Billions owed in leave – Why are we waiting?

Three years ago Unite wrote to all our big employers telling them that they had been miscalculating annual leave payments to their employees for years and they needed to fix it.

The first main problem identified was that companies were not doing the “higher of” calculation for employees who worked irregular hours. The law was quite specific that for this category of worker the company had to pay annual leave at the “higher of” their average weekly pay over the year or their last four weeks average pay. For workers whose hours (or just pay) varied week to week, if they took leave after a busy period they were missing out.

The second main problem was that workers were not receiving 4 weeks leave as required by law. Workers had accumulated leave recorded in hours, usually a percentage of their hours worked through the year. For any worker who increased their hours this meant they could not take a full four-weeks holiday because the number of hours accumulated would always be less than their current weekly hours when divided by four. In industries we represent it was common for workers to start their employment on a low number of hours and at the end of the year to be working more. The value of a week’s annual leave could be much higher at the end of a year using the four-week average. This group will always be disadvantaged.

There were additional problems as well, like not all allowances being included, public holidays not be paid at the correct rate, or when they should be (along with alternative days being given – or, often, not).

The companies we wrote to went into denial and it looked like we would need to start court cases to enforce our member’s rights. But then about two years ago the Ministry of Business, Innovation and Employment (MBIE), the government agency responsible for enforcing legal minimum employment standards, said they had been miscalculating entitlements for their own staff and that this was a nearly universal problem for employers in New Zealand.

As we dug deeper into the issues, it became clear that nearly every single payroll provider had deliberately ignored this requirement to do a “higher of” calculation.

Most payroll systems simply accumulated leave in hours then allocated those hours to workers without even converting them into a week or portion of a week. But workers get four-weeks’ annual leave and if leave is simply allocated in hours then the workers can be severely disadvantaged.  This is not just a technicality that needs to be “fixed”. The law was written to ensure that a worker would have at least the same income that they normally get, not reduced by temporary variations in hours.

Take this example – not unusual. A worker starts the year on 10 hours a week, finishes the year on 20 hours a week and works an average of 15 hours a week for the year. The worker asks for one week’s annual leave. What should they get paid?

At the time this worker takes the leave they have accumulated 60 hours leave owing. The worker wants to take a week’s leave. A week is currently 20 hours, which means this worker can’t take 4 weeks leave as required by law – they have only accumulated enough leave hours for three weeks’ leave.

The same problem is revealed by looking at what they should be paid. If the worker is given a quarter of their accumulated hours for one week’s leave this looks fair – but they are only being paid 15 hours leave. They should actually be paid the equivalent of 20 hours’ pay for their leave. But if 20 hours are deducted from the leave balance then too large a proportion will be deducted – a third of the hours accumulated instead of a quarter.

To fix this problem, the person should be paid at a rate that equals the average weekly hours that they are working now – ie 20 hours a week. The only way to do that fairly would be for the leave balance to be reduced by one quarter but it should be paid out at a rate that equals what would have been earned for 20 hours – effectively time and a third – so that the value of his weeks leave equals his most recent four-week average.

In the past, companies often simply asked the worker how many hours they wanted to be paid for the leave taken. It made no difference to the company since the accumulated leave was just a number of hours. But if the worker asked for more hours pay than they were technically entitled too they lost their annual leave – effectively an illegal cashing up of leave.

Nearly all employers accumulated and allocated leave in hours rather than weeks. This means that to determine annual leave entitlement correctly – to fix past mistakes and pay correctly going forward – they need to do two calculations.

The first is to determine what is a week. In the case of the worker above a week is 20 hours. So the number of hours deducted from the leave balance should not be too many or too few and affect the remaining entitlement negatively.

That’s what should have been done. If it had been done correctly in the past there wouldn’t be a problem now, but it seems almost no employer did this. This has created a nightmare for employers because to fix the problem they have to recalculate entitlements for everyone they have ever employed going back at least six years.

They have to look at everyone’s annual leave taken, determine what a week was at that time, determine what proportion of a week’s leave was taken, determine what value that portions should have had, what was actually paid and then pay the difference to the worker if they are owed money.

This calculation should be done for every person ever employed by the company. McDonald’s has 9000 current employees and a turnover of at least 6000 a year. That is a lot of calculations.

There will, of course also have been overpayments. But these can’t be deducted after all the time that has elapsed since the miscalculation.

But some big employers are trying to do this.

Employers now have another problem before they can get the remediation done properly.

Many employers have also been cheating worker out of their alternative holiday entitlements. For many years McDonald’s had a policy that if you worked a public holiday you could only get a lieu day (alternative holiday) for working that day if you had worked three out of three previous same days. Restaurant Brands operated a three out of four policy and many managers manipulated rosters to avoid the entitlement.

But Wendy’s recently lost a case in the Employment Relations Authority for doing something similar. The ruling in that case said that a simple majority of weeks worked over three months would be enough to earn an entitlement – ie working 7 out of 13 Mondays prior to a Labour day holiday. The ruling also said any recent changes to working periods that indicated the worker was expected to work that day would trigger the entitlement.

That means this legal entitlement should be part of the backpay owing workers and it needs to be corrected before going back to do the annual leave recalculation and paying remediation for that. If employers don’t do that they run the risk of being forced to do the remediation twice.

Millions of dollars are owed to workers – probably hundreds of millions and possibly billions if every employer is forced to pay up.

There is a legal responsibility to keep wage and time records for six years. Many people assume that this is the limit of a company’s legal responsibility. But a past decision of the Employment Court has said that legal minimums like annual leave remain and can’t be extinguished by the requirement to keep records.

This problem was identified by Unite three years ago. The government agency responsible said we were correct two years ago. Why are we still waiting?

The government needs to simply tell these companies what to fix, how to fix it, and to do it immediately.  Most smaller employers rely completely on their payroll providers to get it right, but, instead the providers have been complicit in cheating millions of workers of millions of dollars and need to be held accountable. As an industry they were made aware of the problem many years ago but chose to ignore it. Payroll providers should be held legally liable for their work.

This is a complicated problem but it is not impossible to fix.

This money was stolen from workers deliberately. At the very least it should be paid back.