New Zealand Holidays Act Review

Below is a summary of the causes of our non-compliance with the Holidays Act.

1. Annual Holiday rates and entitlements were not calculated in accordance with the requirements in the Holidays Act. Also, Additional Annual Leave was merged with the four weeks of statutory Annual Holidays.
2. Family Violence, Bereavement and Sick Leave rates and entitlements were not calculated in accordance with the requirements in the Holidays Act and Sick and Carers Leave were merged into “Personal Leave”
3. Public Holidays taken as leave as well as hours worked on a Public Holiday were not calculated in accordance with the requirements in the Holidays Act
4. Termination Holiday pay was not calculated in accordance with the requirements in the Holidays Act.

1. Annual Holidays

The Holidays Act requires employers to provide their employees with four weeks of Annual Holidays per annum. This statutory entitlement arises after each continuous 12 months of employment.

It also prescribes the rate at which Annual Holidays must be paid as, the higher of an employee’s Average Weekly Earnings (AWE) or Ordinary Weekly Pay (OWP).

A flow diagram illustrating this process is below:

What is our non-compliance with Annual Holidays calculations at Rabobank?

Firstly, employees are being paid their Normal hourly rate for taking Annual Holidays instead of the higher of AWE and OWP (as per the above flow).

Secondly, because the payroll system is not set up to look for the higher of AWE and OWP the Gross earnings and Ordinary earnings calculations used to establish these rates are not currently being performed. Finally, Annual Holidays must be paid and entitlements managed in whole or part weeks – the payroll system (including the kiosk) is doing this in hours.

Note. The annual holiday entitlements were being combined with Additional Annual Leave, which made it impossible to report minimum statutory entitlements. This was changed in April 2021 and splits Annual Holidays from Purchased Leave.

What has been the impact of the non-compliance with Annual Holidays?

For a lot of employees Normal rate will be the same as OWP. However consideration of AWE is not being taken into account. The gross earnings calculation used to determine AWE, as prescribed in the Holidays Act, includes allowance payments including some lump sum payments, additional hours and overtime paid which can bring the average weekly rate over the previous year above the ordinary weekly rate.

Additionally, for employees who have changed their pattern of work, say from 37.5 hours per week to 30 hours per week in the previous 12 months, their AWE is likely to be higher than their 30 hours per week rate.

Employees who work irregular hours or changing patterns more than our full time employees, managing Annual Holidays in hours can lead to errors in both rates of pay and entitlement balances.

For example, employee A works 15 hours over 2 days each week and has an entitlement to 2 weeks of Annual Holidays.

Taking 15 hours of Annual Holidays would reduce their entitlement balance to 1 week and the leave would be paid according to the weekly rate that is the higher of AWE and OWP.

If employee A were to have changed their weekly pattern to 30 hours and they still take 15 hours of leave, their entitlement would reduce by only ½ of a week (to 1.5 weeks) and the leave paid at 50% of the higher of AWE and OWP.

2. Family Violence, Sick and Bereavement Leave

These types of leave are described in the Holidays Act in units of a day (rather than weeks as is the case for Annual Holidays). However, entitlements arise based on different rules across depending on the type of leave and some expire while others roll over from year to year.

The Holidays Act states that payment for these types of leave must be of the same value that the employee would have been paid had they worked on the day concerned. This is called Relevant Daily Pay (RDP) and includes all amounts that would have been earned such as planned overtime and taxable allowances relevant to the day on which the leave was taken.

There is provision in the Holidays Act for cases where RDP cannot be determined, and an Average Daily Pay (ADP) calculation is to be used instead. However an employer cannot default to this rate, instead it must make every effort to first determine RDP.

The Rabobank employee profile is not likely to give rise to needing this alternative rate as all our employee have agreed work patterns.

A flow diagram illustrating this process below:

What is our non-compliance at Rabobank?

This is a subjective calculation and requires employers to agree with employees what RDP is for the day that was taken off – accurate leave application and approval through the kiosk is key to ensuring the correct amounts are paid for any days or part day of this type of leave.

Where full time employee are employed to work the same number of hours each day for a five day week, hourly managed entitlements may not result it incorrect payments and entitlement balances. However where employees work irregular hours and/or irregular weeks or if their work patterns change (e.g. full time to part time and vice versa) the same problems arise as exampled in the Annual Holidays section.

3. Public Holidays

The Holidays Act considers two scenarios regarding Public Holidays, ones on which an employee works and ones on which an employee doesn’t work.

For any hours worked on a Public Holiday, employees must be paid a minimum of 1.5 times their RDP or ADP.

A Public Holiday falling on a day that would normally be worked (e.g. a Monday for a full time employee) the Holidays Act describes this as an “otherwise working day”.

Where an employee works on a Public Holiday that is an otherwise working day, they must be provided an entitlement to a full Alternative Holiday day - to be taken at a later date.

