Local Government Magazine
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Holidays Act compliance – the red flags

holiday act

Article supplied by tax specialist company, Grant Thornton NZ.

The Holidays Act 2003 is one of the single hardest pieces of legislation for employers to comply with, and this is no less true for local government organisations.
Over the past three years, non-compliance cases brought before the courts have resulted in tighter definitions of the rules, meaning compliance has never been more important, or more difficult.
Payments owed to underpaid staff have ranged from a few dollars to well into tens of thousands of dollars. Some councils have already identified and paid out substantial holiday pay underpayments: Christchurch City Council, 5779 staff, $5.7 million; Auckland Council, 12,952 staff, $18.2 million; and Hamilton City Council, 2000 staff, $560,000.
Using a major system (even outsourced payroll) doesn’t necessarily guarantee compliance. Few payroll providers made the required changes to comply with the Act when it came into effect. Some are still non-compliant many years later, while others have taken shortcuts and pushed extremely manual compliance processes to their clients in order to stay compliant. During recent reviews, Grant Thornton discovered clients using some of the largest payroll systems were non-compliant.
It is reported that nearly every one of the 22 major payroll providers, collectively servicing 95 percent of employers, had non-compliant systems when the Act came into force. Add to that the configuration issues for payroll systems and processes, and the result is rampant non-compliance, particularly for certain types of employees. Even those on ‘compliant’ systems, which haven’t recently reviewed compliance, are likely still in breach.
There are certain types of employees which are higher risk of holiday pay non-compliance. These groups are the following.

Employees with multiple pay components or irregular components

The more pay components an employee group or staff member has, the more likely it is that there is non-compliance. The Act tries to ensure employees are not disadvantaged by taking leave, no matter their remuneration structure.
If an employee has allowances, commissions, bonuses or overtime, that would normally be paid, these probably need to be included in the holiday pay calculation; they can only be excluded in a few defined circumstances.
In these cases, the holiday pay calculated will be higher than an employee’s Standard rate. Configuration of payment codes in payroll systems is therefore important for compliance. Even changing the use-of, or setting of, a payment type can result in non-compliance.

Employees with variable work patterns

Employee groups with variable work patterns or completely variable hours are commonly underpaid annual leave, and typically have had the largest underpayments. Annual leave must be valued as a portion of a typical working week.
Mistakes here include averaging actual hours over a full year, assuming a five day working week, or using actual hours for that period. If a payroll is not set up for variable workers to average historical hours, then non-compliance is almost certain.

Employees who have changed their pattern of work

If annual leave is recorded in hours or days then employees changing work pattern are high risk. In order to stay equivalent to the legislative weeks-basis of annual leave employers must update payroll work patterns and current entitlement balances whenever an employee changes hours.
Employers may not be aware of this requirement, or for some it is a massive compliance overhead that has simply not been possible to keep up with. Recording leave in hours or days is therefore a large red flag, moving to recording in weeks significantly reduces manual effort and the risk of non-compliance.

Weekend shifts and working public holidays

Even employers with dedicated HR and payroll teams struggle to accurately determine statutory holidays and alternate day entitlements. It is important to have policies on what constitutes an ‘otherwise worked day’ and how to determine regular hours, so that statutory holiday entitlement can be determined.
For statutory holidays the devil is in the detail. Mondayisation and inconsistent work-patterns complicates entitlement. Alternate holidays must also be recorded as whole days and the day it is taken in lieu must be relevant daily pay on the day taken, not the public holiday.

Proactive remediation is beneficial

The Employment New Zealand’s Labour inspectorate has been focusing on holiday pay compliance for a few years now, and councils and CCOs are in the firing line. The good news is, if you are proactive in addressing compliance issues you can drive the process, making changes that bring you into compliance and that also make sense for your organisation.
Ignoring your holiday pay compliance until you get reviewed and receive an Enforceable undertaking can limit your options and result in much higher costs to remediate.
This is a very complex area – it can be hard to know what exactly to look for. If you would like peace of mind on this, Grant Thornton is offering any council organisation a complimentary high-level review of Holidays Act 2003 compliance for a representative group of employees. Get in touch today and get compliant.

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