For payroll professionals, it's not the straightforward holiday pay calculations that create headaches - it's the tricky edge cases that fall between the cracks of the Holidays Act 2003. This guide goes beyond the basics to tackle those challenging scenarios that even experienced payroll managers sometimes struggle with.
Recent court rulings have significantly changed how commissions must be treated in holiday pay calculations. Let's examine what this means for your payroll processing.
The Supreme Court's 2021 decision in A Labour Inspector v Tourism Holdings Ltd established an essential precedent about including commissions in holiday pay calculations. The court clarified that commissions earned before leave must be included in Ordinary Weekly Pay when they're a "regular part" of earnings.
What "regular" means in practice:
The ruling defined regularity in two key ways:
When an employee with variable commissions takes leave, don't just use their base salary for calculations. Instead, look at their Ordinary Weekly Pay (including recent commissions) and Average Weekly Earnings (over 12 months), then use whichever gives the higher amount. This approach ensures compliance with the Tourism Holdings precedent while providing fair compensation.
For example, a salesperson receiving monthly commissions between $2,000 and $5,000 based on performance must include these in both RDP and OWP calculations because they accrue systematically, even though the amounts vary significantly.
According to Employment New Zealand, this interpretation supersedes previous guidance that allowed variable commissions to be excluded if unpredictable in amount.
The seemingly straightforward OWD test becomes particularly challenging with rotating rosters, on-call arrangements, and flexible scheduling.
Imagine this scenario: An employee works a 6-week rotating roster with different weekly days. A public holiday falls on a day they would have worked in weeks 1, 3, and 5 of the rotation, but not in weeks 2, 4, and 6. Is it an Otherwise Working Day for them?
Decision framework:
WHAT WORKS:
According to MBIE guidance, you should consider several factors beyond just the immediate past:
Do employees who are on call during public holidays but aren't actually called in qualify for alternative holidays?
Being "on call" doesn't automatically mean an employee gets an alternative holiday. It depends on how restricted they are. If they can't leave town, must respond within 30 minutes, and can't enjoy everyday activities, they're more likely to qualify for an alternative holiday, even if they're not called in. But if they need to keep their phone on and could reasonably enjoy their day, they probably don't qualify.
The Employment Relations Authority has established that on-call restrictions can trigger alternative holiday entitlements if they substantially limit employee activities, even without being called in.
This requires case-by-case assessment rather than applying a blanket policy to all on-call employees.
Holiday pay calculations become particularly challenging during termination, especially with variable hours, mid-year terminations, and leave taken in advance.
The challenge:
An employee with a complex pay structure (base + commission + allowances) terminates after 15 months. They've taken 3 weeks of annual leave and have 2 unused alternative holidays. How do you calculate their final pay correctly?
Step-by-step solution:
Many payroll systems don't automatically handle these different components correctly. Double-check your calculations, especially when dealing with employees who have complex pay arrangements.
One of the biggest compliance risks is incorrectly determining which allowances should be included in holiday pay calculations.
The challenge:
Your organisation has various allowance types: shift premiums, standby payments, tool allowances, travel allowances, and clothing allowances. Which ones should you include in holiday pay calculations? Here's a systematic approach to making these difficult decisions. The key is applying the same logic consistently across all payment types.
Create a master document that lists every payment your organisation makes, with a clear decision about whether it's included in holiday pay calculations. Update this document whenever you introduce new payment types. This approach creates consistency in your payroll practices and provides valuable documentation if you face an audit.
The challenge:
A nationwide retail chain with 200+ employees had a complex commission structure that varied seasonally. Sales employees earned higher commission rates during peak seasons (Christmas, winter) and base rates during quieter periods. Historically, Holiday pay calculations excluded commission, assuming its "irregularity" exempted it from inclusion.
The solution:
Following the Tourism Holdings ruling, the company implemented a rolling 12-month commission tracking system that captured monthly commission earnings, applied different formulas based on when leave was taken, generated both RDP and OWP calculations inclusive of commission, and maintained historical data for audit purposes.
The result:
A Labour Inspectorate audit found no issues with their revised approach. The solution also improved employee satisfaction and reduced payroll queries by 62%.
When this retailer implemented Smartly's advanced leave management, it was able to automatically calculate these complex commission-inclusive payments without additional manual processing, saving its payroll team approximately five hours every pay cycle.
The challenge:
A healthcare provider with 350 employees operated 24/7 with complex rotating rosters. Employees worked different patterns across day, night, and weekend shifts with various allowances. OWD determinations were inconsistent, with some employees receiving holiday pay for days they likely wouldn't have worked.
The solution:
The organisation implemented a structured OWD determination process that mapped each employee's historical work pattern, calculated the statistical likelihood of working specific days, applied consistent thresholds for OWD determinations, and documented all decisions with supporting data.
The result:
Clear documentation allowed them to defend OWD determinations during a staff union negotiation confidently. Their automated approach also reduced payroll processing time by 8 hours per pay cycle.
Using Smartly's compliance features, the healthcare provider could automate their OWD determinations based on historical work patterns, removing guesswork and ensuring consistent application of the rules across all employees.
Many holiday pay errors stem from payroll system limitations. Addressing these technical challenges is critical for compliance.
The challenge: Most payroll systems weren't originally designed to handle all the complexities of the Holidays Act, which can lead to systematic underpayments.
What you need to configure:
According to MBIE, you should conduct regular system audits using test scenarios across different employee types to validate compliance. This validation is especially crucial for employees with multiple pay components, changing contractual arrangements, or variable work patterns. Testing with these edge cases helps ensure your system correctly handles the full spectrum of your workforce.
Smartly's payroll system is built specifically for New Zealand businesses, with the Holidays Act's requirements at its core. Our system automatically compares OWP and AWE calculations. It uses the higher amount, includes eligible allowances and commissions in calculations, maintains historical data for accurate back-calculations, and provides audit-ready reporting for compliance verification.
The Labour Inspectorate's increasing focus on holiday pay compliance makes robust documentation practices essential.
Keep a "compliance diary" for your payroll processes. After each pay run, note any special circumstances, calculation challenges, or decisions you made about complex scenarios. This running record becomes invaluable during audits, showing your commitment to getting things right and providing context for past choices.
According to Employment New Zealand, the six-year record retention requirement applies to both the raw data and evidence of your calculation methodology.
The proposed shift to hourly accrual methodologies will dramatically change calculation frameworks. Advanced preparation is essential.
The reform proposal suggests moving to an hours-based accrual rate of 6.67% of hours worked. While the timeline for implementation remains uncertain, you should start preparing by:
Our development team is working on flexible calculation engines that will adapt to the new Holidays Act requirements as soon as they become effective. Smartly customers will transition smoothly to the new calculation methods with minimal disruption once the government finalises the reforms.
Holiday pay doesn't have to be the source of your payroll nightmares. With clear frameworks for decision-making, consistent application of rules, and good documentation, even the most complex scenarios become manageable. The key is developing systems that handle edge cases consistently rather than treating each as a brand-new puzzle.
When Labour Inspectors examine your payroll records, they're looking for patterns of compliance – evidence that you've thoughtfully applied the Holidays Act principles across your workforce.
Ready to transform how you handle complex holiday pay situations? Our advanced leave management features can help you automate calculations while maintaining the flexibility for unique scenarios. After all, your time is better spent focusing on your people than wrestling with payroll complexities.
