A long-established payroll company says most of New Zealand's two million workers have probably been underpaid for annual leave or statutory holidays because of faulty payroll systems.

Matt Gardner, who founded Smoothpay Payroll in Palmerston North in 1995, said the total number affected since the Holidays Act was changed in 2004 "could well be 3 million" allowing for the numbers of people who had entered or left the workforce in that time.

"The majority of the payroll systems used in New Zealand still fail to comply with the Holidays Act," he said.

He said every employer who had transferred to his company from another payroll system had been calculating holiday pay incorrectly.


"In 20 years plus, we have not seen, as far as I can recall, any data coming from payroll systems that we migrate into our pool doing annual leave correctly," he said.

The Ministry of Business, Innovation and Employment (MBIE) this week said it had found holiday pay owing to 24,000 employees working for eight employers that it had investigated for holiday pay breaches since 2012. Average amounts owing ranged from $70 to $1800 per worker.

The most common mistake reported so far has been in calculating pay rates for annual leave. The Holidays Act requires paying workers either at their current pay rate when they take leave or at the rate of their average weekly earnings over the previous year, whichever is higher.

Workplace Relations Minister Michael Woodhouse. Photo / Getty Images
Workplace Relations Minister Michael Woodhouse. Photo / Getty Images

Many payroll systems simply pay leave at a worker's standard hourly rate, without averaging actual earnings over the previous year including overtime, extra pay for statutory holidays and non-discretionary bonuses.

Mr Gardner said even salaried workers working standard hours may have been underpaid if they worked on statutory holidays, when the law requires payment for time and a half plus a day off in lieu if they were normally required to work on the holiday.

"I've been banging on about this since the Act changed," he said.

"I was at an Inland Revenue payroll development seminar in about 2011 or 2012 and had a crack at the other payroll developers. They all just shut me down. They are fully aware that they are not compliant."

NZ Payroll Practitioners Association chief executive David Jenkins agreed that non-compliant systems were "definitely a time bomb". But he doubted that the problem affected a majority of workers.


"A large percentage would be compliant," he said.

"I would say if you have variable hours, you have got a good chance that it [holiday pay] might not be paid correctly. I think all employers need to check their payroll systems because they are ultimately liable. Payroll is the largest cost that an employer has and there is a risk from IRD or MBIE if you get it wrong."

Mr Gardner said Smoothpay Payroll paid about 29,000 employees for 1000 employers.

"We are a tiny company," he said. "We are probably a twentieth of the size of the largest payroll company."

MBIE guidelines are online here: