Holidays Act Compliance: 5 'blind spots' of traditional NZ payroll software

Holidays Act compliance

Many New Zealand businesses face difficulty in achieving complete compliance with the Holidays Act (2003). Between 2012 and 2017, 129 of New Zealand’s larger organisations were audited by the Labour Inspectorate, and more than 70% were found not complying with at least one aspect of the Act. 

But what exactly is causing this?

Apart from the Act’s inherent nature of lending itself to multiple interpretations, inefficient, traditional payroll software plays an equal role in affecting compliance as well.  

To help payroll practitioners achieve compliance, we’ve listed five blindspots of traditional payroll software to look out for when managing NZ payroll:

1. Non-compliant set up process

Many NZ payroll systems make it difficult for payroll practitioners to achieve compliance without manual workarounds. Payroll practitioners must find software that allows them to set employees up with unique arrangements, entitlements, deductions and payment rates. NZ software also commonly stores annual leave in weeks days or hours than the legislatively required weeks. MBIE advises that keeping leave balances in hours or days can lead to non-compliance if work patterns change. Software which stores annual leave in weeks and determines employee entitlements at the time they take leave is best practice.

2. Default calculations

Payroll practitioners should avoid software that applies the same default calculations for every employee irrespective of individual work arrangements. Payroll technology should allows users to import historical data and configure an employee’s working week as per their employer agreement. Practitioners should also ensure correct pay rate/leave templates are in place for accurate calculations to be made. 

3. Application of annual leave

According to the Act, an employee's annual holidays leave balance should be 4 weeks only upon completion of their first 12 months of employment. However, employers obviously want to keep leave liabilities down and want to give their employees a break before their 12 month mark. Employers and payroll professionals must be very careful that their payroll system is actually meeting the requirements of the Act so they do not end up with additional, unexpected issues.

It is quite standard to see an employee's annual holiday balance accruing and shown on payslips before the 12 month employment mark, but the calculation of this accrual is often not correct in traditional payroll systems.

Just like when an employee takes annual holiday at the 12-month mark from their 4 weeks of entitlement, the greater of Average Weekly Earnings (AWE) and Ordinary Weekly Pay (OWP) must be done. The issue here is that AWE is a 52-week average divided by 52. If the employee has not been continuously employed for 12 months, the divisor for AWE must reflect the time that the employee has actually worked (whole or part weeks). Many NZ payroll systems do not reduce this divisor and this either goes unnoticed, or if the payroll admin does check and realise, they will have to do manual workarounds to fix this.

4. Absence of calculation methods

Leave calculations require consideration of certain set circumstances like:

  • Employee’s ordinary weekly pay (OWP) at the beginning of the annual holiday 
  • Employee’s average weekly earnings (AWE) for the 12 months just before the end of the last pay period before the annual holiday 
  • If a public holiday falls during an annual leave period 

Accessing a breakdown of calculations helps payroll professionals stay informed on the accuracy of data produced. Having a record of the breakdown of the calculations is also necessary for employers for auditing purposes and employee queries.

5. Reliance on paper based record keeping

The Act requires employers to keep six years worth of records of employee hours and leave entitlements. Software that doesn’t include time and attendance and employee self service features makes this challenging. Outdated processes and systems often result in businesses using paper processes, which make record keeping extremely difficult, and collecting data very frustrating.

Achieve compliance confidently with KeyPay

With the crucial role payroll software plays in compliance, it’s important to seek sophisticated technology that can manage complex rules and calculations whilst providing justification for its methods. Unless payroll professionals embrace the right technology, they will always run the risk of human error and non-compliance when dealing with the Act. 

KeyPay is a cloud-based payroll and workforce management platform built for New Zealand legislation to ensure full compliance for payroll bureaus and practitioners. KeyPay’s automated leave calculations ensure holiday pay is accurately interpreted and applied, compliant with the Holidays Act (2003). Users can set up employees in the system, confirming their contracted hours and defining their standard working day hours. KeyPay then applies the allocated leave entitlement automatically at the correct time for each employee. The system also breaks down leave calculations to show exactly how each amount is determined, providing compliance confidence.

For more insights, download our white paper: Navigating the Holidays Act (2003) and ensuring payroll compliance.

Carissa Tan

Marketing at KeyPay


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