Back in June a new wave of Kiwi businesses were found to be mistakenly underpaying staff their holiday pay entitlements. This “holiday pay nightmare” all started back in 2016 when the news broke that thousands of employees had been short-changed almost $2 billion due to errors in payroll calculations. Four years on, we are still grappling with the issue. So, what is going wrong?
Here we look at why annual leave calculations are so confusing and how to easily demonstrate compliance by calculating leave in weeks.
The root of the problem
The Holidays Act 2003 is a very complex piece of legislation and one of the significant issues with leave calculations stems from Section 16 which states:
“After the end of each completed 12 months of continuous employment, an employee is entitled to not less than 4 weeks’ paid annual holidays.”
Sounds straightforward right. In other words, “employees get 4-weeks holiday pay”. Unfortunately, it’s not that easy. Most payroll systems record annual leave in hours and what starts out as simple math can quickly morph into something far more complicated. Most affected are employers with staff that work highly variable hours and days or who have changes in work patterns.
The easiest way to demonstrate compliance is to hold leave balances in the time units stated in the legislation – i.e. weeks.
Hours, weeks – what’s the difference?
Although it’s perfectly OK to hold your leave balance in hours, those hours must be clearly equivalent to the employee’s 4-week entitlement. They must also genuinely reflect what constitutes a week for the employee at the time the leave is taken, not when earned – and that’s where things get tricky.
Last year, Chris Mar, the Product and Compliance Manager at Datacom, presented about Leave in Weeks and announced that SmartPayroll was working on a solution that makes it easier to remain compliant with the Act. We now hold leave balances in weeks and we have been transitioning customers over to this calculation method since the beginning of the year. Holding leave in weeks:
- Removes the need to recalculate balances when work patterns change.
- Demonstrates the principle that entitlements can only be determined in relation to the work pattern that exists at the time leave is taken.
- Makes it clear that employees receive their correct entitlements.
Let’s look at how to calculate leave for three different types of employees in hours vs weeks.
The “9 to 5er”
The “9 to 5er” is a regular full-time employee and converting weeks from hours is simple math. Take Fred for example.
Based on Fred’s work pattern he would get:
40 hours per week x 4 weeks = 160 hours
The same calculation would apply to someone working regular part-time hours. For example:
20 hours per week x 4 weeks = 80 hours
But, what about someone that starts out as a part-time employee and moves into a full-time role like Mary who is coming up to her 12-month anniversary.
If you hold leave balances in weeks the answer is simple – 4 weeks. Just as it states in the Act.
But what about if you’re calculating leave in hours? What would Mary’s leave entitlement be:
A: 160 hours – based on her full-time hours.
B: 96 hours – based on her part-time hours.
C: 128 hours – halfway between the two.
One of the fundamental principles of calculating leave is that the entitlement is determined by the work pattern at the time the leave is taken, not from the time their employment starts. So, the answer is 160 hours.
Finally, let’s look at Sue who is the most problematic type of employee when it comes to calculating leave entitlements.
The problem with Sue is you can’t offer a fixed entitlement in hours or days on her anniversary, because what represents a week for her is a constantly moving target.
So, what is Sue’s entitlement after a year of service?
A: 24 days
B: 4 weeks
C: 120 hours
There really is only one logical answer – 4 weeks. It’s not possible to work out what 4 weeks of entitlement is for Sue. Therefore, holding her leave balance in weeks is the best way to ensure that she receives her correct leave entitlements.
As you can see, the Act is complex and requires regular monitoring for compliance if employment arrangements change. If you feel a little overwhelmed, you’re not alone and we’re here to help. If you have any questions about compliance with the Act or how SmartPayroll can help to support you and your business, get in touch. We’re committed to making payroll easy and we would love to chat!
Make the switch today!
If you’re keen to move over to SmartPayroll, we make the process super easy. Here’s what you’ll need to do:
- Sign up online
- Get free training – Our Account Services team will call within one business day to start your set up and discuss training options.
- Set up your employees – You’ll then receive an email with your login details. You can start setting your employees up yourself, or provide us with reports from your existing payroll provider.
- Start processing – Once your employees are set up, you can use SmartPayroll for your next pay run.
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