Many NZ organisations have been caught out by issues with holiday pay calculations. Brought to you by FlexiTime PayHero.

As Auckland Transport, Cadbury, Flight Centre, McDonald’s, NZ Police, NZ Post and even the Ministry of Business, Innovation and Employment (MBIE) itself have learned, Holidays Act calculations can be fraught with peril. The main problem is companies using payroll software that accrue leave based on the hours or days worked by an employee, rather than managing leave in weeks, as required by the Holidays Act. Where does that leave the estimated one-third of Kiwi employees who are at risk of being underpaid? 

How did it come to this?

Robert Owen is the CEO of FlexiTime, a Kiwi company that’s been providing online payroll solutions since 2008. He explains that for all its complexities, the Holidays Act is based on two straightforward principles: first, employees get four weeks of paid leave for each year of continuous employment; and second, when they take that leave, those employees must receive what they would normally be paid if they were working.

Widespread underpayment issues have arisen because most payroll systems accrue leave as employees work, either based on the hours worked each week, or on a fixed ‘normal hours per week’ agreed when the employee first started.

“If you’re working 10 hours per week over a year you’ll have accrued 40 hours leave which, as long as your work pattern doesn’t change, would allow you to take four weeks off,” Owen says. “But if your work pattern does change and you’re now working 40 hours per week, those hours accrued in the previous year would only pay for one week of leave. The remaining three weeks may be given to you as leave, but how would you afford to take those three weeks off without any remaining holiday pay?”

A better payroll solution

When MBIE released its updated Holidays Act guidance in 2017, it was made clear that accruing leave based on hours or days worked could lead to non-compliance.

At that time, Owen and his team incorporated this guidance into the design of FlexiTime’s new payroll system, PayHero. PayHero stores employee leave balances in weeks and easily handles variable hours, changing work patterns and tricky public holiday calculations. The system is transparent, allowing the employer and their employees to see how leave has been calculated.

“It also streamlines the employee timesheet process with online, mobile, GPS and clock-in/out options that deliver accurate employee hours straight into payroll,” Owen adds. 

The PayHero team can even help companies transfer their data from other payroll systems. “We’ve developed migration tools that make the switchover process as painless as possible,” says Owen. 

What now for employers and their accountants?

Owen says it’s important businesses don’t kick the underpayment can further down the road.

“Business owners can wait for software patches, or for the Holidays Act review recommendations, but those business owners are obliged to make sure their employees are paid correctly,” he says. “If they know or suspect that underpayment is occurring they should address that. Delaying action potentially leaves their employees out of pocket and puts employers at risk of non-compliance.

“Underpayment scandals are usually a major headache for an organisation’s accountant. If you’re concerned about any potential issues, talk to our team about how we can help your clients pay employees right.”

“Delaying action potentially leaves their employees out of pocket and puts employers at risk of non-compliance.”Robert Owen, FlexiTime CEO

Find out more:

Find out more about PayHero at www.flexitime.co.nz/payhero.