The rise of holiday pay woes

Tax Alert - April 2016

By Christel Townley and Derek Tang

No one enjoys being told that they have not been wholly compensated for their work, especially when it involves an extended period of time.  Yet that is the reality for many Kiwis today as continuing investigations by the Labour Inspectorate show that many businesses, both public and private, have failed to fully comply with the Holidays Act 2003 (“the Act”).  As it stands, there have been investigations into 20 employers for potential breaches of the Act. With further investigations currently being conducted, it should come as no surprise that the arrears of salaries and wages is predicted to run into the millions of dollars.

These issues may be attributed to the information entered into the payroll system and sometimes the system itself may not be operating as it should.  In most cases, employers are to calculate holiday pay at the higher of an employee’s ordinary weekly pay or average weekly earnings over the preceding 52 weeks.  Common errors can be where the system has been programmed to calculate holiday pay at only one of these rates, or payments that should be included in holiday pay calculations are not marked as such, subsequently underpaying the employee.  Examples of these may occur in circumstances where contractual bonuses are being incorrectly treated as discretionary payments, certain allowances are not being included in holiday pay calculations or when employees work greatly variable hours during the year.  Although investigations have been in progress since 2012, the extent of the situation is only now becoming clearer as investigations are being completed.  The ongoing media coverage is certainly not helpful as it impacts the reputation of businesses and the public can often be misinformed about how holiday pay operates.

Given the increased focus on employee payments, consistent with our previous article on the taxation of allowances, the time may be right for a review of payroll related matters.  Please contact your usual advisor to discuss further.    

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