What's actually coming in these
Holidays Act changes?

This piece is written prior to the release of MBIE’s proposed changes to the Holidays Act. We rely on publicly available material from the taskforce and subsequent replies from the government, up to April 2023.

Changes to the 2003 Holidays Act appear imminent. Whilst there is a public consensus that the current legislation is difficult, it is harder to latch onto informed opinion about what the specific problems are or how to solve them. With such a wide range of employment circumstances across the country, it is exceedingly difficult to define a one-size-fits-all set of rules which fairly govern entitlements to all employees. As the country waits for official news on these updates, Payroll Intelligence reviews what we know so far.

What's the current state of play?

Under certain circumstances, the 2003 Holidays Act can be ambiguous for employers and employees to understand the entitlements. Non-compliance is rife, with employers unwittingly making underpayments to some employees for many years. Those invisible liabilities have been quite publicly exposed for some of the country’s larger organisations, and the false expectation that payroll software is bulletproof has left much finger pointing. There are a handful of obvious issues that might be improved, but what’s perceived as most painful will depend on any particular employer’s circumstances and which elements of the Act they encounter most often.

We won’t dwell on the review timeline which by now is well documented: A Holidays Act Taskforce was formed pre-Covid which made 22 recommendations and those have been accepted by MBIE. The changes were loosely documented and publicised throughout this process, but it’s now with the policy makers, with a scheduled mid-2023 release. At which point the new laws will be available for submissions before rolling toward implementation. There is no change in legislation expected before the 2023 General Election.

If an employer has made payments that are non-compliant with the incumbent 2003 rules, obligations to remediate those mistakes remain in place. The ‘2024’ changes are not a silver bullet that suddenly pardon employers from their historical errors and debt owed to their employees.

A snapshot of some key changes.

Most of the 22 recommendations are things that you wouldn’t know about and would be impossible to fully analyse in this article. We will skim through a few and go slightly deeper on a couple of others:

Determining an Otherwise Working Day will finally have a structure (if/how employees are due payment on a Public Holiday), as opposed to ‘rule of thumb’ that comes into play once you’ve perhaps already gotten into trouble
There are some subtle tweaks for how leave entitlements come together, but in the case of Annual Holiday it’s not a huge deviation from what was already available under the 2003 rules.
Gross Earnings vs Discretionary earnings is going. Basically any payment, short of a pure re-imbursement (i.e. employee paid for coffees at a meeting), will need to be included in forward holiday pay calculations.
The payment formulas for Annual Holiday are getting a change, as are the formulas for FBAPS leave (Family Violence, Bereavement, Alternative, Public, Sick)

Relevant Daily Pay is going. This is what a lot of employers use for FBAPS leave so it’s a significant exclusion. Whilst it’s simple to calculate in most scenarios, for teams with variable hours or fluctuating payments the legislation is vague in defining exactly how to pay any specific day off, making it almost impossible to get consensus between employers and employees. The Employment Court has adjudicated a couple of arguments on how this should be handled, but the examples are so niche (and arguably there’s some flaws in the rulings) that RDP for a lot of employers has turned into a bit of a farce. Culling this option entirely may seem a bit heavy-handed because there is meant to be an alternative called Average Daily Pay. It’s a robust formula which removes subjectivity, but most softwares can’t actually do it properly - if at all. In fact most payroll softwares still calculate RDP (and ADP) as hourly rates of pay, even though it’s a single daily value assigned to the day in question (puzzling how anyone can think these are hourly, when “daily” is literally in each title). So RDP’s exclusion will be warmly welcomed by a significant group of employers; one less headache and they can now let the software do what it’s supposed to.

There are other more subtle changes to rates of pay. In the recommendations from the Taskforce, Annual Leave Entitlement will require the calculation of three rates of pay (previously it used to be two) and use the greater option of all three. For FBAPS leave it used to be choose from two (RDP or ADP) now it will be an enforced calculation of two, and use the greater. Confused? Payroll Intelligence will release a full explainer video on these rates, once they are formally publicised.

What do the changes probably mean for employers?

Increased record keeping is a feature of the changes; are you correctly calculating the rates of pay? Are you providing employees with full and accurate payslips? It’s not a given that all payroll tools have these seemingly-obvious capabilities, but they’ll either rise to the standard or they’ll naturally fall out of the market.