Where an employee works on a Public Holiday that is not a day that they would normally work, no entitlement to an Alternative Holiday arises.

Alternative Holidays must be paid at the RDP or ADP that is relevant to the day on which the Alternative Holiday is taken (see #2 above for RDP).

What is our non-compliance with Public Holidays at Rabobank?

At Rabobank, payment for working on a Public Holiday has not always been paid in accordance with the Holidays Act. Public Holiday hours are not specified separately from Normal monthly hours in our payroll system and in some cases an additional 0.5 of normal rate is applied to for any public holiday that has been worked.

Additionally, payment for working on a Public Holiday does not earn (accrue) an Alternative Holiday in the payroll system therefore an Alternative Holiday entitlement balance is not recorded. Instead, Rabobank has been giving employees Time off in Lieu which is also used for time in lieu of unpaid overtime/additional hours - which is not paid at RDP.

Where a Public Holiday falls on an otherwise working day, RDP must be paid for the day – according to the employee’s normal working pattern.

Employees who do not normally work on a day a Public Holiday falls will not be paid for that day unless they worked – see “Working on a Public Holiday” above.

Note. Payment for working on a Public Holiday has been changed and a specific code is used to pay time and a half for all hours worked. An Alternative Holiday balance of 1 day is now automatically generated each time an employee is paid for any hours of work on a Public Holiday.

4. Termination Holiday Pay

What is our non-compliance with Termination Holiday Pay at Rabobank?

At termination of employment, the bank was paying out employee’s Annual Holiday balances which included entitled Annual Holidays (4 weeks for every completed 12 months of employment) PLUS the accrued Annual Holidays since the employee last leave entitlement date less all Annual Holidays taken.

The Holidays Act requires employers to pay only an employee entitled leave balance plus 8% of Gross earnings from the last leave entitlement date. This is because, legislatively, it takes a full 12 months to earn (accrue) the next 4 weeks of Annual Holiday.

Note. This has been changed and the system is now paying Termination Holiday pay according to legislation.

Analysis has shown that the current Payroll system “PayForce” has been non-compliant since it was implemented in February 2014. Analysis of the archived data from the system pre-dating PayForce (Aurion) indicates that the same non compliance was occurring before February 2014.

Leave from October 2013 up until April 2020 is being re-calculated in the first instance, and leave up until compliance is achieved will also be re-calculated.

Section 131 of the Employment Relations Act 2000 (ERA) sets out employers’ obligations where payments for wages or other money have been made at a rate lower than that legally payable. This section is subject to a six year limitation period from the date any cause of action arises.

In October 2019, the Payroll Manager (Rabobank Australia) raised a concern to the Head of HR NZ that the payroll for Rabobank NZ may not have been compliant with the Holidays Act.

As a result, the Head of HR NZ sought legal advice which confirmed that the Holidays Act specifies some calculations for leave payment rates that, it seemed, were not being performed by the ADP payroll system. That advice confirmed that October 2019, in accordance with the legislation referenced above, should be considered the date that the cause of action arose.

Rabobank has taken a proactive approach to investigating compliance with the Holidays Act and in October 2019 engaged EY to complete a payroll audit on a sample of employees. This audit indicated that Rabobank was not always paying leave in line with the requirements of the Holidays Act.

As a result, the bank engaged EY to perform historical re-calculations of leave and approached the MBIE’s Labour Inspectorate for ongoing support and advice on how to achieve compliance.

A NZ based project team was established in September 2020 to confirm EYs findings and the causes of non-compliance at the bank, to manage the engagement with EY and the Labour Inspectorate and to develop a road map to achieve compliance with the Holidays Act.

Rabobank NZ CEO, Todd Charteris, has signed an Enforceable Undertaking (EU) with the Labour Inspectorate, committing the bank to re-calculate historical leave (as at April 2020) and make payments for arrears in the first instance.

This is to be followed by a second EU which will include achieving full compliance with the Holidays Act and making further, final payments for arrears that have been incurred in the intervening period from May 2020.

As the bank proactively approached MBIE, the EU is referred to as a “watching brief” which enables the bank to proactively engage with our allocated inspector. This way, we can be confident that our solutions to achieving compliance are agreed with the Inspectorate in advance of implementation.

Full compliance will only be achieved once all leave payments and entitlements are being managed according to the requirements within the Holidays Act AND all historical arrears have been paid to affected employees – both current and ex-employees.

Achieving compliance

The project team has developed a roadmap to achieving compliance which is made up of incremental improvements. The bank has adopted this approach so that leave payments to employees are made more accurate as soon as possible even if this is in stages.

Historical remediation of Leave

EY were provided with payroll data for all employees who worked for Rabobank between October 2013 and April 2020 and have delivered the re-calculated leave back to the bank.

Once the bank has a clear idea of how and when compliance will be achieved, planning the re-calculation of leave paid after April 2020 and up to the date compliance is achieved will be finalised.

