EXCLUSIVE: Holiday pay miscalculation more than a “mistake”

It is simply not credible that nearly every major employer and payroll providing service made a “mistake” in calculating their annual leave entitlements.

It is also clear that the problem is so large the government needs to form a working group of employers, payroll providers and unions to impose a solution that protects workers legal entitlements.

The major problem that Unite has faced is the employer’s failure to calculate annual leave as the higher of either average weekly pay or what is called “ordinary weekly pay”

This is an important concept. It is needed because sometimes a worker’s status changes and when they take leave it should reflect their improved status.

For example, I may start work as a part-time worker and then become a full-time worker. When I take my holidays my leave should be paid at the full-time hours.

The term “ordinary weekly pay” has existed in law in the Holidays Act since 1944 when all New Zealand workers first got two weeks annual leave on “ordinary pay” by law. It was defined then as:

The exact same formulation was used in the 1981 rewrite of the Holidays Act.The 1981 Act allowed employers to use the average weekly pay formula for each week’s leave in some circumstances. But it included the caveat that:

That essentially introduced the obligation on the employer to choose the higher of the average or ordinary weekly pay.The 2003 Holidays Act introduced some changes that made it easier for an employer to calculate what it termed “ordinary weekly pay”.

It specified that it should include normal commissions and productivity or incentive-based payments and overtime. It excluded one-off or exceptional payments. Those clarifications seem only logical and fair.

It also introduced a new formulation to establish what an ordinary week’s pay was when it was not clear.

This had become necessary in my view because of a proliferation of “zero-hour” type employment agreements where workers hours varied radically from week to week.

If someone worked 10 hours a week at the beginning of the year and was working 30 hours a week at the end of the year before taking annual leave, then their annual leave payment should be at the “ordinary weekly pay” of 30-hours a week.

But, if a worker has no regular hours then the employer might have difficulty figuring out what an “ordinary weekly pay” was. The new Act specified that in those circumstances they have to choose the higher of the average for the year or the average for the four weeks before taking leave.

The Act is very prescriptive on what the employer needs to do. It states:

There is nothing “complicated” about these calculations. Most could be done on a pocket calculator. An excel spreadsheet would handle the rest.Major employers with complex computer programming capability have no excuse to get it wrong. The same applies to payroll companies that are meant to be specialists in this.

What we have discovered is that nearly every employer we deal with, whether they use in-house or external payroll systems, calculate annual leave as an hourly, not weekly entitlement. If I work 20 hours this week I should have around 1.5 hours added to my leave balance.

There may be some justification for this as leave is being “accrued”. This is the period after starting work but before the anniversary date of your employment. This leave balance is a liability the company must pay if you quit.

Once you have worked for an employer for a year, however, and each year thereafter, the leave becomes and “entitlement”.

The difference is important. “Accrued leave” cannot be taken without the agreement of the employer. A leave entitlement is a right that cannot be refused by the employer. They can only negotiate over when it is taken.

Recording leave in hours is completely misleading for workers.

Many workers use up their “accrued” or “entitled” leave “hours” to top up miserably low wages.

I have seen pay slips where there is an annual leave payment even when the workers has done a full week’s work. Employers ignore the legal obligation to only allow workers to cash up a week of their annual.

Workers often use up their annual leave in bits and pieces during a year and have no chance of actually having a proper holiday.

Even if the leave being taken is from the accrued hours it should still be paid at the “ordinary weekly pay” which very few people know about.

Nearly every pay slip we have records leave in hours. Most employers then either allocate hours to staff taking leave in some mysterious process or ask the employee how many hours leave they want.

Lawyers who have joined the public discussion have pointed out that it is impossible to comply with the law when using this method of calculation. As an email newsletter from Hesketh Henry explains:

Other problems arise from payroll systems that are configured in hours. The Holidays Act has no reference to hours and instead calculates holiday pay and other types of leave in weeks and days. However, many payroll systems and employee payslips describe entitlements in hours. Why?

We have worked for years to remove references to hours of holidays from entitlements and employment agreements because they are, quite frankly, wrong. However, despite the legislation referring to days and weeks, and despite employment agreements mostly and correctly referring to days and weeks, and despite many annual salaries instead of wages by hours, payroll systems still seem to get configured in hours. Recording and expressing holiday entitlements in hours is not complying with the Holidays Act or any employment agreement that refers to days and weeks. Calculating an annual salary on an hourly basis would seem, on its face, to also breach the employment agreement.

So what can workers do?

Check your payslip. If annual leave is recorded in hours then it is most likely the system being used is short changing you.

Check your last annual leave payment. If the hourly rate is not higher than your ordinary rate to reflect allowances and overtime, then the system is probably cheating you.

You should ask your employer to record all leave weeks or days on a pay slip. This should apply to accrued leave as well.

You should demand that your employer gets legal advice and have an external auditor brought in to check their systems. If the employer is using an external provider of payroll services you should demand a written assurance from the provider that their systems have been externally audited to be compliant with the law.

It seems that the problem is so massive that only a government led process can assure all workers in New Zealand are being paid properly.

The government should convene a working party involving unions, employers, payroll providers to devise solutions that can be imposed on all employers.

No employer should be allowed to claim it is all too complicated. That is a lie.

There has been large-scale theft. It appears to be deliberate. Workers must be paid their full entitlement going back as many years as is necessary.