part 1 - ministry of business, innovation and employment · or standards for payroll practitioners...

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Calculating Payment for Leave Summary of the compliance issues with the Holidays Act 2003

LABOUR AND COMMERCIAL

ENVIRONMENT GROUP

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MINISTRY OF BUSINESS, INNOVATION & EMPLOYMENT 2

CALCULATING PAYMENT FOR LEAVE – SUMMARY OF THE COMPLIANCE ISSUES

WITH THE HOLIDAYS ACT 2003

Contents Acknowledgements ....................................................................................................................... 4

Purpose of this Report .................................................................................................................. 5

Executive Summary ....................................................................................................................... 5

Size of the issues ................................................................................................................... 5

Nature of the issues .............................................................................................................. 6

Background to the issues .............................................................................................................. 7

Common issues in the calculation of payment for leave ...................................................... 7

Approach taken to gather information ......................................................................................... 8

The process we undertook ........................................................................................................ 8

During the process we met with 37 employers and payroll providers ................................. 9

Other information considered .............................................................................................. 9

Problem definition ...................................................................................................................... 12

Estimated size of non-compliance with the Holidays Act ........................................................... 12

Key factors in non-compliance ............................................................................................ 12

Available data used ............................................................................................................. 12

Survey of Working Life ......................................................................................................... 12

Tax Payment Data ............................................................................................................... 13

Business Demography ......................................................................................................... 13

Analysis ................................................................................................................................ 13

Range of employees affected .................................................................................................. 13

Low estimate – 194,700 workers potentially affected........................................................ 13

High Estimate – 763,350 workers potentially affected ....................................................... 13

Range of arrears owing ........................................................................................................... 15

High estimate – potentially $500 per year underpaid per affected employee................... 15

Low Estimate – potentially $250 per year underpaid per affected employee ................... 15

Summary of the estimated size of non-compliance ............................................................... 16

Anecdotal Evidence ................................................................................................................. 17

Identified Causes of the Issues .................................................................................................... 17

Key Theme A: There is limited capability and resources applied to comply with the Holidays Act ........................................................................................................................................... 18

Finding 1: Many employers are not dedicating sufficient resources to ensure compliance with the Holidays Act .......................................................................................................... 18

Finding 2: Payroll practitioners remain relatively under skilled for the tasks required of them .................................................................................................................................... 20

Finding 3: Many employers are not aware of the importance of payroll in their business 22

Finding 4: Many employers do not refer to the Holidays Act when calculating payment for leave .................................................................................................................................... 23

Key Theme B: Employer practices and employment arrangements do not align well with the Holidays Act ............................................................................................................................. 25

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Finding 5: Business practices make it difficult for employers and employees to engage on holiday pay .......................................................................................................................... 25

Finding 6: Working arrangements with irregular hours and have fluctuating pay add significant complexity to leave calculations ........................................................................ 26

Finding 7: Employers often have provisions in their agreements that are difficult to apply to leave pay calculations ..................................................................................................... 27

Finding 8: Many employers consider their systems to be fully automated and do not realise the need to regularly manually intervene ............................................................... 28

Finding 9: Employers and payroll providers do not often engage on their roles and responsibilities .................................................................................................................... 29

Finding 10: Record keeping requirements are often not met ............................................ 31

Finding 11: The information used to calculate leave payments is often incorrect ............. 31

Key Theme C: Adequate information and guidance is not readily available to assist employers, employees and payroll providers ......................................................................... 33

Finding 12: There is a lack of clear channels for guidance .................................................. 33

Finding 13: Employers and employees find it difficult to understand the Act, placing considerable stress on the employment relationship ......................................................... 35

Finding 14: Employers do not seek legal advice, when they do advice often varies .......... 36

Conclusions ................................................................................................................................. 36

Next Steps ................................................................................................................................... 37

Advice, Information and education ......................................................................................... 38

Information and guidance tools .......................................................................................... 38

Education and training ........................................................................................................ 39

Supportive instruments ........................................................................................................... 39

Audit tools ........................................................................................................................... 39

Payroll software development ............................................................................................ 39

Code of practice or standards ............................................................................................. 39

Consistency in practices .......................................................................................................... 40

Alignment with other systems ............................................................................................ 40

