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Navigating the complexities of the Holidays Act (2003) can be a daunting task for employers in New Zealand. To shed light on this critical topic, we asked Chris Mar – a payroll legislation expert from our Datapay team – to cover the background and basics of the Holidays Act, outline some common compliance challenges, provide practical advice, and looks at the path ahead, including the role of Artificial Intelligence (AI) and proposed changes to the Act.
First, it is helpful to understand the background and the basics Holidays Act.
The Holidays Act (2003) sets out minimum entitlements for employees, and crucially, employers cannot contract out of these.
It is important to understand that these entitlements are non-negotiable minimums. Employers can choose to offer more generous terms, but where they do, they must ensure that these exceed the minimum standards in all scenarios to stay compliant.
In a nutshell, the Holidays Act was established to promote a balance between work and other aspects of an employee’s life by providing access to minimum entitlements of different types of leave to be used in different circumstances:
Over the years, the Act has undergone several amendments to address emerging issues and adapt to changing work environments – although many argue that it has not adapted enough to meet the different types of working arrangements that exist today.
There are three core requirements employers must meet in order to maintain compliance with the Act:
Proof of meeting standards: An employer may offer more than the minimum entitlement in some instances; but they still must show they meet this minimum requirement in all other instances.
Compliance with the Holidays Act can be challenging, and there are several common compliance issues employers may face, especially when it comes to calculating holiday pay rates correctly.
Here are two examples of how these issues can arise and how they can be avoided:
One mistake many employers make is incorrectly classifying earnings to be excluded from gross earnings for holiday pay calculations. Very few payments are excluded from gross earnings, meaning employers should take care when making a decision on what can be excluded from this calculation.
For example, in one instance an employer mistakenly thought they could exclude a car allowance from gross earnings. The employer thought this could be excluded because they paid the allowance every pay period regardless of whether the employee was on leave or not, and they wanted to prevent ‘double dipping’ of the allowance since the value of the allowance was included in leave rates while also being paid in full for the pay period.
In this case, the allowance must still be included in gross earnings as the legislation does not allow for it to be excluded. To prevent double dipping, the employer must look to the wording on how the allowance is paid and include a term that allows this amount to be reduced during a time that the employee is on leave. However, it is important to note that any change of this nature would need to be by agreement.
Misunderstanding what constitutes a discretionary payment is another issue that can lead to non-compliance. A discretionary payment is one that the employer is not obliged to make according to the employee’s employment agreement. A discretionary payment is one of the few instances where payments can be excluded from gross earnings.
However, the definition of a discretionary payment is quite specific in the Act and does not include payments that the employer is required to make, even if the amount is not fixed or depends on meeting certain criteria.
For example, where there is a performance bonus described in an employment agreement, in which the criteria are clearly defined and may include variations in the amount paid, including no amount paid at all depending on meeting certain targets. Even though the bonus amounts may be variable, or not paid at all, this is not considered a discretionary payment because the employer is bound to pay the amount under the terms of the employment agreement.
Another significant challenge employers face when it comes to payroll compliance is an over-reliance on payroll systems.
Finding the right payroll system with the capacity to handle complex calculations is a critical factor in maintaining compliance; however, your payroll system alone cannot ensure this.
Payroll systems must be correctly configured and continuously monitored. Without proper setup and regular updates, even the most capable systems can fail to meet compliance requirements.
In other words, maintaining a compliant system relies on three factors:
Continuous monitoring: Regular monitoring for changes in employee work patterns and other factors is essential. This includes keeping track of changes in legislation or interpretation and updating the system accordingly. In summary, payroll configuration should never be treated with a ‘set and forget’ mentality.
Knowing the Holidays Act can be tricky to navigate, the question is: What practical steps can employers take to avoid experiencing issues relating to the Act?
Here are six key pieces of advice for employers to follow to help better manage the complexities of the Holidays Act.
A key factor – and one sometimes taken for granted – is the importance of education and training for payroll professionals. To maintain a compliant payroll system, it is crucial for practitioners to understand the intricacies of the Holidays Act and stay updated on changes.
