Simpson Grierson A REPEAL IS OVERDUE: REPORT ON A SURVEY OF THE HOLIDAYS ACT 2003 MARCH 2014 About Simpson Grierson We have what is widely considered to be New Zealand's leading employment law practice. Our expert advice is called on by many of New Zealand's top organisations in both the private and public sector. We act for a number of New Zealand's largest companies. We also have a portfolio of major international corporate clients. We act for many major government departments and local authorities. We advise on all employment-related work. This includes accident compensation, collective bargaining and industrial relations, employee benefits, employment and contracting agreements, health and safety, human rights, superannuation (including KiwiSaver), legislative compliance, personal grievance claims, privacy, restructuring, redundancy, union issues, and strikes and lockouts. CONTACTS Phillipa Muir – Partner DDI: + 64 9 977 5071 MOBILE: +64 27 593 5402 Email: phillipa.muir@simpsongrierson.com Rebecca Rendle – Senior Associate DDI: + 64 9 977 5208 MOBILE: +64 21 302 476 Email: rebecca.rendle@simpsongrierson.com contents Introduction 1 Summary of Key Findings 2 Key Finding 1: Not easy to apply 3 Key Finding 2: Calculate leave in hours 4 Key Finding 3: One formula for leave 7 Key Finding 4: Bonus/incentive payments 8 Key Finding 5: Cashing up annual leave 10 Key Finding 6: Parental leave 11 Methodology 12 introduction This survey was carried out in December 2013. We received responses from 196 HR specialists on the Simpson Grierson database. A repeal of holiday laws is overdue The Holidays Act 2003 is an important piece of legislation for all employers and employees. However, it can be difficult to interpret and apply. It was originally drafted in 1981: a time when most businesses were closed on weekends and a 9 to 5 Monday to Friday work week was the norm. The world has changed. While the 2003 and 2011 amendments to the Holidays Act tinkered around the edges, we regularly receive feedback from employers that the Holidays Act is overly complex and no longer fits with the many and varied work patterns now in place. The consequences of misunderstanding rights and obligations under this Act can be significant, potentially leaving employers with liability for back pay of up to six years (together with the substantial costs of auditing and remedying errors). In late 2013 we conducted a short survey on the common key issues and areas of concern we hear about. The responses confirm that it is time for change: it is time to repeal the current Holidays Act and introduce a modern, user friendly piece of legislation that will assist employers and employees to understand, interpret and apply leave obligations and entitlements. Some of the feedback we received includes: "It is extremely difficult for employees to understand entitlements. Employers hold huge potential for errors (administration and compliance). Employees generally just want [something that is] easy to understand and on negotiable terms." "It is still not a well thought out piece of legislation in that it still causes too many misunderstandings around entitlements, both monetary and physical. It should be simple so managers can easily understand it, employees understand their entitlement and Payroll can spend their time doing more meaningful work." "…it does not suit today's 7 day working environment. It is difficult in our industry, being 24/7 coverage…". We hope the results of this survey will be a starting point for change and a wider review of how the Holidays Act can better accommodate 2014 workplaces and work patterns. Based on these survey results, in our view, a re-write is needed. In particular, we recommend amending two key areas of the Act to make it easier to apply and provide clarity: • one formula for payment of all types of leave (instead of the current four formulas); and • accrual and payment of all leave in hours (rather than weeks for annual leave and days for everything else). Holidays Act Report / 1 summary of key findings 2 Leave accrual should be calculated in hours 1 3 The Holidays Act is not easy to apply 6 There should be one formula for calculating leave A repeal of the Holidays Act is overdue Some employees taking parental leave may be disadvantaged 5 Employees should be able to cash up more annual leave 2 / Holidays Act Report 4 $ There is no common approach on whether bonus/ incentive payments are included in holiday pay calculations Key finding 1: not easy to apply 1 The Holidays Act is not easy to apply The first question asked respondents if they find the Holidays Act easy to apply. Of the respondents, 82 indicated they find the Holidays Act difficult or very difficult to apply. Only 38 respondents find it very easy or easy to apply. "A lot of time is spent to comply with the Act. A more straightforward regulation would be appreciated." Survey respondent Q1. Do you find the holidays act easy to apply? 