Deterrence instruments .......................................................................................................... 40

Enforcement activity ........................................................................................................... 40

Legislative work ....................................................................................................................... 40

An additional simplistic calculation ..................................................................................... 40

Amendments to clarify provisions ...................................................................................... 40

Significant amendments to simplify pay calculations ......................................................... 41

Annexes ....................................................................................................................................... 41

Annex 1: Discussions on Calculating Payment for Leave ............................................................ 42

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Acknowledgements

The Ministry appreciates the engagement from all those with whom we had discussions with. The process has been very rewarding, with the Ministry now having clearer insight into how the Holidays Act is being implemented. This would not have been possible without the commitment of those who have made the effort to engage with us. We thank you again for your assistance with this process and look forward to further engagement to address the problems identified in this report.

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Purpose of this Report

To define the size and nature of the issues that result in non-compliance with the Holidays Act 2003, and to identify a range of possible options to improve levels of compliance.

Executive Summary

The Holidays Act provides employees with minimum entitlements to annual holidays, public holidays, sick leave and bereavement leave. The Holidays Act outlines how to calculate the minimum payment for each type of leave. MBIE is responsible for the various pieces of legislation which provide minimum employment entitlements, including the Holidays Act. The Labour Inspectorate (an enforcement arm of MBIE) has found, based on dealing with cases of non-compliance, that there may be a range of issues leading to widespread non-compliance with the Holidays Act.

To address this concern, MBIE has begun looking into the size and nature of the issues that may result in non-compliance with the Holidays Act. This document sets out our findings in regards to the size and nature of the issues, and provides a range of broad areas to improve the levels of compliance. This report takes into account information gathered from discussions with payroll providers and large employers. This information has also been complemented with research findings about the compliance issues facing smaller businesses, and data analysis of official information to assess the scope of the potential non-compliance.

Overall, the problem can be defined as follows: a large number of employers consider it difficult to implement the Holidays Act 2003, which often leads to miscalculations of payment for leave. Analysis of the information we have obtained in this project to date suggests there are several factors that contribute to non-compliance with the provisions for calculating payment for leave in the Holidays Act. The factors that contribute to this problem can be separated into three key themes:

A. There is limited capability, effort and resources applied to comply with the Holidays Act

B. Employer practices and employment arrangements do not align well with the Holidays Act

C. Adequate information and guidance is not readily available to assist employers, employees and payroll providers.

Size of the issues

The common factors that we have identified as contributing to non-compliance are employing workers who:

have fluctuations in the hours they work, and/or

receive additional pay on top of their wages.

These factors may not have been recorded or included in the required calculation of leave payments. For example, miscalculations may occur if an employee works 12 hours instead of their standard eight hours, or if the employee is paid an additional commission or allowance for completing a certain task (such as working a night shift). In addition, further errors may occur where employment agreements have complex conditions that cannot easily be aligned with the Holidays Act or payroll system.

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Considering a range of data available about the prevalence of irregular working patterns and fluctuating pay, we consider that between 194,700 and 763,350 employees could be affected by non-compliance. These figures are based on data of permanent workers who receive overtime pay at a higher rate (low estimate) and people who receive income that has a high rate of variability (high estimate). The high and low estimates of the amount underpaid per worker are between $250 and $500 per year. This leads is to a low estimate of a financial impact of miscalculations being $48.7m per year underpaid to workers and a high estimate of $382m per year underpaid.

Nature of the issues

Despite payroll being a complicated business practice, there is a still a limited amount of resources dedicated to compliance. Without payroll expertise, it is difficult to ensure compliance with the Holidays Act. We consider that there is a low demand for and supply of skilled payroll practitioners and this is correlated with an undervaluation of the importance of payroll.

The employees most likely to have inaccurate calculations of their leave payments are those who are working irregular hours or have fluctuating pay (due to bonuses or allowances). When pay is fluid, it is essential for payroll practitioners to manually intervene in their payroll systems, or to maintain accurate records of time worked, to ensure correct payment. However, it is evident that most employers have a ‘set and forget’ approach to their payroll; where they incorrectly consider their payroll to be automated and do not regularly manually check their payroll is complying with the Holidays Act.

