An overhaul of the Holidays Act is planned to make it simpler and prevent confusion which left thousands of workers shortchanged on annual leave and some government departments and employers with large bills for historic underpayments.

Workplace Relations Minister Iain Lees-Galloway announced a joint taskforce of Business NZ, the Council of Trade Unions and the Government to review the law, with recommended changes expected in a year's time.

There have been calls for an overhaul from both business and the unions after confusion around the calculation of holiday pay caught out several government departments and private companies and meant some workers were not given what they were due.

The affected government departments include police and corrections. The latest figures show that police have had to fork out $39 million in arrears so far and more payments are yet to come.

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Other than police, 51 employers have had to pay arrears totalling $6.14m to about 18,000 staff. The payments have ranged up to $1300.

Lees-Galloway said employers who were affected by that would still be required to compensate workers for any current and historic underpayments if the law changed in future.

Lees-Galloway said the 15-year-old law which sets minium entitlements for holiday, sick and bereavement pay needed reviewing to ensure it was fit for the modern workforce. It catered to a nine-to-five working day, which was no longer as common. "It can be very challenging to work out exactly what people's entitlements are when they work what would traditionally be called irregular hours, but which these days are a normal part of working life."

He said the two principles that guided it would be simplifying the rules but ensuring people's entitlements were not diminished.

The taskforce will be chaired by Gordon Anderson, a law professor at Victoria University, and will include employer, worker and government representatives.

Lees-Galloway said the year-long review was needed to ensure any changes worked as planned.

Any proposed changes would be "tested" with payroll experts and business service providers to ensure they worked in practise.

Anderson said the aim was to ensure legislation was fit for the modern day "and move it on from its origins in the pre-computer days of the 1950s".

Business NZ's John Milford said it was delighted the law was being overhauled. "It is a challenge for employers. Employers want to make sure employees get the right money at the right time. Currently the law is not fit for practise."

CTU's Richard Wagstaff also said the law was not delivering what workers were entitled to.

Payroll services company MYOB Businesses said business would welcome changes that made the law easier to administer.

"Businesses have been tearing their hair out trying to comply with the Holidays Act," said MYOB General Manager Carolyn Luey.

"There have been several high-profile examples of both big and small employers being caught out by the Act's complexity. Business owners will be looking for changes that make it easier to determine exactly what an employee is owed."

At the moment holiday pay is calculated either on the basis of ordinary weekly pay or an employee's average weekly earnings over the past 12 months.

Employers must pay whatever gives the employee the most money. But employers who calculate holiday pay based on an employee's contracted hours can get caught out if that person does variable hours or earns a commission or other variable pay.

The law has caught out a huge number of employers, including government agencies such as police, corrections and DHBs and private companies such as Spark and McDonald's.

Employers have called for changes to the Act, saying they are too difficult to understand.

The Holidays Act was introduced in 2003 to enshrine in law minimum entitlements to annual leave and issues such as sick leave and bereavement leave.