The SME’s guide to mitigating risk around holiday pay

A series of payroll audits showed that most Kiwi businesses have misunderstood the Holidays Act in some way. The audits, conducted by the Labour Inspectorate among larger employers, examined compliance with the Holidays Act. It showed that many employers have not calculated and paid the correct amount of holiday pay to all employees, particularly those who work irregular hours or receive irregular payments.


Not only does this reveal significant confusion in how the Act has been interpreted, it leaves many New Zealand employers potentially facing sizeable back pay bills to remedy incorrect historical payments which could be crippling for smaller organisations.

To make matters worse, not all businesses have complete payroll data available or easy access to this data to make the necessary recalculations. Recalculation exercises can become exceptionally complicated, requiring significant resources beyond the means of many small businesses

How did the problems arise?

Between 2012 and 2017, 129 of New Zealand’s larger organisations were audited by the Labour Inspectorate, showing more than 70 percent were not complying with at least one aspect of the Holidays Act. Staff that worked irregular hours or received irregular payments were particularly problematic. MBIE issued guidance in 2017, in an attempt to clarify employers’ obligations with the Act.

Judging by the scale of the problem, and the fact that MBIE and the New Zealand Police were among the non-compliant organisations found, it appears this has been a genuine mistake for many employers. However, businesses and other organisations may now have to pay employees’ outstanding entitlements. The auditors found outstanding payments of up to $1,800 were owing to individual employees.

Meanwhile, many organisations are still using payroll systems that are not ideal for handling the complexities of the Act. Datacom is refining its payroll software to make it easier for employers to spot when issues arise and to make it easier to maintain holiday entitlements when employees working patterns change. Nevertheless, some decisions will still need to be made by human administrators and payroll managers will still need to use their judgement in order to remain compliant.

What does this mean for SMEs?

If you’re a small business owner, familiarise yourself with MBIE’s recent guidance to ensure that you understand the main principles of the Holidays Act and how it relates to your employees. Check how your payroll software is set up to make holiday pay calculations and familiarise yourself with the main settings. We recommend contacting your payroll provider if you’re not sure what some of the settings mean or how they apply to your employees. Look for the tools and guidance in the software that will help you make the right decisions. Remember that it is ultimately your responsibility to comply with the requirements.

Be a good employer. This means having up front conversations with your staff on how their holidays will be calculated and paid. If they work flexible hours, agree and document how this will translate to four weeks of leave and how it will be reduced when it is taken.  Employers that run well informed and fair workplaces are obviously much less likely to find themselves caught up in an investigation, and even if should one arise, proof that you have sought agreements will assist in achieving a speedier resolution.  

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