Overdue attempt to fix hopeless Holidays Act

The Holidays Act 2003 introduced new ways of ensuring employees get three weeks holiday per year (increased to four weeks in 2007), and also new ways of calculating holiday and sick pay and other leave.

The intent was good, and it works well for people who keep working regular hours, but in practice it has been terrible where employees work variable hours and have changing work patterns. Abiding by the law is difficult.

The last Government tried to sort it out but gave up, putting it in the too hard basket, leaving it a basket case.

Many employers then found out that they had been calculating holiday pay wrong (forced into attempting workable approximations) and some have had to front up with a lot of money to set things sort of right.

Since then employer groups and unions seem to have accepted that their stand off was not working and a solution needed to be found.

The Government has just announced they will review the Holidays act and try and sort it out. This time they have called it a taskforce, as they have already overused the terms working group, committee, inquiry and review.

But this one is overdue and needs to come up with a practical solution.

Tripartite taskforce to review Holidays Act

A taskforce that brings business, workers and Government together has been established to recommend changes to the Holidays Act 2003, says Workplace Relations and Safety Minister Iain Lees-Galloway.

“The Holidays Act was enshrined in law to provide for minimum entitlements to annual holidays, public holidays, sick leave and bereavement leave, and protect worklife balance for workers,” says Iain Lees-Galloway.

“However, there’s been enormous change in our labour market over the past fifteen years and it’s clear we need to look at the Holidays Act with a fresh pair of eyes and ensure it is fit for modern workplaces and new working arrangements.

“We need law that provides certainty to both employers and employees so that employees receive their correct entitlements. The legislation needs to be straightforward and simple to implement, and deliver fair rest and entitlements for workers.

“With an increasing variety of work patterns and pay arrangements, the legislative requirements of the Act are proving difficult and costly for employers to apply and employees are not receiving their full entitlements.

“The time is now right to directly address the underlying issues with the Act. I’ve been approached by Business NZ and the Council of Trade Unions to help tackle this vexed and complex set of issues and I’m excited about the work we have ahead of us.

“The working group will be chaired by Gordon Anderson, a law professor at Victoria University with extensive experience in employment law, both as an academic and as a barrister. He will chair a taskforce that brings together employer, worker and government representatives.

“I expect this group to consult widely to gain a comprehensive understanding of the issues with the current legislation, and work closely with technical experts such as payroll and other business service providers to assist with the design and testing of policy options to ensure they will work well in practice. The group will report back with recommendations in mid-2019.

“The Labour Inspectorate at the Ministry of Business, Innovation and Employment (MBIE) has been working with a wide range of stakeholders to improve compliance with the Holidays Act through the co-creation of new guidance and tools. I am grateful to all those people who contributed to this work.

“Employers are obligated to remediate employees for current and historic underpayments and must be compliant with the current Act until new legislation comes into effect.

“MBIE and the Labour Inspectorate will continue to provide support and engagement on these issues to assist employers in the meantime,” says Mr Lees-Galloway.

For more information on the Holidays Act 2003 review, visit here.

Being compliant with the current act can be very difficult, because the current law just doesn’t allow anywhere near properly for variables.

Holiday legislation is too complicated

Businesses are still complaining about the complexities of the 2003 Holidays Act, with good reason.

The Act was well intentioned and is fine for employees with regular work patterns, but it can be horrible dealing people who have variable or changed work patterns and payments.

Attempts have been made to address the obvious shortcomings but the National led government put it in the too hard basket, ridiculous for a party that claims to support businesses.

RNZ: Holiday legislation ‘too complicated’

A survey from the law firm Simpson Grierson found nine out of 10 firms placed simplifying the Act at the top of their employment wishlist.

That doesn’t surprise me. I deal with a number of companies running payrolls and holiday payments and accruals are major causes of confusion and difficulties.

David Jenkins from the Payroll Practitioners Association said the legislation was messy, and hard for employers to get their heads around.

“The only way to be compliant with the Act is to constantly watch, monitor and change settings in your payroll system. It’s way over the top in regards to compliance.”

Employers’ main concern is how the Act calculates annual leave, public holidays, sick days, and bereavement leave.

With the rise of part-time and casual work, they say the Act makes it near-impossible to accurately figure out how much workers are owed when they take leave.

It isn’t impossible but it can be very difficult, and it can also come up with some ridiculous calculations, especially with holiday pay.

David Jenkins said there was a lack of clarity, and the legislation – which should help employers – actually hindered them.

The provision in the Act for four weeks holiday after 12 months continuous employment was straightforward for those who work the same hours every week, he said. “But as soon as I get someone that works different hours week after week, when they get to 12 months you get four weeks of…what? That’s the problem – the Act can’t help you define what a week is.”

Some employees don’t work some weeks, and work anywhere from a day to seven days a week at other times. If they take a week holiday how many days should they be paid for?

It’s worse if they take a day off, and some awards and employments allow them to take part days or hours off, and that can be diabolical trying to work out what to pay them.

It’s not just small businesses that have had problems.

Since 2012, the Labour Inspectorate has been investigating some of the country’s biggest employers to make sure they’re complying with the Act.

Of the 118 completed investigations, 37 organisations – about a third – have had to pay arrears, to the tune of at least $43 million.

Prior to that I complained to a major employer who was not calculating holidays correctly, and they had a lawyer supporting their position.

But Council of Trade Unions’ president Richard Wagstaff said it employers should figure out their obligations rather than complain the legislation was flawed.

“The big problem here is the fact that employers haven’t done enough to apply the current Act, and to quickly call for a change to that when they know they’ve been caught short doesn’t seem right to us.”

Wagstaff is either way out of touch, or is deliberately trying to play down the problems.

If calculated ‘correctly’ employees with variable work patterns can be advantaged as they get the highest of two calculations. One of those calculations is their last 4 week average pay rate.

If, for example, an employee works an average of say 10 hours a week for most of the year, then works 40 hours a week for a few weeks over Christmas, the timing of when they take holidays can make a big difference to the calculation.

The holiday pay law is definitely an ass, and this became apparent fairly quickly after it came into force in 2004. Businesses still have trouble with it, because in some situations it is unworkable.

Governments since then have ignored numerous pleas to fix it. That is a disgraceful abrogation of responsibility.

There is a reason people keep complaining about the act – in some respects it is crap.

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?