Advice to employers on Holiday Pay issues

The problems with holiday pay calculations in Government departments are getting a lot of attention and it is being said the problems could also affect many businesses.

If you are an employer or a payroll operator – don’t panic.

I think the Government has a responsibility to urgently address this and advise all employers and employees how to use the current Act correctly, or fix then Act so it can be used correctly.

If you believe you are paying holiday pay fairly my advice is to continue doing as you are until official clarification is made. So wait and see what comes out of this.

If employees work regular hours over a holiday pay year and earn regular amounts then there shouldn’t be any problem if you have complied with the Act.

The holiday pay rate is the greater of the employee’s current pay rate or their last 12 month average rate. This usually works out fine.

If employees work regular hours over a holiday pay year but earn irregular amounts like overtime for a part of the year or are paid a bonus should also be ok, although holiday pay rates can vary over the course of the year.

Holiday pay rates can vary depending on how irregular payments occur within the past 12 months and there can be some quirky results depending on the timing of holidays but this is how the Act determines it should work.

The headaches are with:

  • Employees whose work pattern changes significantly over the past twelve months, for example an employee changes from 40 hours a week to 20 hours a week. How to deal with this can take a bit of working out but can be done with the current Act.
  • Employees whose work pattern changes all the time. The Act makes it very difficult to deal with these employees because the old relatively simple 8% calculation is not supposed to be used except in fairly exception circumstances.

Employees in the continuously variable category, where ‘standard hours’ can’t be determined, should be paid at the greater their last 12 month average and their last 4 week average.

This means that if they take holidays just after being paid much more than usual over the previous 4 weeks their holiday pay rate can be abnormally high – correctly according to the Act but it can be nonsensical. Some employees avoid wild fluctuations be using different calculations.

If employees take holidays after a relatively low paid 4 weeks they should be paid at their 12 month average which should be ok.

There is another way holidays can be paid, at an agreed rate (agreed between employer and employee).

But there’s also a  bigger problem with how to calculate how much holiday to give people who work variable hours.

People who work regular hours are given four weeks (or more) annual leave. That’s straight forward.

But people who have changed their regular work pattern at some stage through the year need to be dealt with more carefully.

Again those employees working continuously variable hours and days are the biggest headache. Some employees ignore the Act and calculate a holiday pay rate based on earnings. This is probably reasonably fair but non-compliant with the law.

It gets trickier working out how to calculate what 4 weeks holiday equates to. If the employee took all their 4 weeks at the end of each year in one block it isn’t too difficult.

But if they taken a day or two every now and then it can get horrendously difficult.

If the work 4 hours some weeks and 40 hours other weeks and they want to take a few days holiday how is that calculated easily? Many employees struggle with this. If you know a simple solution that complies with the Act please pass it on.

I’ve read the Holiday Pay Act extensively and believe it is fundamentally flawed with regards employees who work irregular hours.

The current Act makes it very difficult for many employees to comply with the Act and pay their employees for their holidays fairly.

It is the Government’s responsibility to provide practical advice on how to deal with this, and if it can’t be done properly with the current law then the Holiday Pay act should be changed.

Holidays Act 2003: http://legislation.govt.nz/act/public/2003/0129/latest/DLM236387.html

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21 Comments

  1. Ian

     /  9th March 2016

    Small businesses that I’ve worked for have no trouble calculating holiday pay on random hours. The problem here is that MBIE has, more than likely (they won’t say), been using an off the shelf payroll package from overseas that doesn’t have the holiday rates burned in.

    Reply
    • The act has made things difficult for many companies since 2004. That’s why they reviewed it in 2010 but kicked î got touch ás too hard.

      Reply
      • Ian

         /  9th March 2016

        It’s just equations. If you’re not getting it right you haven’t set up your payroll software properly. Or you’re letting staff take holidays they haven’t accrued yet, and ending up with a disparity.

        Reply
        • Ian

           /  9th March 2016

          P.S. That article says ’employees’ rather a lot where it should say ’employers’.

          Reply
        • The problems are much more than ‘equations’ and setting software up properly. I’ve dealt with a number of payroll systems over the last 30 years, and many people using payroll systems. The current law can be very difficult to understand (I’ve read it many times) and comply with.

          Have you read the legislation?

          Reply
          • Ian

             /  10th March 2016

            ” That’s why they reviewed it in 2010 but kicked î got touch ás too hard.”
            “The current Act makes it very difficult for many employees to comply with the Act and pay their employees for their holidays fairly.”

            English first, then maths. Eh?

            Reply
  2. jamie

     /  9th March 2016

    “If the work 4 hours some weeks and 40 hours other weeks and they want to take a few days holiday how is that calculated easily?”

    As I understand it, holidays are calculated using whichever is the greater of usual hours worked or average hours worked.

    Nothing complicated about that aspect. Ian is onto it, they just don’t have their systems running properly.

    Bit unfortunate, being that they’re supposed to be the experts in business and employment.

    Reply
    • No, the calculation of holiday pay is the greater of the current daily pay rate and the average paid over the past 12 months, except if standard hours worked per pay period can’t be determined it’s the greater of the 12 month average rate and the previous 4 week average rate.

