Holiday pay “festering can of worms”

Employment lawyer Susan Hornsby-Geluk has said that the exposure of incorrect holiday pay calculations “has lifted the lid off a festering can of worms”.

I think she’s right. Here’s a real life example.

For employees who don’t have a standard or regular pay (they work variable hours and days) the holiday pay calculation as defined by the act is the greater average of their last 12 month earnings or their last 4 week earnings.

The 12 month average is generally fair enough, but the 4 week average can produce some very uneven amounts.

Example: An eighteen year old works a few hours after school during the year. For a month over the Christmas holiday period they work full time. Then they take annual leave. The four week average reflects their full time period of work of a short period which is out of the ordinary compared to the bulk of the year.

Many people have widely varying work patterns. The timing of taking holidays in relation to those work patterns can have a significant effect on holiday pay rates.

Susan Hornsby-Geluk: Holiday pay hassles – can anyone ever get it right?

The recent exposure of employers paying holiday pay incorrectly has lifted the lid off a festering can of worms.

New cases are being identified daily and this has given rise to a crisis of confidence as to whether anyone is being paid in the right way.

The problem stems from the Holidays Act itself, which is antiquated, complicated and fails to cater for modern working arrangements.

Significant changes came into effect in 2004 when the Holidays Act 2003 came into effect.

Prior to that people with irregular work patterns were commonly paid 6% of their earnings as holiday pay each pay period, or as a lump sum at the end of their year. The new Act and determinations bu the department of Labour ruled out the 6% for most employees (not that 6% was the calculation for 3 weeks holiday per year, this changed to 8% when holidays were extended to 4 weeks).

I know of companies, some quite large ones, who continued to use the 6%/8% pay as you go holiday calculation despite the changes.

Fundamentally, however, the Act still rests on an assumption that people work Monday to Friday, 9am until 5pm. Of course this is no longer the case for many.

Difficulties occur where employees work irregular or part time hours. To cater for this, the principles in the Act have been stretched, twisted and judicially re-interpreted, almost to breaking point.

Add complex employment agreements and internal policy and practice into the mix, and it is little wonder that automated payroll systems – which are only as good as the individuals who programme and use them – can have a hard time keeping up.

Many payroll operators have difficulties understanding how to use the Act, still, 12 years after it came into effect.

Firstly, the Act provides for annual holidays in weeks – employees are entitled to four weeks leave a year. This creates all kinds of problems because typically, we take our holidays, and our payroll systems record our entitlements, in days or hours rather than weeks.

While it’s easy to divide a “week” into a number of days for those who have a steady Monday – Friday work pattern, that is not necessarily the case for shift workers, part timers and people who work overtime. In these cases the days and hours of work may change from week to week.

Where employees move between full and part time employment, the situation becomes even more complex, requiring recalculation of leave balances based on the new hours.

When an employee substantially changes their hours it does get very tricky.

If an employee works one day a week for eleven months and then switches to full time five days a week, then after a year is up takes 4 weeks holiday, should they be paid all of the four weeks at the new full time rate? According to the Act, yes, unless an agreed arrangement has been made between employer and employee.

Secondly, the Act contains a significant number of different calculations and formulae that must be used for working out what to pay people who are on holiday or leave.

There are four separate types of leave calculations:

  1. Sick and  bereavement leave and time in lieu are paid Relevant Daily Pay – what they would have earned had they worked the day or days taken off. If someone is scheduled to work different hours and takes sick leave on a day they were scheduled to work eight hours their Relevant Daily Pay is greater than if they were scheduled to work three hours.
  2. Holiday pay for employees who work regular hours/days and have a standard pay rate is the greater of their current rate or their last 12 month average.
  3. Holiday pay for employees who work irregular hours/days and don’t have a standard rate is the greater of their last 12 month average or their last 4 week average.
  4. A final holiday pay (when leaving employment) has two calculations. Holidays due at the last employee anniversary are calculated with the appropriate rate as per 2. or 3. above, with 8% added. For holidays accrued since the anniversary the calculation is 8% of liable gross pay.

Unfortunately many employers fail to complete the two separate calculations required when an employee takes annual holidays, instead just continuing to pay them their usual pay. In doing so employers may be inadvertently underpaying their employees by failing to pay the higher of the two amounts.

There’s a number of ways employees have been incorrectly calculating holiday and other leave values.

Thirdly, many of the calculations in the Act are based on the principle that an employee on leave should be paid what they would usually receive had they worked.

Again, for people with irregular hours, and commission arrangements, this is very difficult to work out. It involves distinguishing between regular and irregular payments, and contractual entitlements from discretionary bonuses. This creates ample room for error and opportunity for misapplication.

That doesn’t apply to holiday pay, it applies to sick/bereavement/time in lieu leave payments.

It is becoming increasingly clear that the Holidays Act is not fit for purpose. Tinkering with it in the past has not fixed the problem, and has only added to the complexity.

What is required is a complete rethink and a clean sheet of paper.

The ‘tinkering’ in 2003 was based on sound principles for those who work regular hours and days, to ensure employees were given 3 weeks holiday and were fairly paid for that (later increased to 4 weeks).

But the Act is an ass when employees work irregular hours or change their work patterns.

An attempt to address it was made in 2010 but that was put in the too hard basket when unions and Government couldn’t agree on how to fix it, so it remains broken.

The lid has been lifted off a festering can of worms. Will it be properly addressed this time?

The Holiday Pay Ass

There’s been more said today about payroll problems at MBIE and the police but the fact is the Holiday Pay law has been an ass since 2004.

Stuff reports State payroll blunder may be widespread, hitting private workers too.

A payroll blunder that left thousands of state sector workers underpaid may be widespread, meaning many in the public sector and in private businesses may have been short-changed.

The problem came to light after police and more recently staff at the Ministry of Business, Innovation and Employment (MBIE) were underpaid because of an error calculating their holiday pay and shift entitlements.

But Finance Minister Bill English on Tuesday signalled that the problems go back to the Holidays Act in 2004 and “there may be a widespread issue in the public sector as well as the private sector”.

I think it’s been well known there have been issues with the legislation that make it very difficult in some scenarios to follow the law.

Prior to 2004 , when paying part time employees with variable work patterns a common way of dealing paying holidays was giving them their 3 weeks (it changed to 4 weeks later) and paying them 6% of what they had earned over the year (liable gross).

The 2004 Holidays Act clamped right down on paying ‘casuals’ (Pay As You Go employees) like that. The new Act meant you could only use the 6% calculation in very limited circumstances (on call non-rostered work). There are many part time workers who were excluded.

In 2010 the Government reviewed the problems with the Act but put any resolution in the too hard basket and left things as they were – so employees struggled on the best they could with an ass of a law.

I know of large private employers who work around the law (don’t follow it) because it’s just too difficult following the letter of the law.

I’m sure many payroll operators won’t be aware of what the law requires them to try and do.

I think most employers strive to pay Holiday Pay fairly, but find their own way of doing it.

I don’t think the problem is widespread in that most employees will be have paid reasonably fairly, but complying with the Act has been a widespread problem for over a decade.