Many stakeholders consider that the limited information available to assist with complicated employment arrangements cannot easily be translated to their business operations. MBIE is one source of this information, as are payroll system providers, and other third parties. There appears to be a reluctance to seek legal advice as this can vary depending on different interpretations of the Holidays Act.

In the course of developing this problem definition, we have identified a range of areas for further investigation to resolve the issues identified above. These areas cover provision of information and guidance, audits of software tools and their development, a code of practice or standards for payroll practitioners and potential changes to the Holidays Act to simplify the system of required calculations.

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Background to the issues

MBIE is responsible for the various pieces of legislation which provide minimum employment entitlements in the workplace and also the enforcement of these minimum entitlements (primarily through the Labour Inspectorate). The Holidays Act provides employees with minimum entitlements to annual holidays, public holidays, sick leave and bereavement leave. Calculation of the minimum payment for this leave is also provided for in the Holidays Act.1 To ensure that employees are not disadvantaged financially by taking leave or holidays, the Holidays Act seeks to pay an employee what they would have received if they had worked. If what an individual would have received that day cannot be determined, an average of what they have been earning over a period of time is used.

Common issues in the calculation of payment for leave

We are aware of instances of some employers and payroll providers having issues calculating payment for leave in accordance with the Holidays Act. The three main issues that we identified prior to our discussions were:

Determining the payment rate applying to annual holidays2

o Holiday pay must be the greater of ordinary weekly pay or average weekly earnings. If this is not compared it causes significant miscalculations, particularly where employees have worked variable hours, and/or their hours have included any additional pay.

The payroll system not recording, or not having a function to record paid days, for the purposes of complying with bereavement leave, alternative holidays, public holidays and sick leave requirements3,4

o Employers must keep holiday and leave records for all employees for not less than 6 years. As part of the records, employers must document the days which the employee actually works, if the information is relevant to the calculation of payment for entitlements.

o Employers must use relevant daily pay or average daily pay to calculate bereavement leave, alternative holidays, public holidays and sick leave. If it is not possible or practical to calculate an employee’s relevant daily pay, or the employee’s daily pay varies in the pay period in question, an employer may use average daily pay. If an employer instead ‘guesses’ the daily rate, it is possible that it will lead to relevant daily pay being incorrectly determined, which is unlawful under the Act. Therefore, average daily pay should be used as the calculation.

1 Employers and employees are free to agree on different amounts and types of leave (and how to

calculate payment for any form of leave) on the condition that it is above the minimum provided for in the Holidays Act 2003. 2 Section 21 of the Holidays Act 2003

3 Section 81 of the Holidays Act 2003 provides recordkeeping requirements

4 Calculations for these provisions are in Sections 9 and 9A of the Holidays Act 2003

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In discussions held in September and October 2014, payroll providers and large employers provided frank feedback on the issues that lead to non-compliance. These discussions were conducted with an assurance that the feedback provided would be treated in confidence. As such, this report does not attribute any comments to particular people, and does not name the companies and payroll providers that generously gave their time and insights to the project team.

A small minority of those we met with preferred not to provide detail on any issues and focused their discussions on determining what is and is not compliant. This information was noted, and gave insight to the amount of uncertainty on how to comply with the legislation and, in some cases, common misconceptions of the Holidays Act.

It was important that our findings were representative of the experiences in different industries and working arrangements, and the effect this has on calculating payment for employees in New Zealand. We therefore sought to meet with large employers and large payroll providers that would encompass a variety of industries and a large proportion of New Zealand’s workforce. It was also necessary for the employers or payroll providers to have some experience with payrolls that deal with irregular hours or fluctuating pay, as we determined these to be key contributing factors to the issues with calculating leave payments.

During the process we met with 37 employers and payroll providers

We approached approximately 50 employers and payroll providers to meet with us to discuss any issues they were facing in calculating payment for leave. Thirty seven of these stakeholders agreed to meet with the project team. To better frame the discussion we sent out a background document (see Annex 1).

With the remaining stakeholders (most of whom were employers), payroll managers or team managers routinely stated they were unavailable and did not have anything to contribute to the process. We determined that many of these stakeholders simply did not wish to speak about how they are operating. It is unknown whether this was due to concerns with compliance or general unfamiliarity with government.

