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Payroll 3 - Compliance

Written by Jim Roberts on April 20th, 2016.

Is compliance that difficult?  For the most part, ‘No’.  Yes there are complexities around the application of the Holidays Act 2003, particularly public holidays.  It does seem a bit daft to have four or five different methods for the calculation of pay under the Act, two or three if you count the formulae for annual holidays, and two for public holidays, sick leave and bereavement leave.
We are perplexed that for so many people, one of the biggest challenges is the realisation that of those four or five methods of calculation in the Act, none of them are in hours.  The Act deals in weeks and days.  For some systems of work, this can take a bit of thought, but if you work from first principles, the Act can be applied to even the most complex of rosters or shift patterns.
These complexities are not new.  The Holidays Act 2003 has been in force for more than 12 years.  In addition, many of the issues that are blamed on the current Act, existed under the Holidays Act 1981.
The concepts of "days" and "weeks" are certainly not new.  But, WTH?  Yes, Why The Hours?  In 25 years of trying to wrestle this particular beast to the ground the explanations are generally “that’s what payroll does” or “that’s what the payroll system does”.  It is almost as if there are not people making these decisions but somehow this machine just “does” this all by itself!  Well actually, like all employment law, it is all about people.  People decide what information goes into the machine.  People decide what the machine does with the information.  The machine then spits out the result.  You can’t blame the machine; it is just doing what it is told. 
You have probably picked up by now that there is a bit of a theme.  The theme is the use of hours and parts of hours.  Yes, WTH?  What is wrong with hours?  Nothing is wrong with using hours to calculate the pay of a person that is on an hourly wage.  Why it seems to be necessary to break annual salaries into hours is a little more vexing, but that is not the point.  The point is compliance.  Compliance with the Holidays Act is paramount, but that is closely followed by compliance with any collective agreement and then individual employment agreement.  We know there is no reference to hours in the Act.  It is also highly unlikely that there will be a reference permitting a calculation in hours in any Collective or Individual Employment Agreement for any reason except where an employee is on an hourly wage, and possibly overtime. 
We have used annual holidays to make a couple of points that follow.  Similar points can be made for other types of holidays and leave that require an application of a day but payroll insists on converting to hours.
How the Holidays Act works (excluding a closedown for the sake of simplicity) is that once a year on an employee’s anniversary, that employee becomes entitled to four weeks' annual holidays on pay.  It is that simple.  There is no such thing as accruing leave under the Holidays Act.  The entitlement arises once per year and it arrives all at once.  It does not get there incrementally, pay day by pay day. 
Yes, accruing leave is a fiction unless an employment agreement provides that annual holidays can accrue incrementally.  That could be considered an additional benefit to the four weeks that arrives once a year under the Act.
So why do many payslips and payroll information show accruing leave and why in hours?  If an employee leaves employment before that employee’s anniversary date, that employee is entitled to 8% of the employee’s gross earnings since the last anniversary date (plus of course any actual entitlement to holidays from a previous period). 
But that is not hours, we hear you say?  We know, right!  It is a sum that equals 8%.
It seems that a whole lot of people in their wisdom have decided to show the 8% in hours and then multiply that by some average hourly rate if an employee leaves.  The 8% is the only calculation that can technically ‘accrue’ between anniversary dates.
We have seen some references to taking annual holidays in advance.  However, taking annual holidays in advance under the Act has absolutely nothing to do with any accrual.
Isn’t it just easier to either have an 8% calculation ticking over in the payroll system and properly recording a sum of money, rather than a translation into hours and multiplying that by a rate, or just to do that calculation when an employee actually leaves?  Seems simple, and the latter is what the Act actually says. 
But wait, there’s more!  Let’s look at the use of hours a little more closely.  We know that every employee is entitled to four weeks' annual holiday on that employee’s anniversary.  If an employee works a standard 40 hour week (8 hours a day, five days a week), counting holidays in hours means that 160 hours is now proudly displayed on that employee’s payslip and within the payroll records. 
