Understanding the 'NOTS' of the NZ Holidays Act

NZ Holidays Act

I get questions every day on the Holidays Act and find that the fundamentals are still not understood, or for whatever reason are not being correctly applied to payroll.

The issue is there are some payroll systems that do not provide the basic requirements that the Act states must be done. Also, there are people running and managing payroll that do so with their view of how an employee should be paid rather than what the legislation states must be done.

In this post I cover the NOTS of the Holidays Act and where there are areas we can deliver on today to ensure better compliance.

All leave provided under the Holidays Act is NOT paid just at the ordinary rate of pay

Unless the employee gets nothing else EVER then this may work, but this is seldom the case. Even an hourly rate increase will mean the new rate will override the old one if OWP is used (greater of AWE and OWP). Many payroll systems being used for NZ payroll are just paying the ordinary rate of pay for all leave, and that is a reason why these systems should not be used. If an employee gets additional taxable and agreed payments always on the day or in the week, then that is part of the day or the week and inflates the leave rate. 

Annual leave is calculated using the greater of AWE and OWP NOT just one calculation

When calculating annual holidays, the Act is clear on the calculation to use: the greater of AWE and OWP. So, why do I see only one being used or a variation of the two that does not link to the Act’s calculation? The legislation does not let you create something else unless you can always show it is better, but you still need to demonstrate that in relation to the greater of AWE and OWP.

A week is by agreement; NOT defined by the employer or the payroll system

If you are providing 4 weeks of annual holiday entitlement after the employee has met the 12 months of continuous employment threshold, at the same time you need to define what a week is for the employee, including number of days in a week and number of hours in a day. This is because employees don’t always take a week of annual holidays. I still see proportional accrual being used that uses 4/52 of every hour worked to create a pot of hours. This is unworkable as it still does not define a week, a day or the hours in a day. A week is by agreement, so this must be defined with the employee, and it needs to genuinely represent a week that they work (Section 17). Not doing so undermines the whole Act in trying to calculate leave in payroll.

Working on a public holiday is based on RDP x .5; NOT just ordinary hours worked

If an employee works on a public holiday, they will get 1.5 of RDP for actual hours worked less penal rates. Payroll systems often pay ordinary rate at 1.5 or are set up to exclude any other payment that would be part of the day. The Act states RDP and if the day cannot be defined, then ADP must be used even if the employee worked or took the day as a public holiday.

How to know if a bonus is NOT discretionary

If a bonus is agreed in an employment agreement, and/or the employee has to do something to get it (agreed), and/or there is an expectation set that the employee would get it, then the bonus is NOT discretionary and cannot be excluded from the leave rate!

It is very common to state a bonus is discretionary when in fact it is not.  There is a good reference on the Employment NZ website on “What ‘discretionary’ payments mean” so I won’t say anything more.

RDP is NOT calculated using a 4-week average

I am often told that RDP is being calculated using a 4-week average. The 4-week average that was used with RDP was removed from the Act in 2011 and replaced with ADP (a 52-week average). It just shows me how out of date some of these payroll systems are.

OWP is NOT calculated by only using a 4-week average

The other 4-week average that is used and is still valid is the 4-week average for OWP. BUT, it is an alternative calculation not the default and here is where the issue is. Before the 4-week average for OWP can be used, under Section 8(1) you must try to define the week. If the week cannot be defined, then and only then, the 4-week average can be used. There are many payroll systems not even doing a check on whether the week can be defined. Or if they do, it is based only on the ordinary rate for the week excluding what else is detailed by the Act to be included (regular part). Also, the Holidays Act is about the individual and it needs to be assessed what a week is for that employee. Payroll systems love grouping employees, and this can mean the rules for the group override what is happening to an individual. You will need to identify these issues and apply the legislation correctly.

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NZPPA, supporting NZ payroll since 2007

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A note from KeyPay on leave compliance

KeyPay NZ is a cloud payroll system, built with compliance at its core. KeyPay makes leave calculations as simple as possible, allowing employers and payroll administrators to set up employees in the system, defining their standard working day hours and working week in compliance with the Holidays Act. The system allows you to configure the applicable calculation method to be applied in a pay run, specific to the employee. With KeyPay, you can completely automate employee leave compliance with no manual intervention, and peace of mind that you’re applying leave correctly.

David Jenkins

David Jenkins is a guest writer from the New Zealand Payroll Practitioners Association.

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