To achieve this, employers should invest in regular training and seek expert advice when needed – an investment that is well worth it, given the risks it can mitigate.
A critical factor, as we have seen, is ensuring that changes to employment agreements do not unintentionally affect minimum entitlements.
To reduce the risk of this occurring, employers should review their agreements regularly to ensure they comply with the Holidays Act and do not include provisions that could lead to non-compliance.
Keeping abreast of changes in legislation and best practices is crucial for maintaining compliance, so look for information from reputable sources to keep up with legislative changes.
For example, you might subscribe to newsletters from relevant authorities such as Employment New Zealand, MBIE, IRD and industry associations such as NZPPA and EMA. You can also keep an eye out for information from your payroll provider – ranging from release notes to articles – to keep up to date with how your software performs.
Participating in industry forums and working groups can also provide valuable insights and updates on legislative changes.
By staying informed and proactive, employers can be better prepared to meet compliance with the Holidays Act and create a fair and supportive work environment for their employees.
A related point to note is the importance of industry collaboration in addressing compliance challenges.
By working together, employers, payroll vendors and industry groups can share best practices, identify common issues, and develop solutions to support compliance with the Holidays Act.
Another practical way to minimise the risk of lengthy investigations and even non-compliance is to listen to employee concerns and address potential issues proactively.
Open, clear communication with employees can help identify potential issues early on, allowing employers to address them before they escalate into formal proceedings.
Last but not least, employers should take steps to ensure they are leveraging payroll technology as much as possible to optimise legislative compliance.
Modern payroll systems offer features that help automate calculations to support compliance with the Holidays Act and streamline the process of managing this. However – as noted above – while a capable payroll system is a tool that supports compliance, it is just one of three key factors which need to be addressed to meet compliance requirements and should not be considered a substitute for proper understanding and monitoring.
Looking to the future, employers should be aware of the recent announcement made by the coalition government that flagged future changes to the Holidays Act and the role of technology, particularly Artificial Intelligence (AI), in payroll management.
Is AI the silver bullet for compliance?
AI is evolving quickly and has the potential to streamline payroll processes and support compliance by analysing transactions and assisting decision making. The question is: How can AI assist in practical ways?
One of the difficulties payroll practitioners face when it comes to the Act is that ideally each leave transaction is reviewed on its own merits, but since there is limited time to complete a pay run, this can be difficult – and stressful.
In this type of situation, AI could potentially help review complex calculations and identify compliance issues, reducing the time and it takes for payroll professionals to complete an accurate pay run.
Another area where AI could prove useful is to provide greater accessibility to payroll compliance legislation. Providing the AI model has been trained on trusted sources, it can be used to retrieve information and present it in more easily understood language as opposed to complex legal terminology.
In short, AI of itself is probably not the silver bullet for compliance issues – but has the potential to help with payroll compliance in practical ways.
The coalition government recently announced their intention to improve the Holidays Act with an exposure draft of the new Act due for release in September 2024. The proposed changes to the Holidays Act aim to make it more transparent and easier to follow and to reduce the burden on employers.
But it is important to note that while these changes to simplify compliance are welcome, they would only apply prospectively, meaning that compliance with the existing Act would remain applicable for historical claims and that employers would still need to address any past non-compliance issues.
As outlined above, staying informed and ensuring payroll systems are capable of adapting is key to maintaining compliance – and is also a way employers can ensure they are prepared for future changes.
Engaging with industry groups and participating in consultations is a way to stay updated on changes in interpretation or proposed changes to the Act.
When it comes to changes being implemented, it will be critical to allow for a sensible transition period that gives employers and vendors time to adjust to new requirements.
A final factor to consider in preparation for changes to the Holidays Act is that these will be prospective, meaning that any payroll issues relating to the old Act will still need to be addressed. To do so, employers can take advantage of specialised services offered by vendors and consultants to check for – and rectify – any miscalculations.
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