The horrors of the Holidays Act

Talking recently with an accountant friend, we got on to the topic of managing payroll. I asked him if it’s really as complicated as it seems. ‘Oh yes,’ he laughed hollowly. ‘We have about 40 people in our practice, and the wife of one of our directors was working for us in a specialist area. After she had been with us for quite some time, it was discovered that her holiday pay entitlement had been calculated all wrong.’ If a sizeable firm of chartered accountants can screw up, you can see why small business owners often struggle.

Hot topic

Payroll is a hot topic in franchising at the moment following two investigations in 2017 by the Labour Inspectorate of the MBIE. In the first, companies which operated 17 Caltex franchises around Auckland were found to have underpaid 232 current and former employees and had to pay more than $125,000 in arrears. In that case, it appears to have been accepted by both the Labour Inspectorate and the franchisor that the problems resulted from a genuine error, and no penalty was applied.

In the second case, companies linked to the Gengy’s Mongolian BBQ Buffet franchisor were ordered to pay $97,000 in arrears to 132 employees, plus an additional $99,000 in penalties for failing to provide minimum wage and correct holiday pay.

Neither of the cases involved the sort of deliberate frauds uncovered in certain Australian franchises recently, but they caused concern within the franchise sector here nonetheless. No wonder the Franchise Association is promoting greater education in this area.

But is education alone really the answer?

The NGA Human Resources Research, Payroll Complexity Index 2014, ranks New Zealand tenth in the world for payroll complexity and fifth for the complexity of government reporting. According to accounting software specialists MYOB, some of the reasons for this are: 

- Our Holidays Act has complex rules for calculating leave which are open to interpretation and can be difficult to apply correctly.

- Most New Zealand businesses process pay-runs weekly, which means those running the payroll have only a short window to fix errors when they do get it wrong.

- The onus is on employers to understand the PAYE system, correctly calculate tax, leave entitlements and deductions, as well as hit their IR payment and reporting deadlines each month to avoid fines. 

More investigations coming

This whole area should be of concern to any employer, because the Labour Inspectorate is increasingly investigating small businesses for breaches of wage entitlements. It’s of particular concern to franchises for two reasons: first, the Inspectorate knows that if it takes action against a ‘big name’ brand, it will generate greater awareness; secondly, it only takes one franchisee to break the rules – intentionally or not – and the whole brand will suffer.

Now, I’m a passionate believer that staff should be treated properly and that the law should be enforced – it creates a level playing field for all businesses, franchised or not. For the same reason, I’m against the ‘cash job’ mentality that sees the buyer ‘save’ the GST while the seller avoids paying any tax at all. Like the global companies who export their profits to lower-cost tax regimes, they increase the tax bill for the rest of us to pay for the schools, hospitals, roads and other benefits the crooks who avoid paying tax no doubt value. And so I applaud the efforts of the Labour Inspectorate to ensure compliance, and of organisations like the Franchise Association which put effort into informing and educating their members.

But I do have a question. If compliance is so difficult that even a reputable firm of highly-trained, highly intelligent chartered accountants can get it wrong, why don’t we make it easier? Easier for employees to understand what they are entitled to, so they aren’t taken advantage of? Easier for employers to calculate, so they waste less time on payroll and make fewer mistakes? Easier for the Labour Inspectorate to investigate and enforce the law? And, as a result, harder for the real crooks to take advantage of their staff, their law-abiding competitors and the taxpayers of New Zealand.

The latest minimum wage increases have the potential to make wage fraud more desirable in the eyes of the crooks, so let’s hope the new Government also looks at easing the burden for employers. The easier it is for good employers to comply with the law, the more the Inspectorate can focus on the bad ones.

This article was first published in NZBusiness magazine November 2017.

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