How has the 2003 Holidays Act stumped the payroll industry for 20 years?

By this stage we all know that employment laws safeguard the rights of workers. The 2003 Holidays Act sets out how payments and entitlements for time off, are to be applied.

As has been well publicised by now, this law has been difficult for the payroll industry as a whole: employers find it complex whenever circumstances are even remotely variable, and software vendors seem stuck - nervously laughing about how difficult their assignment is, despite working on it for two decades. We are going to discuss some of the issues and possible solutions.

What do we already know?

The intent of the 2003 Holidays Act is to protect workers’ rights and ensure a fair schedule of leave entitlements and pay. There is no ‘one size fits all’ for any employment anywhere in the world - permanent versus casual, salary versus wage etc. - but in New Zealand we have a particularly unique set of laws which simultaneously awards time and payments in units of hours, days and weeks.

When you understand the legislation, you realise it’s an interconnected web of provisions: a fragile house of cards. If any party makes a mistake at any stage, that quite likely has a ripple effect. That could be something as immediate as an underpayment, or a problem for later on such as miscalculated leave balances. When you consider the amount of ‘pay days’ happening for the millions of employees across the country, those are a lot of knife-edge interpretations of a hugely complex document with a myriad of varying rules and exceptions. There are a lot of potential opportunities to make a wrong move.

The harsh truth of the 2003 Holidays Act:

Once you (or your payroll software) makes a mistake, more will follow. Most people would describe it as something of a snowball effect.
You probably won’t even know you’ve made the mistake in the first place. The payments going out the door look right; most people could be staring at an issue and not even realise it. Those tiny 1% cracks which evade detection have added up to billions of dollars worth of liability across the country.

The narrative gets a bit out of hand.

The Holidays Act is defining minimum entitlements for time off. Underpaying your employees under any circumstances is obviously bad, but if an employer breaches these absolute lowest threshold of compensating employees there are significant repercussions.

Some organisations have quite publicly fallen foul of these rules and ended up in the media. The casual observer's primary exposure to the 2003 Holidays Act is the occasional news coverage it gets, for those largest of cases. This coverage comes with a few opinions which most audiences would take as gospel and it all becomes an echo chamber. Our opinion? Some people get a bit carried away.

Most audiences wouldn’t digest the coverage like we do - they wouldn’t necessarily notice the same talking points over and over. Yes there’s a couple of grey areas (otherwise working day, how much leave is being deducted in a variable roster), but by the time you straighten out all the rules, it’s just really basic maths. Someone has to make a lot of mistakes - drive through red lights and stop signs for several years - for this blow out.

Who's to blame? It depends who you believe.

Determining which party is at fault will depend on your outlook: Did the software vendor provide a tool which wasn’t capable of calculating the rates of pay required by law? Or was it the improper use of that software by the client which caused issues? Even if there were baked-in problems with the software - which can be the case - the financial liability typically rests with the employer.

The case for employers:

Employers would be entitled to feel aggrieved by the previous sentence, and rightfully so. Payroll tools are marketed as something which intend to streamline processes, apply payments and deductions correctly, and move money and information to the necessary parties. Employers implicitly trust that the technology they’ve been sold will help them navigate the complex legislation, however there are numerous limitations and most Kiwi businesses don’t carry the expertise to allow for them.

One example of a simple error which appears commonly is "Annual Leave Accrual": an employee’s leave balance increasing each pay period. This can only be described as an urban legend or a myth - it is not in the 2003 Holidays Act - yet it is programmed into many softwares as though it is fact. Just to make matters worse, MBIE released specific guidance on the topic of accrual, warning that leave balances do not work this way and ‘accruing’ could lead to issues.

The case for payroll software vendors:

On the flipside, software vendors would be right in saying they are in a lose-lose situation. Software is an arms race for talented developers and if a quality developer costs $200K+, how can a payroll vendor compete when their customers are paying $2 per pay run? The payroll vendors can only do their best and deliver a tool a which performs at a certain level. Other employers can probably sympathise, but sympathy doesn’t play a part when it comes to choosing a solution.