4 2% 34 Neutral 71 37% Difficult 72 38% Very Difficult 10 5% "It works well – no issues with it." Survey respondent 18% Very Easy Easy "It works for people who work Monday to Friday and get paid an annual salary. For everybody else, it is difficult." Survey respondent Holidays Act Report / 3 Key finding 2: calculate leave in hours 2 Leave accrual should be calculated in hours "Consistency: Annual leave is talked [about] in weeks and sick leave in days." Survey respondent "Our sites run a 6 on 3 off rotating roster. The current HA [Holidays Act] is not built for this kind of work pattern and makes it difficult to administer." When asked how they would prefer annual leave to be paid and accrued, the majority (61%) of respondents suggested hours would be a better system than days or weeks. This change would align leave entitlement with current payroll software and payroll providers. Most respondents (72%) already operate a payroll system where leave is determined by hours. As this is inconsistent with the Act, it adds an extra layer of complexity around how calculations are made and the potential for error. While a work day or a work week may vary greatly between workplaces and between employees, a work hour is the same for everyone. Q2. IF ANNUAL LEAVE COULD BE PAID AND ACCRUED DIFFERENTLY, WOULD YOU PREFER: Survey respondent Weeks 9% "The calculations are a nightmare and we rely on our payroll software to get it right (and pray that it does!)." Survey respondent Days Hours 61% 30% Q3. DOES YOU PAYROLL SOFTWARE/PAYROLL PROVIDER CALCULATE/ACCRUE LEAVE ENTITLEMENT FOR EMPLOYEES IN: Weeks 4% Days 24% 4 / Holidays Act Report Hours 72% Key finding 2: calculate leave in hours Unrostered overtime and Average Daily Pay The next set of questions considered unrostered overtime and how Bereavement, Alternative Holidays, Public Holidays and Sick leave (BAPS) is calculated. The majority of the respondents (72%) are employed in organisations where employees work regular unrostered overtime. Of the respondents who do have employees working regular unrostered overtime, 58% calculate BAPS payments by Relevant Daily Pay and 42% calculate payments on Average Daily Pay. Q4. DO YOU HAVE EMPLOYEES WHO WORK REGULAR UNROSTERED OVERTIME? "It is difficult to administer for a workforce that doesn't have guaranteed set hours each week." Survey respondent "The calculation difference for annual leave versus sick leave is confusing for employees." Survey respondent Yes 72% No 28% Q5. IF YOU ANSWERED "YES" TO QUESTION 4 ABOVE, FOR BAPS DO YOU CALCULATE PAYMENT BASED ON: Relevant daily pay 58% Average daily pay 42% Holidays Act Report / 5 Key finding 2: calculate leave in hours "Interpretation can be confusing at times. Relevant daily pay vs average daily [pay] etc." Survey respondent In New Zealand Post Limited v Postal Workers Union of Aotearoa Incorporated and Street1 the Court of Appeal considered the pre-April 2011 legislation. In particular, it considered the correct payment for public holidays for employees who work regular unrostered overtime. The Court of Appeal found that the averaging formula provided in the pre-April 2011 legislation should be applied. The Supreme Court2 declined leave to appeal because the issue was now principally only of "historical interest." How the new Average Daily Pay formula is to be applied will have to be determined "if and when issues arise". Until that time, the Court of Appeal decision suggests that where employees work regular unrostered overtime then the Average Daily Pay formula should be used rather than Relevant Daily Pay. This section of the survey showed that while 72% of respondents have employees who work regular unrostered overtime, only 42% of them use the Average Daily Pay formula. This highlights the difficulty with determining the correct calculation to use. 1 2 6 / Holidays Act Report [2012] NZCA 481 [2013] NZSC 15 Key finding 3: one formula for leave 3 There should be one formula for calculating leave There are currently four different formulas for calculating leave under the Holidays Act (Average Weekly Earnings and Ordinary Weekly Pay for annual leave calculations and Relevant Daily Pay or Average Daily Pay for BAPS). Question 6 asked respondents if one formula for calculating payment for all leave would make this easier. The overwhelming majority (87%) stated that they would prefer one formula. Only a small percentage (12%) suggested that it makes no difference and a minority (1%) said it would make things more difficult. Q6. ONE FORMULA TO CALCULATE PAYMENT FOR ALL TYPES OF LEAVE WOULD: