NZ Holidays Act October 2019

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Understanding your risk in relation to holiday pay compliance

Those who run payrolls in NZ will attest to the fact that holiday pay is one of the biggest complexities. There are specific rules around various components, including annual leave, sick leave, commissions. There's also a trap for employers calculating leave in hours vs days (a path Australia may be heading down?).

Common drivers impacting holiday pay compliance A number of factors can impact holiday pay compliance – the following drivers are those more likely to impact a larger proportion of your workforce.

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Increasing schedule and earnings variability increases the risk of holiday pay non-compliance

Tips to understand your risk

☐ Do we understand which parts of our business and which of our employees fit in these categories?

☐ Are there any parts of our business where employees can move between these categories (predictable – > unpredictable – > predictable)?

Note: These movements stress payroll systems (‘if’ limitations)

Increasing schedule and earningsvariability… and increasing holiday pay risk

Consistent schedule and

earnings

Variablepredictable

Variable and unpredictable

Commission and incentives

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Gross earnings set the foundation for holiday pay

Have we identified the correct remuneration types employees should be paid when on leave?

Tips to understand your risk

☐ Do we understand the range of remuneration types (values and conditions) across our employment agreements?

☐ Do we have clear policy/understanding of which of these remuneration types should be included in gross earnings?

☐ How does the gross earnings configuration of our payroll system align to our policy?

Testing ambiguity

☐ Do any remuneration types exist where management and employees may not agree on their inclusion in holiday pay, e.g. overtime requested by management, irregular overtime, retainer, no meal break allowance, wellness payment…?

☐ Are there any remuneration types where it doesn’t feel it makes sense to pay an additional eight percent annual leave on, e.g. commissions for outcomes achieved regardless if leave is taken whist on leave, bonuses…?

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Annual holiday pay

Are we calculating annual leave rates per the Act?

Payment for annual leave is made at the greater of either:

The Ordinary Weekly Pay (OWP) the employee is normally paid at the time leave is taken

The employee’s Average Weekly Earnings (AWE) over the 12-month period before the leave is taken.

Ordinary weekly pay Represents all gross earnings an employee normally earns in a week.

Where OWP is unclear for any reason the Act provides a formula for working it out by:

Going to the end of the last pay period

From that date going back four weeks, or if the pay period is longer than four weeks, the length of the pay period

Taking the gross earnings for that period

Deducting from the gross earnings any payments that are irregular or that the employer is not bound to pay

Dividing the answer by four.

Average weekly earnings Determined by calculating gross earnings over the 12 months prior to the end of the last pay period before annual leave is taken, and dividing that figure by 52.

OWP and AWE in effect

In summary Both OWP and AWE must be calculated when

paying annual leave

Your payroll must be able to identify when OWP is unclear and use the ‘four week averaging’ formula.

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Tips to understand your risk

☐ What formulas are used to calculate annual leave? and are they applied consistently across all of our employees?

☐ How do our formulas align to the Act – does our system apply the higher of OWP and AWE?

☐ Are our payroll processes and systems smart enough to determine when OWP is unclear and will apply the four week averaging formula?

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BAPS leave

Are we calculating BAPS leave rates per the Act?

Bereavement, Alternative, Public Holiday and Sick (BAPS) leave is calculated using a daily rate

For all BAPS leave an employee should be paid either their Relevant Daily Pay (RDP) or Average Daily Pay (ADP)

In all instances you should first attempt to calculate RDP which is the gross earnings amount the employee would otherwise have earned on the day if they had worked

Where it is not practical or possible to calculate RDP, ADP should be calculated by summing the employee’s gross earnings over the past 52 weeks and dividing by the number of whole or part days the employee either worked or was on paid leave during that period.

Tips to understand your risk

☐ What formulas are used to calculate BAPS leave? Are they applied consistently across all of our employees and do they align to the Act?

☐ Does our payroll system capture the number of whole and part days worked?

☐ Are all gross earnings included in BAPS rates? If not (e.g. non-meal allowance, long-shift allowance) how well do our people understand their obligations to include these in timesheets? Do they understand their (and their team members) employment agreements to ensure they are applied correctly and consistently?

☐ How do we know when it is not practical or possible to calculate RDP (and therefore should use ADP)?