Payroll Providers

We met with 22 payroll providers, who represent approximately 95 per cent of employers in New Zealand who use payroll software. There are approximately 100,000 smaller employers who may or may not have payroll systems. If they do, they are likely to be ‘off-the-shelf’ or licenced payroll systems that are inexpensive to purchase and operate. Larger employers are more likely operate a formal and higher quality payroll system, which may be outsourced or managed in-house.

Large employers

We met with 15 employers (with 100 or more staff), who employ approximately 20 per cent of the workforce who work for businesses with 100 or more employees (approximately 10 per cent of the workforce). This approach was considered the most effective way to sample a significant proportion of the workforce in areas that are likely to have employees with fluctuating pay or irregular hours.

Other information considered

Small businesses

New Zealand has a high proportion of small to medium sized enterprises (SMEs). An alternative approach to understanding the challenges that SMEs face was required, as any direct consultation with a representative sample of small businesses was determined to be cumbersome at this stage of the process. We recommend that more direct discussions with

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small businesses or small business representatives occur later in the testing of the problem and discussions around any potential solutions. In the meantime, we have analysed research developed within MBIE on the issues that small businesses face with calculating leave.

There are also two key pieces of research conducted by the Ministry (one as the former Department of Labour) which shed light on the issues that small businesses face in calculating payment for leave. The first piece of research considered for this report is ‘The effect of the Holidays Act 2003 on small and medium enterprises: A qualitative study’ published in 2009 (2009 study)6. This research involved interviews with employers, payroll administrators and employees from 10 independent, private sector businesses with between 1 and 40 employees. The firms selected were in the transport, manufacturing, retail or hospitality sectors due to their tendency to employ staff with varying daily or weekly working hours. As this was a small qualitative study, its findings are only indicative of the issues.

The second key piece of research considered for this report was the ‘Evaluation of the Short-term Outcomes of the 2010 Changes to the Employment Relations Act and Holidays Act’ published in 2014 (2014 study)7. This evaluation used a mixed-methods approach, using data from a number of sources; including surveys and interviews with key commentators, employers, employees and unions. Although not specifically dealing with the general complexities of the Holidays Act, the research highlights a number of issues around the effectiveness of the recent amendments to assist employers to understand and apply the Act and the applicability of the amendments.

Data from previous cases

The Labour Inspectorate has dealt with many cases of miscalculation of leave payments. Research was conducted on previous cases to determine whether there were any common factors that would be relevant to the development of this problem definition.

Analysing the 16 audits recently completed by the Labour Inspectorate in Canterbury that identified breaches of minimum employment standards, 12 (75 per cent) of these breaches involved breaches of minimum holiday entitlements. Broader research further supports this level of non-compliance, with 55 per cent of all complaints alleging a breach of the Holidays Act between 1 July 2012 and 29 October 2014. The number of allegations of Holidays Act breaches is generally higher in organisations with 20 or less staff. However, the highest proportion is in organisations that have 501+ employees. The table below illustrates the proportion of all alleged breaches in each grouping of employer size (where the size of the employer is recorded) which relate to the Holidays Act.

6 Research found here: http://www.dol.govt.nz/publications/research/effect-holidays-act-on-

smes/effect-holidays-act-on-smes_02.asp 7 Research found here: http://www.dol.govt.nz/publications/research/short-term-outcomes-2010-

changes-era-and-ha/short-term-outcomes-2010-changes-era-and-ha.pdf

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Table 2: Proportion of allegations in each employer size grouping which relate to the Holidays Act

Source: Labour Inspectorate Database 1 July 2012 – 29 October 2014

In cases where the size of the organisation has been identified in a complaint, a significant proportion of the complaints are made against small businesses. The table below shows that 37 per cent of these complaints were made against employers with five or less employees, with 66 per cent of complaints being made against employers with 20 or less employees. There are significant limitations with this data as not all complaints identified the size of the business. However, these proportions illustrate that employees in small businesses are somewhat more likely to make a complaint against their employer for breaches of employment standards. This level of complaints may reflect the ability of larger businesses to resolve issues.

