THE PROBLEM WITH THE NEW HOLIDAYS ACT: THEY HAVE FORGOTTEN ABOUT SMALL BUSINESS PAYROLL

If you have ever experienced small business payroll software, it provides a very limited range of options for the payroll practitioner or user. This includes being unable to configure the system to suit the business's specific needs and having payroll providers decide calculations and legislative requirements while not being able to see what the payroll system is doing as there is no or little transparency.

In this post, I will talk about the largest business sector in New Zealand (small business) and what small business payroll needs to calculate leave for their employees. I will explain it in the context of how the government’s MBIE better rules approach has failed to consider this in developing a new Holidays Act.

To start with, here are the stated key principles driving the Taskforce overseeing the Holidays Act review:

• Certainty – The Taskforce has focussed on ensuring that its recommendations provide definitive answers that employers, employees, and payroll providers can rely on in circumstances where it may not be obvious how to calculate entitlement.  
• Transparency – The Taskforce wants to bring more transparency to the calculation and payment of leave entitlements so employees can understand their leave entitlements, how these have been calculated and how they have been paid.
• Practicality – The Taskforce has focussed on ensuring that the proposals it develops can work in the real world. Real-world scenarios and payroll data have been used in the testing, so the implications of various options can be considered.

This is exactly what businesses (employers), especially small businesses, needed in a new Holidays Act. What I have seen from the government’s MBIE better rules approach is the complete opposite of those principles.  And it will be even worse for small businesses as they just do not have the ability to manage and apply an even more complex and impractical Holidays Act that does not provide certainty or transparency.

You may say all that small businesses need to do is select the correct payroll system that provides the compliance needed to meet the current and any future Holidays Act. But this is a very simplistic view as small businesses don’t have payroll specialists, and they base their decisions on purchasing a payroll system or service on what they can see and have been told.  It does not help that several payroll providers make outlandish claims.  I have mentioned this before from being “super compliant” (then they changed their claim to be “seriously compliant”) to “the only compliant payroll system in NZ”, and even “NZ accountants recommend” just to highlight some of the claims made. The problem is that many businesses believe that to sell a payroll system, you have to meet a range of legislative requirements and get checked and audited by government departments, and that is just not the case in New Zealand. 

Understanding small business payroll

To put this into context, I want to highlight what you will typically find in small business payroll (at a high level):

• Small business payroll management and processing are usually one of many jobs for the small business owner or employee delegated to undertake the business’s payroll activity. The user is not a payroll specialist. A small business could not justify having one for its size. 
• Small business payroll is very basic and streamlined and does not provide the same options as a full-blown payroll system. Access to configuration tables, or even being able to see calculations, is limited or totally locked down.
• The payroll provider pretty much dictates what and how things are done, removing the legislative options stated in the law that may be available in a higher-level payroll system (used by medium to large employers).  So, a small business may be forced to use calculations incorrectly to what the law requires.
• Small business payroll is typically not transparent.  You cannot see what calculations, tests, or rules the system is using in the background. The small business owner just assumes that the system is doing it right!

So, where have the government and MBIE gone wrong?

The MBIE better rules group has a range of so-called stakeholders, including payroll providers, union and MBIE representatives, and a couple of specialist attendees and employers. It has been interesting to see that the employers present are all large employers and nearly all have highly customised, bespoke, or enterprise software (so potentially million-dollar payroll systems). They have the money and resources to do anything needed in payroll. But for all the hype and spin from MBIE and the Minister on the better rules approach, small business is the one group that is not represented. There is an employer’s group representative, but basically, they have been lost in space and are not present to actively challenge what is being put forward or how it will not work for a small business (or any business) during the better rules approach. I guess the employer’s group will jump up and down once we get a bill to show they are there for employers, but that will be too late.

In MBIE’s poorly managed meetings (if you have problems sleeping, join one of these) as part of the better rules approach, the over-the-top complexity is discussed in the vaguest of terms, with no depth or understanding of small business needs. The focus is only on ticking the box to ensure each of the 22 recommendations from the Holidays Act review will be shown to have been implemented even when they do not fit with how payroll works or is processed in a small business. Furthermore, payroll providers are being given a free ride to innovate in how they provide all the requirements of the new Act (calculations, tests and processes). The problem for small business payroll is that it already has a limited payroll, so adding complexity won’t help and will create an even more unworkable situation where the payroll may not be able to do what the new legislation requires.

Of course, it will be stated that small businesses are not as complex as larger organisations.  In some cases, I would agree, but that is a very naive view for the purpose of pigeonholing small businesses and avoiding the issues of this crazy over-the-top complexity that MBIE has created through the better rules process. Having more complexity will not fit with most small business payroll systems. Nor will it provide the ability for a small business to understand the rules, tests, and calculations involved in processing leave payments for their employees when using a payroll system with design limitations while also trying to run their small business. 

What do small businesses need from a new Holidays Act?

They want transparent calculations that are simple to understand and run. They want to be able to easily explain to their employees how any leave type was determined and paid. Also, they want all of the above to be done with minimal time involved and with certainty for the employee and the business going forward that leave has been paid based on clear legislative requirements. I could say all payrolls run within a business want all of the above. However, for a small business, it is essential because, as stated earlier, they don’t have the additional layers of support that larger-sized companies would typically have in place to run their payroll.

The Holidays Act needs to fit with the rest of payroll’s activities for a small business. For instance, tax (PAYE) has become quite streamlined with payday filing (as long as you keep everything simple). For a small business, payday filing is straightforward.  It is transparent and an activity that, once done several times, creates certainty in that part of payroll. The Holidays Act presently does not provide certainty.  And with the legislation becoming even more complex, this will continue to be the case. It does not help that small business payroll providers commonly only offer a selection of the options that the legislation requires. This creates non-compliance because the small business will use what is in the software even when other default options should have been used (because they think the software provides everything needed). A typical example of this in small business payroll is using only a 4-week average to determine ordinary weekly pay when that is only used if the week cannot be determined. So, what small business payroll needed from a new Holidays Act was to fit the limitations and needs of small businesses and the type of payroll system they use. Instead, we have a new Holidays Act focused on the needs of large companies with additional resources to support their payroll compared to small businesses where payroll is just one critical activity (of many) done with limited resources and constraints.

In conclusion, going back to the start of this article, the three key principles that needed to be part of any new Holidays Act: Certainty, Transparency, and Practicality have not been achieved through the MBIE better rules approach – quite the opposite. The process failed to understand the needs of the largest business sector in New Zealand, small businesses. Their payroll needs are quite different. MBIE and its better rules process can’t hide their failure behind the familiar mantra mixed with the spin and hype that it is “just another cost of doing business”. There are only so many valid costs a small business can absorb, and the failures of the new Holidays Act should not be one of them!

NZPPA supporting NZ payroll since 2007!