Hard work needed on holiday pay

The Ministry of Business, Innovation and Employment (MBIE) recently issued new guidance on holiday pay to help employers comply with the Holidays Act without the risk of running up large back pay bills. Organisations must pay employees’ holiday pay based on the higher of their ordinary weekly pay or their average weekly earnings over the past 12 months.



For some employees this calculation is easy.  For others, especially those who work irregular hours or receive irregular payments, this can prove difficult, and consequently the risk of incorrect holiday payments is much higher.

MBIE has determined that a ‘set and forget’, one size fits all approach to paying holiday entitlements is not enough to comply with the Holidays Act. It is now pursuing employers in cases where it has determined workers have not been fairly compensated for their holidays based on the hours they worked. This will affect thousands of New Zealand employers and workers, so it’s time to look at your payroll practices and software to ensure your organisation avoids penalties.

What is Datacom doing to ensure compliance with the Holidays Act?

Datacom was part of the Payroll Systems Functionality working group made up of selected payroll system providers and professional service advisers that together with MBIE looked at problem areas around interpretation of the Holidays Act. This led to the MBIE guidance to clear up many common misunderstandings being issued in 2017.

Datacom is continuing to help its customers understand and meet their Holidays Act obligations. We’re making changes to our software and processes so employers across all sectors where variable hours are common, such as hospitality and retail, will be able to meet their obligations more easily.

We also encourage employers to check with their payroll provider to make sure their system is configured correctly to meet their individual needs. With more and more people working irregular hours thanks to the greater demand for flexibility and work-life balance, it’s important that all employers apply the rules correctly to avoid action by MBIE and having to back pay incorrect leave payments.

What should employers be doing now?

While we can make managing your employees’ holiday and leave provisions easier, it’s still the duty of each employer to make sure pay is correct. Payroll software on its own can’t make judgement calls on what constitutes an employee’s regular working hours.

We advise all employers to read the MBIE guidance on the Holidays Act so you understand what this means for your organisation.

The following steps will also help ensure your organisation remains compliant:

  • Respond to changes in employees’ work patterns – If an employee’s agreed work pattern changes, employers should discuss the implications for the employee’s holiday entitlements with them in good faith, and in a timely manner. Some holiday and leave provisions require specific agreement with employees (remembering that there is a legal minimum that must be adhered to)
  • Review your organisation’s work arrangements – While irregular work schedules are unavoidable for some organisations, be aware that this will make it more difficult and costly to calculate the correct holiday pay. Consider reducing highly irregular work arrangements where possible
  • Ensure your payroll systems are fit-for-purpose – Examine your existing processes to make sure you aren’t incurring liability. If you use a third-party payroll service provider, check what they’re doing to help
  • Err on the side of caution – When in doubt about any pay entitlement, it’s best to choose the option that’s most favourable to the employee. Avoiding any chance of underpayment will reduce your risk as well as the future cost of any potential investigation

We also advise employers to keep thorough, up-to-date records on their employee’s pay and hours, as missing data can make the auditing process much longer.

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