One of the key concepts of the Holidays Act is a week for annual holidays and a day for the other types of leave provided under the Act. A week is by agreement and if the week changes, the entitlement changes to reflect the new agreed week.

In this post I want to highlight some issues that the NZPPA has become aware of with using averaging for time. These issues have become apparent from the many remediation payroll projects that have been undertaken or are in the process of being undertaken to resolve the issues of underpayment for leave and the Holidays Act.

When the week cannot be defined because every week is different for an employee, the Holidays Act fails because there is no method to determine a variable week for an employee. The employer and payroll are left with an unworkable situation where a week must be determined, but cannot be because of the variable nature of the hours the employee is working.

Now, defining a week that cannot be defined because the employee’s work pattern is variable is currently being done through a range of methods as follows:

• Some payroll systems use proportional accrual where 4/52 of every hour is collected to create 4 weeks of annual holiday entitlement. However, this does not work because it creates a bucket of time but still does not define a week and how many days in a week when leave is taken.
• Some employers use the last week worked as the basis of the current week. However, depending on what was worked in the last week it can mean the week does not actually represent the typical week the employee works and could mean an employee is paid more or less than they should be for that week.
• Some employers use a roster or the work pattern of the employee to determine the week. However, once again it’s unclear how far back you go to determine a week. I know of NZPPA members being told by a MBIE labour inspector that this assessment can be anything from 3 months up to 6 months, which is unworkable for a payroll which could be processing leave for hundreds or thousands of employees in a pay period and it becomes a manual activity as the payroll system cannot do the assessment.
• Another method seen is where the employer averages the last 13 weeks (one quarter of the year) to create a week and days for a week. However, this is an average and an average could always be less than the current week, so they end up doing another check to ensure it is not less than what the week would be. This is yet another manual activity on top of normal payroll processing.

Now, the Holidays Act section 17 states:

17 How employee’s entitlement to annual holidays may be met

(1) An employer and employee may agree on how an employee’s entitlement to 4 weeks’ annual holidays is to be met based on what genuinely constitutes a working week for the employee.

The key to section 17 is that it must be “agreed”, and all the above methods mentioned usually don’t involve even talking to the employee – it is just done so the week can be determined under an unworkable Act. Even if used, there is a second part to the section above which is “what genuinely constitutes a work week for the employee”. So, even if the week is determined by any of the methods above, the result needs to be tested against what genuinely constitutes a work week for the employee, which again is not being done in conjunction with the employee. The bottom line is that a week and the days in a week must be defined even for an employee working variable hours with agreement from the employee.

Large payroll remediation projects using averaging to determine time

The Holidays Act disaster has created a demand for payroll systems to be audited and the big accountancy consulting companies have seen this as a cash cow. However, it just adds additional costs on the employer who is trying to pay their employees correctly. Over the last couple of months, I have been able to see a couple of so-called analytical models created by these large accountancy firms that are being used to reprocess bulk numbers of employees when recalculating leave taken to ascertain if they have been under- or overpaid for leave.

What has been very concerning is that at the centre of these so-called analytical modules is the use of averaging for time when the week or the day for the employee cannot be clearly seen. This means that just like the other methods covered earlier in this post, time is being averaged without the employee’s agreement and as with any average, it could provide time at a lesser amount which does not genuinely constitute a week for the employee. The models being used are not about the individual employee’s actual week or involving them in defining their week, but are all about bulk reprocessing of leave for large numbers of employees.

The use of averaging in this context undermines the results provided from this type of bulk remediation activity and put the employer at further risk of challenge if the individual employee still believes they have not been paid correctly for leave taken. I have had payroll practitioners involved in this activity who are not allowed access to the model and are kept in the dark on the use of averaging in how it defines a week or days in a week to recalculate annual holidays.

It has also not helped payroll’s confidence in having to educate the consultants undertaking the work on the actual requirements of the Holidays Act. Often they come from a purely accountancy background without any real understanding of payroll or how an employer and payroll must apply a wide range of legislation from employment law to tax.

I recommend any employer that is currently using this type of model for remediation of leave spends some time asking questions on how the model determines a week and days of a week for annual holidays. Keep asking until you are totally confident no averaging is being used to define time without the employee’s agreement. The only way to apply the requirements of the Act in paying an employee correctly is to assess each employee’s week and if there are issues to seek agreement from the employee on what a week is for them. Yes, it sounds unworkable but that is what the Act requires and the cost to the business of not doing remediation correctly for large groups of employees can be substantial, especially if you end up having to do it for a second time.

Will the current review of the Holidays Act help with this?

No, as the terms of reference are about going forward, so we are all stuck with resolving the past and what is happening now.

In conclusion, a week must be defined and if there are any issues with doing this, then the employer and employee need to agree what genuinely constitutes the week. Averaging a week without the employee involved does not meet the requirements of the Act. Any model used for remediation needs to be clearly understood, so no hidden method that does not meet the requirements of the Act should be used that could undermine the purpose of the remediation process.

Lastly, recalculating leave is a complex, time-consuming and costly activity, so it is important to do it right so you can determine whether an employee has been paid correctly for leave.

NZPPA supporting NZ payroll since 2007!