Open Letter - THE FAILED EXPERIMENT OF THE HOLIDAYS ACT 2003

12 April 2024

Right Honourable Brooke van Velden

Minister for Workplace Relations and Safety

Dear Minister

Open Letter - THE FAILED EXPERIMENT OF THE HOLIDAYS ACT 2003

I have written this article for NZPPA members on what we need in payroll from any new replacement to the present Holidays Act, but I have forwarded it to you because payroll needs must be included in any future changes.

Were you part of the 1 April 2024 party as we celebrated the 20th anniversary of implementing the Holidays Act 2003?  Oh, sorry.  I meant the celebration of misery that the Holidays Act has caused in payroll.  There are other words I could use, but I have never written an R18 payroll article!

The title of this article is The Failed Experiment of the Holidays Act 2003.  That’s the best way I can sum it up because action would have been taken if something had caused billions of dollars of underpayments, uncertainty, and general chaos (not just in payroll).  So, the Holidays Act must be a weird experiment (with a team of mad scientists employed by MBIE running it!).

However, I want to look ahead and put forward a wish list of some high-level areas that any new Holidays Act (or whatever a new law will be called) needs to include or consider.  I will only add a few points under each section, but there would be a lot of decision-making and work under each heading.  I could easily write a book on my experiences and what is needed to make a new workable Holidays Act, but I will wait and see the new government's direction. 

Areas a new Holidays Act should consider include the following:

• A practical underlining test to be applied in developing a new Holidays Act
• Review gross earnings
• More effective use of averages to define time
• Use hours as the base time interval
• Minimise the use of multiple layers of calculations
• The calculation used must provide certainty, be transparent, and  easily be verified (by any party)
• Create a payroll specification to guide payroll providers
• Consequences for payroll providers if their software is not compliant
• Make any change to be included on a payslip
• Any new terms used must have a clear and concise definition
• Include a transitional calculation to resolve any outstanding issues once we move to a new act
• MBIE needs to be reviewed before any new act is implemented

A practical underlining test to be applied in developing a new Holidays Act

Firstly, in the development of any bill, there must be an underlying PRACTICAL TEST that any potential changes are put against to ensure it will work for all parties (especially payroll) before it becomes law:

• Will this work in any size business (especially small businesses, the largest business sector in NZ)?
• Will this work in payroll (can it be systemised in software, how will it impact payroll processing, does it provide transparency in calculations and consistency in results)?
• Will this provide clear, transparent records so any party (including external ones) can see how and what has been paid?
• Will it be easily understood by employers and employees regarding how leave entitlement was determined and calculated for any leave taken (could a small business owner sit down with an employee and easily explain how their leave was calculated)?

Review gross earnings

Presently, an employer can pay an annual bonus for work the employee has achieved and finds that by paying the bonus, it is included for the next 12 months in the gross earnings for leave, so it effectively inflates the leave rate for that period.  I call this the gift that keeps on giving!

So, for an employer, the bonus cost is not the actual value when the bonus is paid but the ongoing additional cost created by the Holidays Act.  I have always felt it is wrong that employees can get paid more than they would normally get while working when they go on leave.  I have seen the calculations under the present act create large, distorted payments to an employee for leave taken that have no relationship with what the employee would receive on a day or week they actually work.

I don’t know where this concept of paying more than what the employee actually gets when working has come from.  However, it has become a substantial unknown cost for employers.  Employees should expect to get at least the same amount they would have received if they were working and no more.  With any new act, there needs to be a review of how payments are included in gross earnings for leave calculations.

More effective use of averages to define time

In the present Holidays Act, there is no option to define time with any average when a day or week cannot be defined.  The three averages present are for defining money (AWE, OWP Section 8(2) 4-week average and ADP). 

Having an average for time can mean we can use an average to determine a week, days in a week, and hours in a day for an employee who works variable hours if we cannot define the week by agreement.  So, this would be seen as an alternative calculation and not the default, as many employees working agreed weeks should be defined by what is in their employment agreement.

An average variation could also be used to determine entitlement for the employee's annual holidays (four weeks) when they work variable hours and days in a week, and the employment agreement cannot determine this.

Yes, an average is a blunt instrument because it can mean the employee could receive less, but it is a method that can provide consistency and certainty.  Payroll systems could easily systemise it into software (as long as all the components included in the average are clearly determined in law).

Use hours as the base time interval

The focus of weeks and days in the present act has always been divisive in payroll, with employers and the various types of workplaces they provide, and with employees.  This is because a range of legislation states hours (the Employment Relations Act, Minimum Wage Act, etc.).  Payroll systems generally use hours as a base time interval, and employees think in hours for their work (overtime, shift work, etc.).  If an employee works variable hours, an average (discussed in the previous section) will help define the week and day. 

Using hours should be seen as the foundation time interval that feeds upwards into a day and a week.  For payroll, using a foundation time interval is the best way to determine the actual time, but there is a difference between actual hours and agreed hours.  Actual hours are exactly the hours the employee works (this fits best with employees who work variable hours).  In contrast, agreed hours are the employee's fixed hours on a salary or wage (they always work these hours based on what has been agreed in their employment agreement).

Accruing leave on hours to determine entitlement, commonly known as proportional accrual, presently does not work because it creates a pool of time that does not define the week; this is where an average would be easy to apply.  If hours were used to determine the value for leave as part of gross earnings, such as in “pay as you go” situations with the 8%, it could work if payments going into gross earnings were defined (what’s in and out).  It would also work better for an employee working variable hours where the employment agreement could not define the week for the employee.  This is an area where a lot of work needs to be done to show in what situations this should be applied or whether it should be used at all.

