9.05.2018

Payroll 1 – Your Next Nightmare

This is the first of three newsletters focused on payroll compliance.

Well, the balloon has finally gone up, payroll compliance in Government Departments is not just limited to the well published disaster of Novopay (known by some as Never Pay) but there may be deep-seated payroll compliance issues in a number of Government Departments.

Novopay has been widely touted as a ‘software problem’ and, given that there were no reported issues beforehand, that may very well be the case.

But the assumption that every payroll problem is an IT or software issue is not correct.

Last year the long running payroll problems in the New Zealand Police became public knowledge and now the Ministry of Business Industry and Employment (MBIE) has its own problems.  Incidentally, in case you missed it, MBIE is the Ministry responsible for ensuring the pay and Holidays Act compliance of every employer in New Zealand.

For both the Police and MBIE situations, the reported problems concern correctly calculating entitlements under the Holidays Act 2003.

It might not be the software

Don’t automatically blame the software.  While Novopay has been well touted as a software issue, payroll software is and should be increasingly configurable and customisable.  Modern software should be able to cope with the challenges posed by the various parts of the legislation, and particularly the Holidays Act 2003.

If the software is not the problem, then the problem can only be with how it is configured and/or used.  As with any computer system, if the inputs are wrong then the outputs cannot possibly be right, and if the payroll system instructions are erroneous then the pay is unlikely to be accurate.

Payroll in the Government sector, related institutions, and ex-Government Departments that are now private businesses have had a legacy payroll issue in the form of Personnel Information and Payroll Service (PIPS).  PIPS ended in about 1997.  However, it was not easy to customise and many workarounds were developed.  As an example, one of these was using a deviser across the payroll for any employee, or groups of employees, who did not work a standard 2080 hours.  We suspect that despite the adoption of new payroll software, which can adapt for different hours of work (and some of the new software is inherently customisable), the new payroll systems are still being configured or used with the same workarounds that existed under PIPS.  We hope we are wrong.

The other issue that arises frequently is with payroll systems being run out of Australia, either within the business or a separate provider.  It is relatively common to find that the New Zealand payroll has been configured to comply with Australian laws, particularly their holiday legislation.  Hello, we are a different country, and we have our own laws, which are different too!  You must comply with our laws.

We are all on an hourly wage – really?

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.

Salaried employees, including your Chief Executive, are not employed on an hourly wage but an annual amount.  There is simply no need to input a salary as if it is paid on an hourly basis.  Granted, a salary may need to be divided by 26 for a fortnightly pay, or divided into weeks or days for the purpose of Holiday Act compliance, but the Chief Executive’s salary does not need to be reduced to an hourly wage.

Don’t blame the payroll team

There is little point asking your payroll team or whoever configures the software for your organisation if it is compliant.  The immediate answer will be yes, of course we are”, and probably implicitly, ‘how dare you ask’.

However, this is a real issue that all employers need to consider.  While the Police payroll is an extreme example, its liability was reported to be more than $40 million at one point and $34 million at another.

The starting point is to ask objectively ‘what is required to be complaint?’.  Then, and only then, should that be compared with what the payroll system is actually doing.

It is not a matter of blaming the payroll team or the people responsible for configuring the software, who are all likely to be acting on instructions and/or historical experience.  They have probably been doing what has been done for a very long time and passed down from person to person.  Unfortunately doing what you have always done does not equal compliance if it is wrong.

Compliance only comes from understanding what is required by the legislation and the employment agreements, which are a matter of understanding the law.  Once that is understood only then can the payroll system, in terms of how it is actually configured and what it actually does, be measured for compliance.

Our next article focuses on the MBIE Labour Inspectors and their current focus on payroll compliance.

Do you need expert legal advice?
Contact the expert team at Hesketh Henry.
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