Make no difference 12% Make things more difficult for our workplace 1% Make things easier for our workplace 87% "Differing calculation methods for different types of leave is confusing for employees to understand." Survey respondent "[It is] extremely difficult for payroll and staff themselves to understand, particular (sic) for staff who work rosters, or work varying hours on different days. An hourly accrual would make this much easier to manage." Survey respondent One respondent summarises the issues: "The most difficult aspect of the Holidays Act is that the Act is extremely unclear when determining payment entitlements. The interpretation you make can affect your entire workforce and then you expose yourself to potentially massive claims with a 6 year limitation period. In addition payroll systems are not configured to automatically comply because the Act is so difficult to interpret. We have had numerous examples of our payroll system incorrectly calculating entitlements on what were supposedly fairly straightforward issues. We are fortunate to have the resources and expertise to get proper advice and do regular audits but I assume most companies do not. I would not be surprised if the vast majority of companies did not properly comply with the Act." Holidays Act Report / 7 Key finding 4: bonus/incentive payments 4 $ "Bonuses shouldn't be included in the holiday pay rate." Survey respondent "The definition of discretionary payments needs amending to avoid large bonuses being paid before taking leave to drastically increase holiday pay." There is no common approach on whether bonus/incentive payments are included in holiday pay calculations These questions asked respondents about whether they include bonus and incentive payments in holiday pay calculations. The response to the question asking whether or not bonus/incentive payments are currently included was mixed. Nearly an even number of respondents include or don't include these payments or know if they are included. This underscores the lack of clarity here. The most surprising result is that almost one third (33%) of respondents do not currently know if these payments are included. However, most employers (59%) said they exercise discretion when it comes to making bonus and incentive payments, even if certain company or performance targets have been met. Q7. DO YOU INCLUDE BONUS/INCENTIVE PAYMENTS IN HOLIDAY PAY CALCULATIONS? Survey respondent No 30% Yes 37% Unknown 33% Q8. CAN YOU EXERCISE THE DISCRETION NOT TO MAKE A BONUS/INCENTIVE PAYMENT EVEN IF KPIs OR OTHER COMPANY OR INDIVIDUAL TARGETS ARE MET? No 20% Unknown 21% 8 / Holidays Act Report Yes 59% Key finding 4: bonus/incentive payments There is a high threshold for meeting the criteria for a discretionary payment. An employer must still have the discretion not to pay (or to determine how much to pay), even if all individual and/or company targets have been achieved. Therefore to be truly discretionary the incentive value of a scheme must be considerably watered down. Many employees receiving incentive or performance pay are senior employees with equal bargaining power and generous remuneration packages. In this case, should the parties have the freedom to contract and negotiate a component of performance pay that is inclusive of holiday pay so that the parties have certainty? "Generally the Act works well. The primary area of frustration is around the calculations for ADP and RDP and in particular the inclusion of bonus payments." Survey respondent Holidays Act Report / 9 Key finding 5: cashing up annual leave 5 Employees should be able to cash up more annual leave "I think there are issues when staff accumulate large amounts of leave liability. As an employer we are unable to force them to take leave for their own wellbeing and to reduce the liability cost for the employer." Survey respondent The survey reveals that just over half of respondents would like employees to have the ability to exchange more than one week of annual leave for cash each year (52%). Almost one third (30%) do not support this change while 18% do not have a view. Currently an employee can request to exchange up to one week's annual leave for cash each year. Respondents were asked about their view on having the ability to agree to exchange more than one week of leave for cash each year, provided that the employee retains three weeks of annual leave to be taken in any calendar year (ie parties can agree to exchange excess leave balances for cash, although there is no requirement to do so). Q9. WHAT IS YOUr VIEW On HAVING THE ABILITY TO AGREE TO EXCHANGE MORE THAN ONE WEEK OF LEAVE FOR CASH EACH YEAR? I am neutral 18% I do not support such a change I support such a change 52% 30% The need for employees to take regular holidays for rest and recreation is vitally important. Many employers want to address cashing up excess leave balances without making employees take lengthy holidays against their wishes. If this was permitted, consideration would need to be given to the issue of employees starting to 'stockpile' leave to cash up the excess in subsequent years, as opposed to simply dealing with existing and historical excessive leave balances. 