The Government announced today that it will establish a tripartite Working Group to review the Holidays Act 2003 (Act) and make recommendations for change within the next 12 months. This will be welcome news to many employers who are still trying to ensure compliance with an outdated and overly complicated Act. The hefty price tag for remediation payments to date and the continuous challenges of ensuring compliance going forward have put pressure on the Government to finally take action.
Holidays Act 2003 Review
The Government has announced that the review of the Act will be carried out by a tripartite Working Group with Business New Zealand and the New Zealand Council of Trade Unions. The Government representatives on the Working Group will include senior officials from the Ministry of Business, Innovation and Employment (MBIE), the State Services Commission and Inland Revenue. The Working Group will be chaired by Victoria University law school professor Gordon Anderson.
The key objectives of the review will be to develop options that:
make the provision of, and payment for, entitlements to holidays and leave simpler and more readily applicable to the range of working arrangements in the labour market;
provide clarity and certainty to employers and employees so that employees receive their correct entitlements and employers' indirect compliance costs are reduced;
aim to protect the overall entitlements to employees; and
are easy to systematise and implement in payroll systems.
The Government has made it clear that the scope of the review must be broad enough to consider any other matters relating to the Act such as parental leave, for example. The Working Group is expected to consult widely to get a comprehensive understanding of the issues with the current Act and to draw on examples from overseas. There is also an expectation that some form of technical reference group will be established as part of the review consisting of people such as payroll providers, business rules experts and service design and delivery experts.
The issue of remediation of underpayments under the Act is out of scope of the review and the obligation of employers to remediate employees for historical underpayments remains, as does their obligation to ensure compliance with the current Act until new legislation is passed.
The Working Group is expected to report back with their recommendations to the Minister within 12 months and will provide an interim report after 6 months in order to update Cabinet, and the public, on the Working Group's progress.
You can read more about the terms of reference of the review here.
The scope of the issue
The Labour Inspectorate has been very busy over the past six years conducting payroll audits and entering into enforceable undertakings with both public and private sector employers across New Zealand who have been found to be not complying with the Act. It has been recognised that the majority of the non-compliant issues identified are inadvertent as employers generally outsource their payroll services to an external third party. However, under the Act it is the employer who is responsible for ensuring that employees receive their minimum statutory entitlements and therefore remains liable for any potential underpayments due.
MBIE records that as at 1 March 2018, 140 payroll audits have been completed, with 55 of these initiated by the employer. Of the completed audits, there have been 107 cases where one or more compliance tools have been applied - the most common tool being an enforceable undertaking between the employer and a Labour Inspector. Although the underpayments due are not always significant for the individual employee, for large employers that need to remediate underpayments dating back six years, this can result in a significant bill. For example, MBIE records that New Zealand Police has made six arrears payments totalling around $39 million, with further payments potentially needing to be made. A number of employers, including MBIE itself, are still working through their payroll review project which means the outstanding liability related to Holidays Act non-compliance remains unknown.
There are a number of different issues which have resulted in non-compliance with the Act. This includes the fact that the Act provides several different methods for determining and calculating holiday and other leave. For holiday pay, employers are required to conduct two different calculations and pay the employee the greater of the two, whereas many employers have defaulted to only using one calculation. Difficulties also arise for employees who do not work a standard 40-hour week or who receive variable pay during the year through incentive or commission payments, for example. The Government has acknowledged that a proper resolution of these issues will only be achieved through legislative change.
Where to next?
It is not yet clear what the resolution will be and how the Act will be updated to better reflect modern working arrangements. The challenge for the Government will be how to simplify the legislation whilst ensuring that employees don't miss out on their minimum entitlements. It is important for employers to bear in mind that their legal obligations to ensure compliance with the Act will remain until new legislation is passed which the Government has indicated is likely to be a minimum of two years away, with a significant implementation period following to allow service providers to develop new products to deliver on the changes.
Our Employment Team has considerable experience in advising public and private sector employers on compliance with the Act. If you or your business has any questions regarding any of the issues raised in our article, please contact one of our team or your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.