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The Key Payroll Challenges for NZ business – Part 1

13 Mar, 2017

In this 2-part blog we look at some of the key payroll and workforce management issues that can catch New Zealand businesses – of any size – unaware, and possibly open to legal action, unwelcome costs and negative PR. Before you start, we recommend you read Ignore the strategic benefits of effective payroll at your peril

Holidays Act Compliance

The New Zealand Labour Inspectorate completed 144 “Payroll audits” between 2012 and 2018. With the passage of the Employment Standards Legislation Bill, MBIE’s resourcing has been significantly increased as well as a strengthening of Labour Inspectorate powers for its education and enforcement activities of the Holidays Act.

As at 31 July 2016, the completed investigations carried out by the Labour Inspectorate had resulted in employers paying arrears totalling $35 million to nearly 26,000 employees. The investigations continue and the number of organisations being audited for Holidays Act compliance continues to grow.

MBIE estimates that between 194,700 and 763,350 employees are likely to be underpaid for holidays and leave equating to between $50 million and $382 million per year on a nationwide basis. Taking the Limitation Act 2010 into consideration, MBIE estimates arrears nationwide are likely to be between $292 million and $2.29 billion.

Remediation for Holidays Act – BAPS Leave Calculation

In 2006, the Postal Workers Union Aotearoa (PWUA) began what became a long running legal dispute with the New Zealand Post Group (NZP) regarding the manner in which payments for certain types of leave were calculated.

NZP successfully defended the PWUA’s claim in both the Employment Relations Authority (ERA) and the Employment Court. However, in October 2012 the Court of Appeal found in favour of the PWUA. This finding has far-reaching impact for a large number of employers whose staff work irregular, inconsistent or fluctuating hours.

Remediation of the New Zealand Post “BAPS” calculation impacted over 18,000 past and 8,000 current employees. The challenging remedial project involved employee payroll records spanning four payroll systems and the back-pay period covered two legislated methods of calculating holiday pay.

The costs were substantial, and the remedial payment was provisioned at approximately $12 million with some former and current employees receiving lump sums worth several thousand dollars.

New Zealand Police have famously paid more than 15,000 of its current and former employees around $40 million in back pay.

Even before the New Zealand Post Case, settled in 2012, Adecco was instructed by the ERA to review and correct holiday pay for salaried staff who receive bonus payments. The remediation affected about 15% of its staff and was a signal for all employers that they should review their payment methods to both salaried and waged staff.

Impact of the Holidays Act

The Holidays Act requires employers to pay Annual Leave based on the greater of Average Weekly Earnings and Ordinary Weekly Pay. This has the potential impact of increasing an organisation’s annual leave liability on an ongoing basis. In the public health sector, Annual Leave liability for the District Health Boards has been estimated at $650 million in October 2019.

Overpayments

Overpayments can be difficult to recover. The Wages Protection Act requires employers to seek agreement with employees in recovering overpayments irrespective of the cause or size of the error. Employees can elect to repay in small amounts and the administrative cost of this further compounds the original error.

For terminated employees, recovery can be extremely challenging with the cost frequently outweighing the potential recovery.

In a well-reported case, Air New Zealand requested an employee to repay an overpayment that occurred as a “mistake”. The employee had raised concerns about the accuracy of his pay and the Employment Court ruled the amount unrecoverable. They advised that an employee is not obliged to point out the specifics of any error, but that the employer is responsible for carrying out appropriate extensive review.

Compounding the $70,000 overpayment, Air New Zealand was also instructed to pay over $13,000 to the plaintiff for legal fees as well as their own legal costs. Air New Zealand sought leave to appeal against the decision but this was declined.

Payroll Fraud

Businesses employing sole charge staff or small accounting and payroll teams are particularly prone to payroll fraud. Frequently there are few control mechanisms defined or monitored. An employee of a Lower Hutt engineering firm stole more than a quarter of a million dollars by making false entries in the company’s payroll and finance systems. The single most common reason fraud occurs is people “didn’t think they would get caught”.

Complex environments such as District Health Boards can carry one of the highest rates of payroll fraud. This is not so much a reflection on the number of cases, but more an indication that they have effective systems for detecting payroll fraud and are recording, reporting and addressing such cases.

How much fraud goes undetected at other organisation is, of course, unknown.

Timesheet fraud covers a range of activities including claiming for hours, allowances, penal rates and reimbursements that are not correct, or are not contractually agreed. Leave leakage is now being recognised as a significant cost to businesses who are not rigorous about ensuring all employee leave taken is approved and recorded.

Ready for more? Go to part 2