10 / Holidays Act Report Key finding 6: parental leave 6 Some employees taking parental leave may be disadvantaged While not a specific question within the survey, some respondents commented on the issue of leave entitlements for people taking parental leave and expressed a view that the Holidays Act can be unfair for some employees returning to the workplace after taking parental leave. Several respondents indicated that change would be preferable so that employees are not at a disadvantage if they want to take annual leave or sick leave when they return to work. An employee continues to accrue annual leave while they are on parental leave. However, the Parental Leave and Employment Protection Act 1987 provides that this is to be paid based on an employee's average weekly earnings for the previous year. For an employee who has been on parental leave for one year, their leave will have no monetary value on the date that they return to work (although, it will then increase to full value after they have been back at work for one year). In reality a new parent is likely to want to take annual leave before they have been back at work for a full year. In some cases, there may be a customary closedown or an employer direction requiring them to take leave. Conversely, a full-time employee who waits one year so that their leave has full value will have acquired another 20 days of leave during that year and the employer will have a leave balance of 40 days at full value to manage. The comments from employer respondents on this issue show that further consideration needs to be given to whether the correct balance is being struck and, if not, how this can best be achieved. One respondent summarises the issues: "Earning annual leave while on parental leave is a nonsense as it has no value on the employees (sic) initial return to work. It causes problems over time as the value increases in terms of cost to business and the person not always being able to use all of the leave. Good service not broken while on parental leave but annual leave should not accure (sic)". "It is unfair for women returning to the workplace after taking parental leave, in that any holidays are calculated on the previous year's earnings (which are zilch given [they] have been on leave). Therefore this penalises women who need to take leave (sick or holiday) to care for children upon their return to the workplace." Survey respondent "I don't believe the Holidays Act works well for employees coming back from parental leave, the way annual leave taken in the first year after being back must be calculated. It is unfair for mothers returning to work to not be able to take annual leave paid at 100% of their current salary in that first year." Survey respondent Holidays Act Report / 11 Methodology This research draws on 196 responses from HR specialists on the Simpson Grierson database. Questions in the survey were not compulsory leaving respondents to address the topics they were most knowledgeable about. Question Number of responses 1 191 2 174 3 169 4 176 5 113 6 148 7 133 8 138 9 141 10 Comments only Q11. NUMBER OF EMPLOYEES AT RESPONDENTS' COMPANIES 1-49 11% 5000+ 18% 1000-4999 21% 12 / Holidays Act Report 50-999 50% Methodology We received responses from HR specialists in a wide range of industries. Some respondents let us know what industry they work in. The table below indicates the industries represented in the survey. Q11. INDUSTRIES OF RESPONDENTS Professional, Scientific & Technical Services 15 Public Administration & Safety 10 Manufacturing 9 Electricity, Gas, Water & Waste Services 6 Finance & Insurance Services 5 Information Media & Telecommunications 5 Administrative & Support Services 4 Construction 4 Education & Training 3 Health Care & Social Assistance 3 Other Services 2 Arts & Recreation Services 2 Retail Trade 2 Wholesale Trade 2 Mining 2 Agriculture, Forestry & Fishing 2 Holidays Act Report / 13 BARRISTERS AND SOLICITORS AUCKLAND: Level 27, Lumley Centre, 88 Shortland Street, Private Bag 92518, Auckland 1141, New Zealand. T +64 9 358 2222 WELLINGTON: Level 24, HSBC Tower, 195 Lambton Quay, PO Box 2402, Wellington 6140, New Zealand. T +64 4 499 4599 CHRISTCHURCH: Level 11, HSBC Tower, 62 Worcester Boulevard, PO Box 874, Christchurch 8140, New Zealand. T +64 3 365 9914 www.simpsongrierson.com