Table 3: Proportion of Holidays Act complaints by size of employer

Source: Labour Inspectorate Database 1 July 2012 – 29 October 2014

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Problem definition

The problem can be defined as follows: a large number of employers consider it difficult to implement the calculations for leave payments outlined in the Holidays Act 2003. These difficulties often lead to miscalculations of payment for leave. The three key themes that attribute to this problem are that:

A. There is limited capability, effort and resources applied to comply with the Holidays Act

B. Employer practices and employment arrangements do not align well with the Holidays Act

C. Adequate information and guidance is not readily available to assist employers, employees and payroll providers.

The findings that have led to the development of this problem definition and the three themes above are outlined in more detail in the identified causes of the issues section (see page 17 ).

Estimated size of non-compliance with the Holidays Act

To aid in the understanding of compliance issues with the Holidays Act it is important to consider the size of the issues. Robust and precise empirical estimates of the size of non-compliance with the Holidays Act are not possible due to limited data on business operations at a detailed level. The following analysis provides approximate estimates of the size of non-compliance based on available data and the factors that increase the chance of non-compliance. The aim of this section is to provide a set of estimates that identify the number of employees likely affected by non-compliance and the potential size of arrears.

Key factors in non-compliance

The common factors that we have identified as notable in most instances of non-compliance are having working arrangements that:

have fluctuations in the hours worked, and/or

include additional payments on top of wages.

These factors may not have been recorded and/or included in the required calculation of leave payments. For example, miscalculations may occur if an employee works 12 hours instead of their standard eight hours, or if the employee is paid an additional commission or allowance for completing a certain task (such as working a night shift). In addition, further errors may occur where employment agreements have complex conditions that cannot simply be aligned with the Holidays Act or payroll system.

Available data used

To estimate the size of the issues, we have considered the following data sets.

Survey of Working Life

The Survey of Working Life (SOWL) seeks to provide reliable statistical data to monitor changes in the employment conditions, working arrangements and job quality of employed people in New Zealand, and to better understand the reasons for and implications of these employment patterns.

From the 2012 Survey of Working Life we have the following information on workers:

• Type of employment relationship • Wages and earnings

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Key Theme B: Employer practices and employment arrangements do not align well with the Holidays Act

Business models vary from business to business. It is important that businesses have the freedom to structure their organisations to best suit their commercial environment, allowing them to maximise their economic activities. This means that some businesses will run 24 hour, 7 day a week operations, while others may operate between 1 p.m. and 12 a.m. Wednesday to Sunday. Due to this large variability in how businesses operate, any relevant legislation is going to be tested in terms of its applicability to all situations.

Our findings suggest that due to the large variability in business practices, many payroll practitioners face increasingly complex and unique situations that they must then apply to the Holidays Act. A strong example of this is in the healthcare sector, where a doctor may have multiple roles (in some cases in excess of 10 roles) which are remunerated at differing pay rates. It is a particularly complex task to determine entitlements and then calculate leave payments for someone whose hours vary, roles vary, and pay fluctuates.

Finding 5: Business practices make it difficult for employers and employees to engage on holiday pay

The Holidays Act is set in the context of an employer and employee agreeing on the amount of work hours to be worked and remuneration for this work. This allows employers to best understand how to apply the Holidays Act as they have contextual information on the employment relationship. In larger businesses, it is expected that this role is delegated to managers who can then pass this information on to the payroll function.

Due to the dispersed nature of many businesses, the connections between payroll (whether in-house or outsourced) and business operations have weakened and become systematised. For example, to calculate payment for leave, payroll relies on managers to input the correct hours and pay owing into software which is then sent to payroll. Others may rely on time and attendance software to send through the hours to payroll with managers simply signing out the hours before payroll organises the relevant remuneration.

The provisions of the Holidays Act mean that systematising must be met with significant caution. We consider that most of the inadvertent and unknown breaches are occurring due to poor practices relating to how information is produced by systems, which then dictates how leave payments are calculated. The use of outsourced or detached in-house payroll means that the payroll practitioners in these areas have no oversight of whether the information they are receiving is correct. This dramatically reduces the ability of the payroll staff to effectively audit their payroll system.

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their leave payments are less than another employee’s in the workplace (even when lawfully lower), they often feel as though the employer is acting unlawfully and withholding pay. The employer is likely to feel untrusted in their approach and may also feel that the employee is attempting to ‘game’ the system when leave is taken when the values are higher.

