MBIE Holiday Pay Audits28 September 2017
In the wake of payroll errors in Police and even in MBIE itself, MBIE has been busy conducting audits in many larger organisations.
Almost without exception, including some union payrolls, widespread non-compliance has been identified.
MBIE’s earlier investigations pre-2016 found that between 194,700 and 763,350 employees could be affected by non-compliance with the high and low estimates of the amount underpaid per worker being between $250 and $500 per year; with the annual estimate of underpayments projected to be $48.7m at the low end to $382m at the high end.
The problem fundamentally is that the Holidays Act is extremely difficult to apply correctly, as it requires an individual analysis of every employee’s situation at the point in time they take any leave. To compound that, most payroll systems are not designed to handle the types of calculation required which means many organisations have to develop complex work-arounds to produce a systemised approach to pay. In the end this can be lose-lose for employers because in some cases there are overpayments (unlikely to be recovered) as well as underpayments (which will have to be rectified).
In some cases MBIE has recorded examples of non-compliance but that doesn’t necessarily mean that employees have been underpaid. For example, in the case of annual holidays some employers use only average weekly earnings and don’t make the required comparison with ordinary weekly pay. That is because for waged workers the overtime component usually means the average earnings figure is much higher than ordinary weekly pay. But technically that is counted as non-compliance even if the employees are not underpaid.
Many systems use a rolling average hourly rate to calculate leave entitlements which can also be result in non-compliance even if there is no underpayment.
For sick and bereavement leave and public holidays, employees are entitled to be paid their relevant daily pay. If this can’t be determined or the employee’s pay varies during the period of the leave then average daily pay may be used. That calculation is the gross earnings for the 52 calendar weeks before the end of the pay period immediately before the calculation is made, divided by the number of whole or part days during which the employee earned those gross earnings. Sounds easy, but often work-arounds are required here also because some payroll systems do not link to data showing the number of days on which the employee earned those earnings which is an essential part of the calculation.
In many cases the holiday and leave records are also deficient. Some of this is relatively minor such as failing to record public holidays taken by salaried employees where there is usually no impact on pay.
Some of these issues can be satisfactorily addressed with a lot of time and cost, but the fundamental issue is that the law is too complicated to apply. In 2015 Cabinet decided not to proceed with another review of the Act, opting instead to monitor the situation while the Labour Inspectorate in MBIE continued its enforcement and engagement work to address non-compliance.
The incoming Government needs to deal with this. The Australian system of applying a simple leave loading (17.5% of ordinary pay) is a bit agricultural. It may also increase holiday pay costs, but at least it’s a simple method guaranteed to give employees confidence and at the same time give employers certainty about what their costs will be.