☐ If we are using an average rate what is the impact to employees whose earnings are predictable and have increased or decreased relative to those throughout the year?

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Calculating leave in hours can create unintended consequences

Have we defined a ‘week’ and a ‘day’?

A number of payroll systems calculate leave using hourly rates

If gross earnings are correct this does not create a significant risk for (a) consistent and (b) variable but predictable employees – management and the employee are likely to both agree how many hours would have been worked if leave was not taken

However the Act requires weekly (annual) and daily (BAPS) rates to help manage ambiguity where the hours that would have been worked and earnings paid is not clear, i.e. what proportion/multiple of a day (BAPS) or week (annual) leave is taken?

This can create over and underpayments and impact leave balances (i.e. take away the employees ability to have a future holiday, or leave you with a higher leave liability)

To illustrate An employee who is contracted and rostered

to work 40 hours per week has recently worked between 55 and 60 hours per week over the past five weeks

Annual leave is taken from Monday to Friday:

Should we pay the employee their contracted hours? What if the employee has an expectation they would have worked 60 hours – does this mean we would underpay if using 40 hours? Or could they work 40, 55 or 60 hours?

Were we to pay 60 hours we would likely pay what they would have earned had they worked – but then we would deduct 60 hours from their 160 hour (four week) annual leave entitlement. Does this mean we are taking away their ability to have a future holiday (20 hours) when we should only deduct one week (40 hours)?

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Tips to understand your risk

☐ Have we defined a week and a day for each employee? Do we have processes in place to update these definitions when work patterns change, e.g. part time to full time?

☐ What rate (hourly, daily, weekly) is used to calculate leave?

☐ What divisor do we use to calculate an hourly or daily rate? Contracted: Will increase the leave

rate (correctly) but if not managed correctly can overpay leave where large hours are being worked (i.e. an increased rate on increased hours instead of a consistent rate on increased hours)

Hours worked: Will keep the leave rate consistent, but if not managed correctly can underpay where the amount of hours leave taken does not reflect those hours worked (refer prior example)

☐ What approach do we currently use to identify the hours leave taken where it is not predictable? If we are dependent on timesheets do all employees entering and approving timesheets understand how to manage this ambiguity?

☐ Is our current calculation approach having any unintended consequences on our employees’ annual leave balances?

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Are commissions and incentive payments treated correctly to manage significant over and under payment risks?

Commission and incentive payments are included in gross earnings

The large value and timing of payments can create some unintended holiday pay consequences, e.g.:

Some commissions will continue to be earned whilst an employee is on leave (e.g. software licence revenue). If not managed correctly organisations can ‘double up’ commission payments in holiday pay

Commissions can create large payment spikes. If not managed correctly this can create unintended holiday pay over payments.

Tips to understand your risk

☐ How do we treat commissions and incentives that span multiple pay periods when calculating holiday pay?

☐ Have we identified commissions that continue to be earned whilst employees are on leave? Operationally how do we manage overpayment risk for these commission types?

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Holidays Act knowledge

How can we positively confirm we comply with holiday pay requirements?

The holiday pay requirements of the Holidays Act are simple to understand – their implementation is not

A number of organisations have a (fair) default assumption their payroll system is compliant, i.e. holiday pay compliance is not on the payroll radar during day-to-day processing (pay everyone on time and reduce overpayment/fraud risk)

Payroll system configuration and calculations can be complex requiring a lot of detail to work through and understand across all of your employee leave scenarios

We have not seen a fully complaint payroll system, yet our clients are reassured from their vendors (assurance over ‘out of the box’ vs what needs to happen during implementation and operation). Where gaps exist that cannot be remediated by the system the onus is put back on your processes and people (cost to serve and risk).

Tips to understand your risk

☐ How well does our payroll team understand the Act? How well can they describe its impact to our business in plain English?

☐ How well can they describe our compliance to the Act (and the basis for their conclusions)?

☐ On balance how comfortable am I with our compliance? Is there anything I don’t know?

☐ How do I know I’m getting the best recommendations from my payroll provider?

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PwC New Zealand Vaughan Harrison Partner, Wellington +64 27 511 6563 vaughan.x.harrison@pwc.com

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