After decades of mass confusion for employers, resulting in workers being underpaid by billions of dollars, the government has pledged to improve the Holidays Act 2003 – but experts warn there’s no easy fix.

The Act has long been criticised by all sides of politics for setting out overly complex methods of calculating leave entitlements, baffling business owners and tripping up payroll software programs.

The outcome has been hefty arrears bills for many employers who have mistakenly underestimated their staff’s leave payments.

“I’ve had small business owners crying on the phone, saying ‘this is going to destroy the business, I’m going to have to shut down’,” says New Zealand Payroll Practitioners Association (NZPPA) chief executive, David Jenkins.

“It hasn’t been written to fit [with the way] people actually work. It’s written like everyone works Monday to Friday, 8am to 5pm. If that was the case, the Act would work perfectly.” Jenkins says even the Act’s name is misleading.

“It shouldn’t be called the Holidays Act because you’re talking about family violence leave, bereavement leave and sick leave, as well as annual leave,” he says.

“Just for annual leave, you’ve got three different ways it can be calculated… there’s two calculations for the other types of leave, meaning you’ve got five different calculations in the Act. “Every single one has a whole set of rules about how and where it’s used and when. It’s extremely complex on a whole range of levels.”

Business NZ’s Manager – Employment Relations Policy, Paul Mackay, says even when problems have been identified, working out exactly how much employees are owed is often a difficult, expensive exercise.

“Calculating and paying arrears is a big part of the puzzle,” he says. “It’s cost many businesses hundreds of thousands of dollars in accountants’ fees and lawyers’ fees to investigate where the problem lies.”

Government departments have also been caught out, including MBIE, which is charged with enforcing the Act. “The police were the first to highlight the fact that there was a problem. It cost them something like $35 million to $40m in arrears,” Mackay says.

“Then the Labour Inspectorate, which is part of MBIE, discovered there were problems within MBIE. So MBIE became, embarrassingly for them, the second high-profile case.

“Then it spread like Y2K. The resolution of payroll problems became the next Y2K, a nationwide exercise in trying to uncover and rectify system errors in terms of computing software and calculation errors in terms of people.”

Ripple effect

The healthcare system is facing the largest arrears bill yet uncovered, with Health New Zealand estimating almost $2 billion is owed to around 270,000 people due to mistakes dating back more than a decade.

“A hospital is probably one of the most complicated payroll scenarios you can imagine. You’ve got people working 24-7 and lots of legacy allowances,” Jenkins says.

“Trying to put that into a payroll system when the legislation is unworkable from the start is why they’ve got $2b in underpayments.”

Jenkins suspects many large companies face similar problems but have not yet declared them.

“A lot of companies are waiting to see if a new Holidays Act will resolve their issues. It won’t though because [new legislation] is going forward, not going back retrospectively,” he says. “It’s billions of dollars over the last 20 years.”

Mackay says one of the many issues with the Act is that some of the leave calculations allow for the use of averages, which people have used in the wrong circumstances because the concept is relatively easy to understand.

“People thought averaging was the easy way for everything,” he says. “It became common practice even when it shouldn’t have been used and meant people were using the wrong calculations and creating arrears.”

This use of averaging extended to many payroll software programs, which Jenkins says do not require certification in New Zealand to ensure they are fit for purpose.

“If I miscalculated six years ago, that sits in the gross earnings going forward and has a ripple effect year after year. What starts as a little bit of money grows and grows, it undermines all your leave calculations and then suddenly a small business owner finds they owe $8,000 to an employee. Then multiply that by the number of staff.”

Political football

Workplace Relations Minister Brooke van Velden says she’s determined to sort out the issues, aiming to release a draft bill for targeted consultation by September and implement reform during this Parliamentary term.

“Change has been a long time coming and I know there are many who are frustrated with the Holidays Act,” she says. “We need an Act that businesses can implement, and that makes it easy for workers to understand their entitlements. We need to do this once and do it right.”

The problem is that we’ve been here before. The Key government introduced changes in 2011 which Mackay said added more calculation options to the already puzzling equation.

Labour set up a taskforce in 2018 with union and business involvement, which agreed on a raft of reforms which were not implemented before last year’s election. Van Velden acknowledges the taskforce’s work but says more changes are needed.

“The advice I have received from officials has led me to the conclusion that there are further opportunities to improve the simplicity and workability of the legislation,” she says. “In some areas, the previous government’s decisions would end up increasing complexity and compliance costs.”

The New Zealand Council of Trade Unions (NZCTU) warns tinkering with the taskforce’s agreed changes based on limited consultation risks turning Holidays Act reform into a political football.

NZCTU President Richard Wagstaff believes van Velden wants to reduce sick leave for part-time workers and fears other entitlements will be cut back.

Should that happen, Wagstaff says unions will fight for their reinstatement under future governments and there will not be a settled solution acceptable to all.

“Consensus, as we had it, is highly desirable,” he says. “If there’s a process which causes workers’ entitlements to be taken away, we’ll certainly look at restoring them. “Then you just get into a situation where things just get batted from one election to the next and that’s not in anyone’s interest over time.

“It will bring back the problems we’ve had before in terms of complexity. Getting entitlements right is highly likely to be harder if they’re changing all the time. It’s going to make life a lot easier for everyone if we reach a consensus and stick with it.”

Tough nut to crack

Regardless of what the reforms look like, Jenkins says it will likely be years before they come into effect. “Whenever the Act is changed, it takes at least 18 months for payroll systems to change software and be ready to implement the change,” he says.

“You’re talking years. You’d be lucky to see anything change before 1 April 2026 and even then, I doubt it.” Mackay, who is part of MBIE’s reform consultations, says fixing the Holidays Act “has been a very tough nut to crack. “It’s easy to say ‘simplify it and change it to this’, but to express it in law in a way which is not ambiguous is a lot trickier than people think,” he says.

“Let’s do it once and do it right, not do it quickly. I feel that’s what we’re doing now. We’re working away, solidly, painfully, methodically through every damned word.” ■