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Pay and payroll mistakes that can cost your business

Nick Stanley
by, Nick Stanley

Getting pay or payroll wrong is a major risk for any business. Errors can be costly not only in terms of money and time, they could land you in hot water, legally.

Business owners and management are ultimately responsible for any pay mistakes and their consequences.

At worst, you could face fines and prosecution by the IRD or Ministry of Business, Innovation, and Employment (MBIE), as well as any interest and potentially expensive legal fees.

There is also the damage mishandling an employee’s pay can do to their trust and confidence in the business, which can end up sapping morale across the company.

Unfortunately, pay errors aren't uncommon. People make mistakes, forget to do things, or are unaware of their legal obligations.

MBIE estimated in 2016 that payroll underpayments alone could affect more than 700,000 NZ employees and add up to more than $2 billion.

The combination of a good payroll system and strong HR system will help reduce mishaps and non-compliance with the law, and will make it quicker to identify and resolve any issues.

Let's look at some common pay mistakes that any NZ business should watch out for.

Underpayment

Employers are responsible for ensuring their employees receive all entitlements when they're paid for work they do, but it isn't always easy to calculate those entitlements.

Scan the news headlines over the past few years and you'll see how complex and confusing payment for annual leave and statutory holidays can be.

There are two ways to calculate holiday pay: either on the basis of ordinary weekly pay or an employee's average weekly earnings over the past 12 months. You must pay whatever gives the employee more money.

Given that many payroll systems calculate and pay leave in hours, not weeks, the calculations can fail to average actual earnings over the previous year including overtime, extra pay for statutory holidays, and non-discretionary bonuses.

Even MBIE (the ministry in charge of administering the Holidays Act 2003) have been caught out on this one; more than 9000 of their workers were underpaid for holidays, and it's estimated the ministry will spend more than $10 million sorting it out.

It isn't the only large public and private organisation getting holiday and leave entitlements massively wrong:

  • The Corrections Department needed $16 million in this year's budget to rectify their breaches of the Holidays Act.
  • Auckland Council recently reviewed its payroll system and found underpayment errors that could cost it $16m.
  • Bunnings is paying back over $11m to more than 12,000 workers who they paid incorrectly for leave.
  • In 2016, the Police had to pay $33m to over 15,000 staff after it was found to have underpaid them for holidays and other forms of leave.

It is surprisingly easy for an employer to make mistakes with holiday pay and you may not even know your business is doing it.

The Government recently announced a working group to review the Holidays Act, describing the law as “unworkable”. While this is welcome news, it will likely be some years before we see any significant changes, so businesses must get holiday pay right.

Your payroll system will only do what it has been told to do, so don’t just accept the numbers are correct. Review what payments are being included and excluded for annual leave, and check closely each time you pay holidays to make sure the amounts are right.

Learn more about why leave management is important.

Overpayment

Overpaying your workers can be just as costly and harmful to your business as underpaying.

The National school payroll system, Novopay, has been in the news for years due to incorrect payments to thousands of school staff and the cost of rectifying the problems. Just this month, it was revealed that over 2000 education workers have been overpaid, some to the tune of tens of thousands of dollars.

Overpayments can be hard on employees if they were unaware of the issue and are not in a financial position to repay the money. In certain circumstances, you might also find you are not able to recover the money and the employee (or ex-employee) keeps it.

Minimum wage compliance

Employees must be paid at least the minimum wage for every hour they work.

It doesn't matter if they are are full-time, part-time, fixed-term, or casual workers, or whether they are paid by wages, salary, or commission. The minimum wage is the lowest that a worker can be paid (you and your employees can agree to any wage rate higher than the minimum).

Currently, the rate for adults (aged 16 and over) is $16.50 before tax. There are separate rates for starting-out workers and trainees (80% of the adult minimum wage). KiwiSaver payments and holiday pay must be paid in addition to the minimum wage.

If a business makes a serious failure to pay the minimum wage, it and its managers could face significant penalties. If it is in relation to a migrant worker, the managers could face jail time.

The government reviews the minimum wage each year, so you need to make sure you're up-to-date with the latest rates.

Unlawful deductions

This is where things can get shady. Legally, you can't deduct money from your employee's wages unless it's for a lawful purpose (e.g. PAYE, KiwiSaver, child support payments, or student loan repayments), is reasonable, and the employee has agreed to the deduction in writing (they can withdraw their consent at any time).

Despite the clarity of the law, a surprising number of businesses incorrectly make deductions from their workers' pay. Sure, some may not know the full extent of their legal obligations, but there are some that just plainly flout the law, paying employees less hours than they actually work, or docking pay for damage to company property, and in other cases, taking money as reimbursement for visa applications and rent.

The law makes no distinction between an employer not knowing what deductions are legal and deliberately breaching the Wages Protection Act, and employees can take cases of unlawful deductions to the Employment Relations Authority. The Labour Inspectorate (along with Immigration New Zealand) is also actively encouraging employees to tell them of breaches in employment (and immigration) law and they will prosecute businesses.

The bottom line is any deductions must be legal and you should always discuss them first with your team members. If you are unsure, get advice on the content and wording of any clauses in an employment agreement that are intended to allow deductions from wages.

Take pay seriously

The process of calculating pay and paying people can be complicated and extensive, but having sub-par payroll practices can be costly, ineffective, and a major risk for your business.

Whoever is in charge of payroll is critical to your company; they are performing more than simple data entry, and should be treated and paid accordingly.

Having a robust payroll system can help with accuracy, automation, and record-keeping (you need to keep accurate records of all payments for at least 6 years.). If you use payroll software, make sure it is designed and configured for the NZ business environment.

Coupling your payroll processes with the oversight of a good HR team will ensure you're always meeting all your legal requirements.

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