Do you Trust Your Payroll System?

Bunnings has announced it will backpay staff $11 million as part of its efforts to comply with the Holidays Act. The payment affects 12,235 staff members and the median payment to staff is $317. 

Adding to the cost of getting the holiday payments correct, Bunnings have said all money owed will be inflated to current value in line with the Reserve Bank of New Zealand Consumer Price Index. 

The Holidays Act has faced criticisms and created many challenges for those running payrolls, since it came into law in 2003.  A 2016 government report identified that more than 24,000 people in the public and private sector had been underpaid between $70 and $1800 each since 2012. A total of around $30 million was paid to NZ Police employees alone. 

So, do you trust your payroll system? 

Employers who "set and forget" their payroll systems to calculate leave payments on the basis of what is in the employee's contract as opposed to what they are actually earning may end up not paying staff enough. 

One of the issues is that there are two ways to calculate holiday pay; either on the basis of ordinary weekly pay or an employee’s average weekly earnings over the past 12 months. Employers must pay whatever gives the employee the most money i.e. “the greater of” either ordinary weekly pay or average weekly earnings. 

Employers who calculate holiday pay based on an employee’s contracted hours can get caught out if that person does variable hours or earns a commission or other variable pay. 

The “greater of” calculation does not change when an employee’s standard hours or pay change, but it is important employers understand their obligations when either of these scenarios occurs, for example: 

Reduction in hours: John worked full-time until February this year. Since then, he has worked part-time. John takes leave in July. His average weekly earnings for the past 12 months includes pay from when he worked full-time, meaning it is greater than his new ordinary weekly pay. This results in the leave payment being more than what John would have received had he been at work that week. 

Increase in pay: Jane was paid an annual salary of $50,000 up until February, when it increased to $60,000. Jane takes leave in July. The ordinary weekly pay would be higher than the average weekly pay, meaning Jane would be paid holiday pay at the higher rate of pay when on leave, despite accruing most of the leave at the lower rate of pay. 

Common payroll mistakes occur with:

  • Employees working overtime or variable hours;
  • Employees receiving incentive-based payments (such as commission and bonuses);
  • Employees receiving allowances;
  • Employees returning from parental leave;
  • Employees taking unpaid leave; and
  • Employees whose contracted number of hours is increased or decreased. 

If you have any doubts that your employees may not have been paid correctly, then we would recommend that at the very least you review your payroll system, including historical data for leave payments, with an emphasis on the calculations used to calculate public holidays, sick leave, alternative leave and bereavement leave.

If a Labour Inspector knocks on your door and finds your employees have been incorrectly paid, your payroll provider is likely to point you to the fine print in your contract which releases them from any resulting liability. Telling MBIE “I didn’t know” would also not be an acceptable defence.