Let’s say the employee's circumstances result in the employee cutting back work to one 8 hour day per week, the day after the employee’s anniversary date.  What is the employee’s annual holiday entitlement?
Under the Holidays Act, the answer is very simple – it is four weeks.  Four weeks is now 32 hours.  Using 'payroll' hours that is now 32 hours.  This is to be calculated at the greater of average weekly earnings or ordinary weekly pay.  The greater of those, given that the employee has gone from five days to one, is quite obviously average weekly pay.
However, the employee has a payslip that shows an entitlement to 160 hours.  That 160 hours is equivalent to 20 weeks of annual holiday when the employee is now working one 8 hour day per week!  If holidays were properly recorded and shown in weeks, the payslip, and the payroll records, would show four weeks, no matter what the variation in the employee’s days or hours of work.  However, describing annual holidays in hours has super-inflated that employee’s entitlement to annual holidays from four weeks to 20 weeks.  Can't blame the Act for that.
Yes, while there has been a focus on the possibility (or probability) of underpayment of holiday pay, nobody seems to have picked up that the same problem, tipped on its head, could well be resulting in overpayments. 
What does payroll do?  Well, that depends.  Those 'in the know' automatically adjust the annual holiday balance to reflect the hours currently worked by the employee.  If an employee is tracking their annual holidays, that will, quite properly, be met with howls of protest as the employee sees a 160 hour balance, that the employer has held out that the employee is entitled to, plummet to 32 hours (i.e. four weeks at one day 8 hours per day).  And what about those not in the know?  Well, you don’t know what you don’t know, which means there is a high likelihood the employee has just been gifted 16 additional weeks of annual holidays that the employee is not entitled to. 
So WTH?  We don’t actually know because we have never had a cogent explanation.  As we started out, we have been told in those first two quotes “that’s what payroll does” and “that’s what the payroll system does”.  What we then suspect happens which has neither been confirmed nor denied, is that the person taking one week of annual holiday in the example above, receives a payment which is 8 hours multiplied by the greater of the ordinarily hourly rate or average hourly rate.  And there's the rub. 
What does the Act require the employer to do?  Well, not that.  It requires the employer to work out what the ordinary weekly pay and average weekly earnings would be for the week.  Those calculations then need to be applied to the week of holiday, which in this example is one day.  It is a top down calculation that the Holidays Act requires, particularly for average weekly earnings which is 1/52 of the previous 12 months gross earnings.  It is not a calculation that starts with gross earnings, divides that by worked hours to get an average hourly rate and multiplies that by hours of holidays.  That misses the fact that the calculations are to be weeks – not hours – and they can be quite different.
Does this mean that every payroll system calculating holidays and leave in hours is wrong?  Absolutely not.  If the employee mentioned above had not changed their hours of work, then calculating in hours would have achieved exactly the same result as calculating in weeks as required by the Holidays Act.  That is because a week will always be the same.  So too, if payroll (being a person or a machine or a combination of both) is in the know then the employee’s ‘entitlement’ would instantly go from 160 hours to 24 again, probably reaching the same sum as required by properly calculating under the Act. 
Even then, if an employee's working week changes regularly, such as an employee on a roster that does not match a calendar week, continually changing holiday entitlement recorded in hours will be a challenge, whereas a week is a week.
However, calculating in hours, even if it comes out at the right amount, does not comply with the Act.
What payroll actually does, we don’t know as it seems shrouded in mystery.  What we do know is what the Act says, and that often seems relatively straight forward.  If payroll is, by another means, getting the right answer, why hold out to employees that they have entitlements to holidays in hours when the Act, and in most cases, their employment agreements, refer to weeks?  Why hold out to employees that they are accruing leave, when the Act, and in most cases, their employment agreements, do not include any such concept? 
It seems that the answer is because 'that's what payroll does'.  That might be so, and it’s just a thought, but complying with the Act and employment agreements, is not such a bad idea.
Topics: Employment Law
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