Minimise the use of multiple layers of calculations

The more calculations used, the greater the chance of non-compliance and the more complexity it creates, along with confusion and misunderstanding; this is just common sense.  There has been this blind belief that payroll system software will fix any issue, making any calculation workable and compliant with the act’s requirements.  That would be true if calculations were systemised and developed for a payroll system. 

But even if they were systemised, having two or three calculations for annual holidays and different ones for FBAPS leave, even in a payroll system, can easily be undermined because it is based on other factors such as what is paid and when and an employee’s changing work patterns. 

The adage of “less is more” is what should be applied to a new Holidays Act.  Yes, I understand that one or two calculations (at the most covering all leave types provided under the act) will not cover all situations, but there could be a special washup calculation used at the end of the year to cover any issues with the calculations used.  If done annually (if needed), it would provide certainty to all parties and become a standard payroll activity.

The calculation used must provide certainty, be transparent, and be easily verified (by any party)

Along with the previous section, any calculation for leave must provide certainty, which is lacking in the present act.  Certainty in calculating leave (payments to be included and the time period it covers) must also be transparent so any party (management, payroll, the employee) and any external party (MBIE, unions, etc.) can clearly see the relationship between what was paid for the leave taken and its compliance with legislative requirements.  The payroll system needs to enforce that to provide transparency in the calculations undertaken. 

Presently, it is nearly impossible to see what the system is doing (NZPPA has seen this numerous times from our auditing).  Having certainty and transparency regarding any calculations undertaken for leave under a new act will ensure that issues can be clearly seen and resolved. 

Create a payroll specification to guide payroll providers

Payroll providers must have direction set by the authority that enforces and administers the act, which is MBIE.  IRD does this as they understand the importance of supporting payroll developers to ensure payroll software meets legislative requirements. 

We did have a payroll specification for the Holidays Act when DOL was a standalone ministry before merging to form MBIE.  I approached MBIE to get their ongoing commitment to continue developing the Holidays Act payroll specification but was told they would not and that the payroll providers would need to seek external advice.  This is one of the reasons we have so many issues in payroll systems.  Providers were left with no support from MBIE; this must change with any new act.

Consequences for payroll providers if their software is not compliant

To me, this is a no-brainer.  There must be consequences for a payroll provider if their software is not compliant with legislative requirements.  Anyone can flog a payroll system in NZ, and what we have seen through our auditing at NZPPA are shocking examples of payroll systems that just should not be used.  To take a payroll provider to court (especially for a small business owner) is near on impossible.  With the present Holidays Act, they can easily use the issues with the legislation to dodge any compliance problems their payroll system has caused.

With the current Holidays Act, NZPPA sees payroll providers deciding what parts of the law they will include or exclude in their software.  This can mean that the required calculations defined in the act are not included because the provider believes their clients do not need them.  Any new act must ensure that all requirements (that can be systemised) are fully provided in any payroll system so businesses can meet any legal requirements set by law.

Make any change to be included on a payslip

Presently, there is no legislative requirement for a payslip to be provided to an employee.  I would consider providing a payslip as payroll best practice.  A payslip as a legislative requirement should be part of an education programme to upskill employees to take ownership of their pay so they understand what they have been paid (not just leave, but all payments made to them and deductions like PAYE, etc.). 

Educated employees who understand their pay will be able to raise any valid issues when they are paid, resolving problems at the time of payment.  This is not what we see now, with issues going back many years that take substantial time (sometimes years), resources, and additional money to resolve.

Any new terms used must have a clear and concise definition

This may seem minor, but it has caused significant issues with how the act is applied in payroll.  Any new terms created for a new law must have plain-language definitions to be understood and applied correctly from day one.

Terms such as “regular” and “discretionary” in the present act have caused ongoing issues with their application.  This is even with a definition added to the act in 2011 for discretionary payments (provided, but not in plain language).

Include a transitional calculation to resolve any outstanding issues once we move to a new act

We must move on if a new act is introduced and not be torn between going forward with a new law (with potentially new calculations and new rules) and being dragged back over the last six years trying to resolve issues from the old one.  This could create a perfect storm for payroll being caught between two pieces of legislation. 

A basic transitional calculation needs to be included in a new act to finalise any issues identified in the past with the old one so employees can still be compensated without involving complex remediation.

MBIE needs to be reviewed before any new act is implemented

MBIE is a risk-averse government department that has not helped with the Holidays Act issues by not showing leadership, support, or even basic workable guidance.  They have created an environment of fear within businesses and confusion for payroll.  Based on how NZPPA has been treated over many years of involvement with them, I have little trust or confidence in any project MBIE is involved in. 

There needs to be a fundamental attitude change at MBIE from where all employers are “bad” (or are seen as the enemy or a target) to a focus on providing genuine support, direction, and leadership (especially to payroll).

So, in conclusion, I have only stated a selected range of high-level issues (and there are a lot more).  And yes, I am biased because I only look at the issues from a payroll perspective (I love payroll). 

There is much work to do, and I just hope payroll can get a seat at the table and be really involved, not just the lip service involvement seen in other reviews of the Holidays Act.

The message to you, Minister, is that NZPPA and its members want to be involved in any changes to the Holidays Act.  I am also happy to expand (in writing or in person) on any points I have raised.

Yours sincerely

David Jenkins, NZPPA CEO

NZPPA supporting NZ payroll since 2007!