In an attempt to make things easier, the taskforce has potentially made things worse and/or more expensive to keep up with. A criticism of the 2003 Act is that the same 8 hour day could/must be expressed as either 8 hours of ordinary time, 1 day of FBAPS leave, or potentially 0.2 weeks of Annual Holiday. Understandably, this doesn’t make sense to a lot of people: “Can’t they all just be an hourly rate?” It would be an unpopular response to simply say “No”, but actually delivering on that request gets quite messy. It’s so messy that the taskforce doesn’t seem to bother trying it for Annual Holidays - you may jump through a couple of new hoops but ultimately your 8 hours will end up as 0.2 of a week, because we seem forever tied to four weeks of annual holiday which dictates everything downstream. To the taskforce’s credit, they’ve made an attempt to have FBAPS leave expressed as an hourly rate, but it would appear that employers will now need to utilise information that doesn’t live in the payroll software, and probably gets stored in a Time and Attendance tool (if the employer even has such a tool at all). Increased costs, just for the sake of a more digestible number on a payslip? Some employers may wonder who’s actually winning out of these changes.

Based on what’s been released so far, there are still some big question marks about the actual rules themselves. Payroll Intelligence submits that use of words like would/could/should in financial legislation is always difficult to apply correctly, day-in-day-out. It’s prone to abuse or at the very least the outcome will be a source of contention. If we revisit 2003’s Relevant Daily Pay we see use of the term “would” and can understand why it might be disputed:

“means the amount of pay that the employee would have received had the employee worked on the day concerned” (before then listing the types of pay which could arguably have happened on the day in question and therefore must be included).

Would they have worked overtime if they weren’t sick? Would they have received a sales commission if the business was open on Public Holidays? Well, meet 2024’s Ordinary Leave Pay:

“OLP would include the base rate for any hours worked in the relevant period, plus pay for any scheduled overtime, allowances, incentive or commission payments that the employee would have received if they had worked for the relevant period.”

Granted, this quote is taken from the recommendation document. But how else does the intent of OLP get articulated into law without recycling those subjective terms again? This appears to be a reboot of the troubled RDP and so too rebooting the major headache for those with variable rosters and payments. Just to make matters worse, 2003’s RDP could be fundamentally ignored if an employer wanted to use Average Daily Pay…but 2024’s OLP is slated to be a mandatory calculation: employers cannot just choose the other option, they must calculate(/guess) OLP every time there is a Public Holiday, or Sick Leave, etc. and use the largest value. Remember that improved record keeping? That probably extends to being able to prove you calculated OLP, even if you didn’t end up using it. But wait, there’s more: employers must also calculate(/guess) OLP whenever Annual Holiday is taken. Not only are ambiguous pay rates clinging onto life in their original category, it’s actually spread beyond FBAPS leave and into Annual Holiday rules. But wait, there’s still more: the keen observer will be asking “if OLP now lives in both types of holiday, is it a weekly rate of pay, or a daily rate of pay?” It’s somehow both. OLP for Public Holidays etc will be benchmarked against another daily rate of pay, whilst OLP for Annual Leave will be benchmarked against weekly rates of pay. It is simultaneously an apple and an orange. Calculating the dollar value of OLP already sounds exhausting. As for how it gets deducted from various leave balances in weeks and days, that’s anyone’s guess.

Conclusion.

Anyone’s opinion on changes needed for the 2003 Holidays Act will depend on their experience with it and how it applies to their business. There is probably a group of employers who are unfazed by the topic, blissfully unaware they actually have a vested interest in the changes, but they don’t yet realise their own non-compliance or what’s caused it. Subtle tweaks are proposed in a few areas, addressing fringe matters. The big changes are to the rates of pay;

No more discretionary earnings; almost all remuneration calculated forward in leave payments
What’s proposed would rightfully bury a couple of 2003 calculations which have perhaps been the catalyst of this entire review.
When it comes to FBAPS Leave, the easy-fix of RDP is now gone; employers can no longer just pick the option that is most convenient, they must calculate multiple rates of pay regardless of whether it is FBAPS leave or Annual Holiday.
Calculations for FBAPS leave will have two mandatory calculations, whilst calculations for Annual Holidays will have three.
An attempt to bring FBAPS rates of pay into an hourly format seems a stretch for most payroll tools and would likely require a tight integration with Time and Attendance software, in order to execute a more ‘transparent’ hourly rate of pay.
One of the flagship changes that is introduced across both major pay categories - OLP - appears to lack definition in the material made available thus far.

The changes promised clear methods, formulas and tests, and there will be examples where those were successfully delivered and will affect fringe cases. Most employers seem destined to swap one set of problems for another. Whilst there is still a lot of water to go under the bridge yet, don’t expect a legislative change that suddenly makes it demonstrably easier to get your employees paid correctly.

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