The 2014 study into the amendments to the Holidays Act highlights the creation of this tension due to the limited knowledge of the provisions of the Act. The study found that workers may feel disadvantaged due to unequal payments of leave, despite completing the same job and receiving the same wage rate. The employee, thus, considers that it is the employer who is providing inequitable payments, when the employer is following the provisions in the Holidays Act.

Finding 14: Employers do not seek legal advice, when they do advice often varies

Seeking legal advice is one of the most effective ways for employers to assess whether they are compliant with the Holidays Act. Many larger employers have internal legal resources, however few utilise this resource to assess compliance due to the low priority and general disconnection of payroll with the business. Some larger employers do dedicate significant internal resources to comply with the Holidays Act. These employers have the ability to allocate resources to this area due to the size of their business, meaning that the smaller businesses are disproportionately affected by the cost of assessing compliance.

Those who seek legal advice often feel that the advice does not align with other information they have been provided with. Due to the complexity of working arrangements and limited case law in this area, legal opinions can often differ. Those few who seek certainty that their approach is compliant often receive a variety of legal opinions before coming to a decision on how to proceed. Some employers spend $50,000 per year on a variety of legal opinions to ensure they are compliant with the legislation. This adds further uncertainty to a highly complex area of minimum employment standards.

Conclusions

Using the information we have collected from interviews and a number of other sources, it is apparent that non-compliance is likely to be widespread. Per employee this non-compliance is likely to have a relatively low cost for most, with the range of wage arrears depending on the business capability and complexity. On a national scale, the cost of non-compliance is likely to be significant. To reiterate, the problem can be defined as follows: a large number of employers consider it difficult to implement the calculations for leave payments outlined in Holidays Act 2003. These difficulties often lead to miscalculations of payment for leave.

We have found that there is limited capability, effort and resources applied to comply with the Holidays Act. Many businesses require significant resources to comply with the Holidays Act due to the level of complexity in their workplace arrangements. However, the capacity of most payroll functions is not adequate to comply with the Holidays Act. The complexity of payroll usually stems from our finding that employer practices and employment arrangements do not align well with the Holidays Act. The variety of employment arrangements, which are often unique to any given business, means that business processes and engagement with payroll providers and employees is not sufficient to comply with the Holidays Act. Due to this complexity, many payroll practitioners and payroll providers seek guidance on how to comply. However, we have found that adequate information and guidance is not readily available to assist employers, employees and payroll providers. There is an over reliance on general guidance, with specific advice varying in terms of its accuracy.

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Next Steps

It is appropriate to consider potential options to improve the system. We intend to consult stakeholders on any options to ensure that we consider the impact any options will have and whether they will be effective in achieving the desired outcomes.

To ensure that regulation of the Holidays Act meets government standards, the areas to consider for improvement will be aligned with the Treasury’s Best Practice Regulation model (2011). This model outlines how Government and industry can assess the performance of regulatory systems. The key principles that any system should be assessed against are:

a. Growth Supporting

○ Economic objectives are appropriately considered in any requirements.

b. Proportional

○ The burden of any requirements is relative to the desired outcomes.

c. Flexible

○ The system enables individuals to meet the requirements by adopting their own low cost or innovative approaches.

d. Durable

○ The system can respond to changing circumstances and environments.

e. Certain and Predictable

○ The system provides certainty for those who must implement the requirements.

f. Transparent and Accountable

○ The development and enforcement of any requirements are transparent, justifiable and open to public scrutiny.

g. Capable Regulators

○ The system regulators have the means to effectively and efficiently operate the system.

Using these objectives and reflecting on the issues discussed in the previous section of this document, we consider that the following areas could be contemplated as broad areas to improve, to produce a system that is recognised and complied with:

I. Advice, Information and education

○ Information and guidance tools

○ Education and training

II. Supportive instruments

○ Audit tools

○ Payroll software development

○ Code of practice or standards

III. Consistency in practices

○ Alignment with other systems

IV. Deterrence instruments

○ Enforcement activity

V. Legislative work

○ An additional simplistic calculation




Annex 1: Discussions on Calculating Payment for Leave

part 1 - ministry of business, innovation and employment · or standards for payroll practitioners...

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