time-and-a-half) are often not correctly captured within holiday pay calculations.
Errors may also arise if the payroll system is not intelligent and flexible enough to determine which Relevant Daily Pay/Average Daily Pay (paid leave) and Ordinary Weekly Pay/Average Weekly Pay (annual leave) formula should be used for each employees’ individual circumstances.
Relevant and Average Daily Pay and Ordinary and Average Weekly Pay are defined within the Act but are often not correctly and consistently implemented across payroll processes, data and systems. In some instances, the problem is due to companies using payroll software from international providers that is not tailored to meet New Zealand Act requirements.
The implications from incorrectly calculating holiday pay can be significant. Not only might an employee have been paid too much or too little, it also has flow on effects to PAYE, KiwiSaver, Working for Families and Student Loans and breaches to individual and collective employment agreements.
It is important to check your payroll complies with Holidays Act requirements and ensure payroll, finance and people managers understand the implications of the Act on pay and leave calculations. There is likely to be increased mobilisation and focus from MBIE Labour Inspectorate and tensions with payroll providers over the accountability for remediation and resulting liabilities.
Pressures from staff, unions and ex-staff over pay accuracy (real or perceived) can create tension within an organisation and challenges may arise when trying to maintain employee trust and goodwill with unions. The cost to remediate errors can be significant both financially and through management efforts, not to mention the impact this may have on a company’s reputation.