No matter what industry you’re in, even the most robust software must be operated with a degree of expertise to ensure ongoing performance. If you sold someone a perfectly good car, it’s probably not your fault they crash it five minutes later. There are parallels with the current Holidays Act crisis: how did some of the largest employers in the country not recognise an obvious red flag like Annual Holiday being paid in hours? (Obviously, if a tool can only do Annual Holiday in hours, then that’s probably on the software vendor: selling a car that has faulty brakes).

All things being equal, the software vendors would ask: at what point does it stop being the fault of the person who sold you the car? In the case of payroll, they are probably off the hook - rightly or wrongly - as soon as the client takes hold of the steering wheel.

What solutions are there?

To keep it succinct, employers probably have three options they can choose to bet on.

Change what you’re doing
Keep doing what you’re doing, but make sure someone has your back
Hope that the goal posts get shifted

What does change look like?

Put all the noise to one side: the key deliverable is to regularly execute payroll whilst meeting the challenge of the legislation, all in the most cost-effective manner. The idea of having a member of staff bashing away at a keyboard, choosing options and looking up rules is embarrassingly outdated. That is not to say payroll personnel will disappear: the relationship between task and human resource will evolve, as it does in any industry.

The global economy is built on specialisation: you don’t build your own cellphone, you procure it from a specialist for obvious reasons of quality, expertise, cost and time. Payroll will be no different. The main reason so many organisations still DIY their payroll is because the business case for the outsourced alternative isn’t strong enough. Tempus by Payroll Intelligence has now tipped that equation, but that is discussed as an appendix to this article.

Insurance isn’t likely to get any warmer to the idea

If an employer wanted to stick with the self-service model, they would be doing so at great risk. Remember, in most Kiwi organisations, the person conducting payroll is only doing so part-time among other responsibilities. If a tiny human error can instigate a liability, employers must ask themselves whether they want to be exposed on the day that a liability comes to the surface?

The option of an employer seeking insurance for potential liability isn’t terribly mainstream and isn’t likely to change. In this case, it would similar to asking "I lit my own house on fire, and it’s currently burning. Is it too late to take out fire insurance?"

Legislative change probably isn't going to cut it

There is always an opportunity that legislative change could make life easier. The ultimate goal would be a reformed Holidays Act which could deliver its’ core objectives, whilst being simple and easily implemented, all within a modern employment environment.

At the time of writing this article, the ‘2024’ reforms have not yet been officially released. All that is known are the recommendations and the government’s position response. Rather than speculate on recommendations which are being worked on behind closed doors and potentially overhauled, Payroll Intelligence will be releasing a series of content analysing the reforms once they are publicised.

Sadly, it looks as though this opportunity for meaningful change won't bring much respite. Most employers will need to improve their data management practices in order to comply, and should expect an increased cost.

Conclusion.

The intent of the Holidays Act is perfectly fine, but to implement it equally for all Kiwi workers it becomes complex. Mistakes are easy to make - sometimes through no fault of the operator - they silently appear and then grow. Employers and their payroll software need to bring their A-game every pay run, which might seem an unfair standard for an industry where there’s not a lot of money or in-house expertise. At some stage the scales will suddenly tip in the favour of offloading this whole process (frankly, we think that it’s in the next paragraph) because it’s no longer economic to retain the expertise, invest the time every pay run and still carry all the risk.

Appendix: A way forward

At Payroll Intelligence we were asked by each of our clients whether we offer payroll services. Those clients had been brought to us because something had gone wrong with their own payroll ecosystem and we straightened out their arrears position. It was too late to help them stop that first problem, all we could do was measure that damage. But perhaps we could help them avoid it happening again.

What we came up with over the last couple of years is called “Tempus”. No matter what your employment scenario; old rules, new rules, house rules. Tempus can do them all. Get rid of this whole headache, so you can redeploy your valuable time onto more profitable tasks. It’s a matter of time until every Kiwi business figures out how much this makes sense. Go take a look at our Tempus page (www.payrollbytempus.com) and when you’re ready to have your chat, drop us a line.

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