5. Corrections plans for costly pay error

The budget allocated $16m for Corrections to comply with the Holidays Act. Photo: Shane Cowlishaw

Corrections is the latest government department to discover it may have underpaid its staff, Shane Cowlishaw reports.

The budget revealed $16 million has been set aside in Corrections’ expenditure for “compliance with the Holidays Act”.

It follows a string of public organisations being hit with surprise backpay bills, including Auckland Council, which announced on Friday that it could be up for $18m after a review of its payroll system found underpayment errors.

In 2016, Police was also forced to pay out $33.3m to about 15,750 staff after it was found to have underpaid them for statutory holidays, sick leave, annual leave and bereavement leave.

Last year, the Ministry of Business, Innovation and Employment, the department tasked with enforcing employment standards, revealed it had set aside $10.15m to fund underpayments to more than 9000 staff.

Richard Waggott, Corrections’ corporate services deputy chief executive, confirmed the money had been asked for to cover any costs it incurred when it figured out if it owed staff money.

While it was unknown how big the cost could be, seeking money in the budget would ensure it would not have to come out of frontline costs.

“Many of our staff work shifts, and a number may be entitled to overtime payments. To manage the different types of employment arrangements we have, our payroll system is specialised and complex.”

An endemic problem

So, what’s the problem here?

A dated piece of legislation that payroll systems struggle to interpret, essentially.

Workers are entitled to four weeks’ holiday, but payroll systems operate in hours worked.

This is fine for the standard 40-hour employee, but it gets complicated once you start dealing with part-time workers or people who work rosters such as four days on, four days off.

Christie Hall, New Zealand law leader at EY, said the problem wasn’t just in government, but across the business sector.

“We have not gone into a business in five years and not found it a problem.”

The issue had first begun to crop up in 2010, but until a few years ago MBIE had taken a relatively relaxed enforcement approach.

This had changed and they were continuing to work through an audit list of 100 companies, “almost all who will have the same issue”.

“The other problem I think we’ve got fundamentally is there’s been a disconnect between business and the payroll companies in that business thought they were buying compliance and the payroll companies thought they were selling software.

“People have had these systems configured for five years, they’ve employed someone who they see as being data entry on a pretty low wage to be the ‘payroll lady’ and they’re wondering why there are problems with their system

Hall said the act was in desperate need of an update to keep pace with the modern working world, but with some organisations already having paid out millions, others should be voluntarily looking to address any discrepancies.

Another employment lawyer, Susan Hornsby-Geluk, agreed payroll system difficulties were the main culprit.

There were other problems, however.

When people took annual leave they were also entitled to whatever was greater: what they were ordinarily being paid when the holiday started or their average weekly earnings over the past year.

Many employers didn’t realise this and just went with the ordinary pay rate, she said.

There was also a “grey area” about discretionary payments such as bonuses and commissions and whether they should be included when calculating holiday pay.

Many employers would consider they wouldn’t, but the court and the Employment Relations Authority would likely have a different view.

If a discrepancy was identified and a complaint lodged an employer was required to back pay for six years from the date. This often meant the real costs could often be in labour costs rather than backpay, she said.

“That ($16m) sounds like a huge amount but some of that might be compliance costs, what you’ll find is employers might have to pay employees a couple of hundred bucks but spend more than that trying to track them down.”