Who has been involved in the remediation process?

An internal Rabobank team has worked closely with EY, ADP Ltd and a Labour Inspector from MBIE. The team have documented all issues, remediation steps and methodology. This has all been reviewed and our re-calculations have been approved by the Labour Inspector assigned to Rabobank to complete this work.

Through the process of EY building their re-calculation tool and for mapping out the bank’s pathway to achieving compliance, the Labour Inspector has been involved in and has confirmed decisions and approaches to policy, process and system requirements that will lead to compliant calculations.

EY own the IP for their calculator tool but they have used the bank’s requirements to perform the calculations.

A meeting can be arranged for EY to take you through your personal data set and re-calculations. The requirements can be found in the table and your original historical (un-remediated) payroll data can be provided to you on request.

The table with a list of payment types that are included in Gross earnings for the purposes of leave rate calculations is shown below:

No.

In 2017 the IRD Commissioner released a statement regarding the tax treatment of remedial payments for historical leave pay errors.

In that statement, the instruction is for employers to pay remedial payments as lump sum payments not salary and wages.

See full commissioner statement here.

The Labour Inspector has approved our approach for remediation payments and the recalculation of historical leave payments and entitlements to April 2020 has been completed by EY.

Remediation payment calculations for the period 1 October 2013 through to 30 April 2020 have been completed and the bank is now contacting affected employees who worked for the bank during that period.

In terms of the road map to achieving compliance, the 1st stage improvements have been implemented and include:

• Separating Purchased Leave from statutory Annual Holidays
• Changing the payment for working on a Public Holiday
• Implementing “Alternative Holidays” for employees who have worked on a Public Holiday (if it was normal working day for them)
• Applying the correct calculations to Termination Holiday Pay

Concurrently, we are working with our provider to establish what system changes might be needed to enable the ADP Payforce payroll system to perform the correct leave rate and entitlement calculations.

Under the Holidays Act employers are required to provide employees with four weeks of Annual Holidays after each 12 months of continuous employment.

Where Additional Annual Leave was added to the Annual Holidays balance, it became impossible to monitor and manage the legal entitlement.

Additionally, the payment rates for Annual Holidays will change in accordance with the legislation whereas payment (and deductions) for Purchased Leave will continue at “Normal” rate.

We applied a mathematical/proportional approach to separating these leave types and applied this to all instance of Purchased Leave as it was felt that separating each leave instance would not advantage or disadvantage either the employer or the employee.

Where employees had purchased 1 additional week, we divided each leave instance by 4/5 for Annual Holidays and 1/5 for Purchased Leave until a full week of Purchased Leave had been taken (and paid) e.g. Where a (37.5 hours) full time employee took two days of Annual Leave the 15 hours were separated into 12 for Annual Holidays and 3 for Purchased Leave.

Where employees had purchased 2 additional weeks, we divided each leave instance by 4/6 for Annual Holidays and 2/6 for Purchased Leave until a full week of Purchased Leave had been taken e.g. Where a full time employee took a week (37.5 hours) of Annual Leave this became 25 hours of Annual Holidays and 12.5 hour of Purchased Leave.

Given both Purchased Leave and Annual Holiday entitlements and time taken & paid were merged together the Labour Inspectorate has agreed that this approach is the most fair - in the absence of records that confirm which leave type employees had taken.

Yes. As for all historical recalculations, if an employee has more information/data than the payroll system holds their relevant calculations will be reviewed noting that where revised calculations result in a different amount, the bank is not obliged to pay the higher of the two amounts by default – it will be the most accurate/compliant amount for each instance that will be paid.

The calculation of “gross earnings” for the purposes of Annual Holidays rates is, while defined by the Holidays Act, open to interpretation in some circumstances. For the Bank, this includes the consideration of whether the Variable Incentive (VI) scheme is deemed part of an employee’s employment agreement or discretionary.

Metropolitan Glass NZ (MetroGlass), who has a similar bonus scheme, has already received a ruling in the Employment Court that their scheme is not truly discretionary and has appealed that decision. The Appeal court hearing was in July 2021 however there is no specified or legislated timeframe in which the determination will be made.

MBIE’s Labour Inspectorate has confirmed that the MetroGlass scheme is sufficiently comparable to that of the Bank’s and that they will consider that the outcome Appeal Court’s determination to apply to our VI scheme. Accordingly, no changes are being made while the law is currently unsettled on this point.

Testing of the Payforce system to date indicates that VI payments can be configured to be included in the calculation of gross earnings for AWE purposes and we are working with ADP to confirm this capability.

For historical errors up to April 2020, EY has been asked to re-calculate gross earnings (and resulting AWE) taking the VI payments into account AND excluding them.

It is the intention of the bank to pay recalculated Annual Holidays amounts owing excluding VI payments as soon as possible and to “top up” these payments after the Appeal court’s consideration, if the VI scheme is determined not to be discretionary.