      Holiday weeks/days are accrued based on period worked (eg weeks worked) or hours worked.

      Reply
      • Ian

         /  9th March 2016

        Annual holiday pay must be—
        (a)
        for the agreed portion of the annual holidays entitlement; and
        (b)
        at a rate that is based on the greater of—
        (i)
        the employee’s ordinary weekly pay as at the beginning of the annual holiday; or
        (ii)
        the employee’s average weekly earnings for the 12 months immediately before the end of the last pay period before the annual holiday.

        Have you read the act???

        Reply
        • That’s what I said, the greater of their current rate and their 12 month rate. It’s worked out in weeks, days or hours.

          Unless their standard hours can’t be determined, in which case it’s the greater of their last 12 months average and their last 4 weeks average.

          I’ve read the act numerous times.

          Reply
          • Ian

             /  9th March 2016

            So what’s so hard?

            Reply
            • Three things in particular.

              1. You can get very uneven calculations especially with the 4 week average when an employee’s work pattern varies a lot.

              2. It’s difficult to work out how many hours or days to give a person for holidays if their work pattern has changed significantly during the year.

              It’s difficult to work out how many days or hours to accrue and give if an employee’s work pattern continuously fluctuates. For example if they work from 0 to 5 days a week through the year and take a two days holiday, what do you give them?

            • Ian

               /  9th March 2016

              The average is $ divided by 52, (or $ divided by 4) again how is it hard.
              Or, What’s your specific problem?

            • I suspect you haven’t actually worked with payrolls that deal with variable work patterns.

              The calculations can be easy but the results are the problem. See:
              https://yournz.org/2016/03/09/advice-to-employers-on-holiday-pay-issues/#comment-87425

              And employees with continuously variable work patterns the calculation of holiday days/hours due can also be complex if you are to ensure 4 weeks annual leave at a fair holiday pay rate.

  3. Robby

     /  9th March 2016

    I posted this link on the other thread yesterday, but here it is again:
    http://employment.govt.nz/er/holidaysandleave/holidaysonline/calculate.asp
    At pretty much every business I have been employed by full time, a sick day or statutory holiday has been paid at 8 hours wages, which under the law is wrong. A real ‘can of worms’ has been opened…….

    Reply
    • But sick and public holidays (and bereavement and time in lieu) are paid differently to holiday pay, so that’s a different can of worms.

      For those leave types you are supposed to be paid what you would have earned if you worked they day you take off.

      So if you regularly work 8 hours ordinary and 1 hour time and a half every Wednesday and you are sick on Wednesday you should be paid the equivalent of 8 hours ordinary and 1 our time and a half.

      Reply
    • But if you work 8 hours per day Monday to Thursday and 2 hours Friday and are sick on Friday you are only due 2 hours Relevant Daily Pay.

      Reply
      • Robby

         /  9th March 2016

        You are quite right Pete. But in my experience, this is not what actually happens. Every company I have been employed by has got the annual leave calculation right, however sick days/stat days/jury service have always been paid at the rate of 8 hours normal time.

        Reply
  4. Here’s an illustration of one of the problems with the current Holidays Act.

    A a part time reliever employee does not have standard hours or pay so is paid holidays at the greater of their 12 month average and their 4 week average.

    They are paid $200 per day and work on average one day a week through the year, but work full time ($1000 per week) for 4 weeks over Christmas.

    Their 12 month average is:
    48 x 200 = 9600
    4 x 1000 = 4000
    Total annual income 13600
    Weekly average (/52) = 261.54

    This is higher than their 4 week average when they are earning 200 per week, but in the weeks following their full time work their 4 week average changes substantially.

    4 week average
    1 week after = 1000
    2 weeks after = 800
    3 weeks after = 600
    4 weeks after = 400
    5 weeks after = 200 when their 12 month average of 261.54 will take over

    So when this employee takes their holidays makes a huge difference in their technically correct holiday pay rate. Employees who understand this may try to take holidays to optimise this distortion. Employers who understand this may try to stop them taking holidays when the rate is extreme.

    And something that can be confusing – if the employee takes 1 week annual leave should they have 1 day or 5 days deducted from their holidays due?

    This is a simplified example but it can happen like this. One off lump sum payments like bonuses can also distort the 4 week average.

    Another more complex but not uncommon scenario is someone who works during school holidays only or mostly, because many parents want to take time off them.

    This means as low as no pay during terms and full time work during the holidays that are 2-3 weeks 3 times through the year plus 6-8 weeks over the summer.

    This creates very lumpy holiday pay rates using the 4 week average right through the year.

    Many employees have continuously variable work patterns and it gets even more complex.

    Reply
  5. The Holiday Act is widely seen as “too complex” and not workable:

    BusinessNZ and the NZ Payroll Practitioners Association have called for the Holiday Act to be reviewed because they say it is too complex and does not work with many employment situations.

    http://www.stuff.co.nz/national/politics/77740773/ministry-refuses-to-name-supplier-of-payroll-system-after-workers-underpaid

    Reply

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