5 Common Payroll Mistakes and How to Avoid Them

A frequent mistake is misinterpreting the rules around public holidays, particularly regarding when an employee is entitled to paid leave and how much they should be paid. This mistake commonly occurs due to the confusion around paying casual employees and how to determine the “otherwise working day”.

Why is it a common mistake? 

Determining whether a public holiday is an “otherwise working day” for an employee is often confusing for employers. According to New Zealand legislation, if it’s not immediately clear, the employer and employee must consider various factors to reach an agreement. These factors include:

• The employee’s employment agreement
• Work patterns 
• The availability of work
• Roster systems, and 
• The expectations that the employee would normally work on that day.

However, the law does not provide clear guidelines on how to prioritize these factors, leaving room for interpretation. This ambiguity can lead to mistakes, such as incorrectly determining an employee’s entitlement to statutory pay for public holidays.

The complexity is further highlighted by case law, such as the Wendco case, where the court ruled that employers should not only consider the past four weeks of an employee’s work pattern but also examine the last three to six months. This broader analysis helps ensure a more accurate determination of what constitutes an “otherwise working day.”

For more detailed information on the challenges faced by Wendco and how they addressed public holiday pay errors, you can read our article on Public Holiday Pay: The Mistakes & How to Fix Them.

Without a clear prioritization of the factors listed in the legislation, employers can easily misinterpret the law, leading to errors in payroll and potentially resulting in legal disputes.

How can I avoid making this mistake?

To prevent errors in determining whether a public holiday is an “otherwise working day” for your employees, consider the following steps:

1. Review Employment Agreements Regularly: Ensure that employment agreements clearly outline work patterns and expectations for public holidays. Regularly reviewing and updating these agreements can help avoid confusion.
2. Analyze Work Patterns Over a Longer Period: Don’t limit your analysis to the past four weeks. Consider work patterns over the past three to six months to gain a more accurate picture of whether a day should be treated as an “otherwise working day.”
3. Use Payroll Software: Consider using reliable payroll software, like Crystal Payroll, that is designed to help you navigate these complex calculations. Crystal Payroll uses past work patterns and up-to-date legislative guidelines to help determine whether a day qualifies as an “otherwise working day” and calculates statutory pay accordingly, reducing the risk of mispayments.

Misunderstanding final pay entitlements during termination is another common error. Specifically, confusion arises between accrued annual leave and the 8% of gross earnings that must be paid out.

Why is it a common mistake?

Employers often mistakenly believe that both accrued leave and the 8% of gross earnings must be paid out during final pay because the accrued leave appears as another leave balance. However, accrued leave is intended to account for leave taken in advance by employees, not as an additional payment. The Holidays Act 2003 does not specifically mention “accrued leave” in the context of final pay, but it clearly states that employees are entitled to 8% of their gross earnings upon termination. This 8% of gross earnings represents compensation for all untaken leave, including any accrued leave. 

The purpose of this approach is to simplify the final payment process and ensure that the employee is fairly compensated without being overpaid. By including the value of the accrued leave within the 8% of gross earnings, the employer avoids double-paying the same entitlement.

How can I avoid making this mistake?

1. Understand the Holidays Act 2003: Understand that upon termination, only 8% of gross earnings plus any outstanding leave entitlements need to be paid out, not the accrued leave balance. Ensure that you’re familiar with the provisions of the Holidays Act 2003 to avoid costly errors.
2. Double-Check Calculations: Before finalizing any termination payments, double-check your calculations to ensure that only the 8% of gross earnings is paid out and not any accrued leave. If there’s any confusion, consult with a payroll specialist to verify the correct amount.
3. Use Payroll Software: Consider using payroll software that is compliant with New Zealand’s employment laws. Such software can automatically calculate final pay, including the correct treatment of accrued leave and the 8% of gross earnings, reducing the risk of human error.

A common mistake involves confusion about how annual leave is paid out, particularly when employees have irregular working patterns or earn additional income through overtime. Many employers assume that annual leave is always paid at the employee’s regular rate, unaware that the pay rate can vary based on factors like recent earnings. This misunderstanding can lead to underpayment of employees during their annual leave.

Why is it a common mistake?

Confusion often arises because employers don’t realize that the pay rate for annual leave may increase due to higher past earnings. If an employee has a variable working pattern, it’s essential for the employer to clearly define what constitutes a “regular working week” to ensure accurate leave accrual and payout.

When employees take annual leave, it’s paid out based on the higher of two calculations: Ordinary Weekly Pay (OWP) or Average Weekly Earnings (AWE). This means that if an employee has earned more than usual in the recent past (due to overtime or other factors), their annual leave pay will be calculated at this higher rate. Employers can be caught off guard by this increase and may not understand why the employee’s pay during leave is higher than expected.

How can I avoid making this mistake?

To avoid underpaying employees for their annual leave, employers should:

1. Understand the Legislation: Understand that annual leave is accrued based on regular working hours and is paid out at the higher rate of either Ordinary Weekly Pay (OWP) or Average Weekly Earnings (AWE). Regularly review your employees’ working patterns and earnings to ensure accurate leave calculations.
2. Use Accurate Payroll Systems: Ensure that your payroll system is set up to automatically calculate annual leave pay using both OWP and AWE. Crystal Payroll is one example of a payroll software system that automatically calculates both OWP and AWE and allows you to select the higher rate for payment.

Inaccurate data entry, especially failing to record the number of hours worked each day, is a major error that can lead to non-compliance with the Holidays Act 2003.

Why is it a common mistake?

Many employers mistakenly record only the total hours for a pay period instead of the specific daily hours worked by employees. Under the Employment Relations Act 2000, every employer is required to maintain a wages and time record for each employee, which must include details such as “the number of hours worked each day in a pay period and the pay for those hours” (as outlined in section 130(1)(g)). 

These records are essential for ensuring compliance with the Holidays Act 2003, as accurate wage and timekeeping is critical for calculating entitlements. Making this mistake can result in inaccurate wage records, making it difficult to comply with the Holidays Act, particularly when calculating annual leave, relevant daily pay, and average daily pay. Additionally, failing to maintain accurate records can cause significant issues during audits or inspections by labour inspectors.

How can I avoid making this mistake?

To avoid this mistake, ensure that daily working hours are recorded accurately for every employee. This will help you remain compliant with the Holidays Act 2003 and avoid complications in calculating various leave entitlements. Regularly auditing your wage and time records can help identify and correct any discrepancies early.

• Use Time and Attendance Software: Implementing time and attendance software allows employees to accurately record their own daily working hours. These records can then be integrated into your payroll system, reducing the chance of human error.
• With Crystal Payroll: Crystal Payroll integrates with a variety of time and attendance systems, automatically importing daily hours into the payroll system. This helps maintain accurate records that comply with the Holidays Act. Additionally, Crystal Payroll offers the “Earnings & Hours Analysis” report, a tool designed for audits and general use. This report simplifies record-keeping by consolidating employee working hours over time, ensuring you have accurate data at hand if needed during an audit.