Making Payroll Providers Accountable to Ensure Compliant Software Under the New Employment Leave Act 2026

Author: David Jenkins, NZPPA CEO

Employers will remain legally responsible for paying employees correctly. For that reason, payroll providers must be held accountable for the software employers rely on under the new Act.

The key point: employers should be responsible for their employment arrangements, payroll information and the way they use the system. Providers should be responsible for the calculations, rules and controls they build into the software.

This article is part of a wider series examining the new Employment Leave Act and its implications for payroll. It focuses on a longstanding imbalance: employers carry the legal liability for payroll compliance, while payroll software providers may face limited accountability when their systems contribute to non-compliance.

NZPPA raised this concern in its submission on the Employment Leave Bill, but the issue was not adequately addressed. If legislation cannot strengthen accountability, NZPPA will focus on helping employers and payroll teams set clearer expectations with their providers, including shared responsibility for system compliance, assurance and testing.

MBIE must also support employers by introducing meaningful measures to hold payroll providers accountable throughout the two-year implementation period. Provider self-assessment, without independent scrutiny or evidence, will not be sufficient. After more than 20 years of problems under the Holidays Act, the risk of repeating the same mistakes is too significant to ignore.

This is not a criticism of every payroll provider. New Zealand has providers that take compliance seriously and deliver high-quality systems. However, others fall short, and employers need practical ways to identify the difference and protect themselves.

The liability gap must be addressed

The Employment Leave Act 2026 was passed on 6 August 2026 and will replace the Holidays Act 2003 on 6 August 2028. Employers and payroll providers now have two years to understand the new rules, update their systems and processes, convert leave balances and thoroughly test the changeover.

The two-year preparation period does not change where the legal responsibility sits. The employer must provide the correct leave, make the correct payments and keep the required records. Using payroll software or outsourcing payroll does not pass that responsibility to the provider. If the system calculates leave incorrectly, the employer must put it right and will carry the cost and compliance risk.

Employers should be responsible for the matters they control, including employment agreements, rosters, employee classifications, pay information and how the system is used. The problem arises when non-compliance stems from calculation rules built into the software that the employer cannot see, test or change. Payroll providers must take responsibility for the decisions they make when designing their software.

Why software accountability matters

Payroll software does much more than process figures. It turns employment arrangements, time records and pay information into leave entitlements and payments. Under the new Act, systems will need to handle hours-based leave accruals, different types of hours, leave compensation payments, agreed and notional rosters, multiple roles, public holiday tests, converted leave balances, pay statements and new record-keeping requirements. One wrong design decision by a provider could affect every employer using that product.

The provider knows how its software works; the employer usually does not. Many employers, particularly small and medium-sized businesses, cannot see the formulas, rules or assumptions operating behind the screen. Even experienced payroll practitioners may be unable to check locked calculations without clear specifications, test cases and expected results. This makes it very difficult for a customer to test a claim that a product is ‘New Zealand compliant’.

One software fault can quickly become a widespread payroll problem. The same error may be repeated across thousands of employees and pay periods before a particular leave situation brings it to light. Fixing it may involve rebuilding data, contacting employees, recalculating payments, changing system settings, obtaining specialist advice and carrying out a full remediation exercise.

Accountability is not the same as transferring employer liability

NZPPA is not suggesting that payroll providers should be responsible for every payroll error. They cannot control inaccurate time records, outdated employment agreements, incorrect employee classifications, unauthorised overrides or a customer’s failure to use the available functions correctly. Those matters remain the employer’s responsibility.

A provider should, however, be accountable when the problem comes from something it controls, including:

a statutory formula, test or entitlement that has been built incorrectly
functionality required by the Act being unavailable, despite the product being promoted as supporting compliant New Zealand payroll
hidden assumptions or default settings that change the statutory result
an update that changes calculations without proper notice, testing or release information
a known and significant software fault not being corrected within a reasonable timeframe
claims about the product’s compliance, capability or readiness that cannot be supported.

Both parties have responsibilities. The employer is responsible for its employment arrangements, payroll data, system settings, approvals and day-to-day payroll operation. The provider should be responsible for the product it designs, updates, controls and sells.

Testing support is welcome—but it must go further

Employment New Zealand says MBIE is working with payroll providers on technical guidance and that providers should identify gaps, design changes and test their updates before the Act begins. This work is essential, but support with testing is not the same as confirming that a product applies the law correctly.

NZPPA considers that MBIE should provide one clear technical specification and a standard set of test data with known results. This would not certify every possible employment arrangement or guarantee that an employer will configure the system correctly. It would show whether the provider’s standard software produces the correct result for a useful range of common and complex payroll situations.

Any test result must identify the exact software version tested. A product tested in 2027 may be changed several times before the Act starts. If a provider changes its legislative calculations, it should retest the affected areas. Customers should also be able to see the results, limitations and unresolved issues, rather than this information remaining between the provider and government agencies.

What a credible provider testing process should include:

Clear technical rules: One published interpretation of each statutory calculation, test, data requirement and transition rule, kept separate from non-binding good-practice guidance.
Standard test cases: MBIE-issued examples covering common, variable and complex arrangements, with the input data and correct results provided.
Provider sign-off: A named senior officer confirms the software version tested, what was covered, any exceptions or dependencies, and when testing was completed.
Testing records: Providers keep test scripts, results, fault records, approvals and release notes and make them available when reasonably required.
Known limitations: Customers are clearly told what the software does not support, what needs to be configured or handled manually, and what information must come from other systems.
Fault notification: Customers are promptly told about significant faults, the software versions affected, the likely impact, temporary workarounds, the expected fix date and available remediation support.
Control of updates: Changes to legislative calculations are documented, tested against previous results and explained to customers before release.

The same guidance must be available to everyone

MBIE and Employment New Zealand must give payroll providers the detailed information and ongoing technical support they need. However, any guidance used to design calculations, manage the transition or test software should also be published for employers, payroll practitioners, auditors and advisers.

Guidance given only to providers puts employers at a clear disadvantage. An employer cannot challenge its provider if it cannot see the rules and test results used to build the product. Publishing the guidance will also promote consistency. Providers should not be able to choose which parts of the Act they will automate or use different calculations without explaining why and what that means for customers.

The guidance must clearly separate what the Act requires from an interpretation or suggested good practice. Payroll teams cannot safely configure systems using general wording that may change or be interpreted differently.

What employers should require from providers

A government-led testing process would help, but employers should not wait for one. They should require written evidence of their provider’s readiness and make provider delivery a formal part of their Employment Leave Act implementation plan.

Ask for a written gap analysis showing how the software will meet each relevant requirement of the Act and identifying anything that is planned, unavailable or requires manual work.
Require a delivery plan covering design, development, customer testing, data migration, parallel runs and cutover—not just a proposed release date.
Obtain clear calculation specifications, configuration instructions, data requirements, conversion rules and known limitations that payroll teams can understand.
Ask for evidence that the provider has tested both common and complex situations, including multiple roles, notional rosters, additional and casual hours, public holidays, terminations and leave balance conversion.
Confirm who will pay for identifying affected employees, recalculating pay and completing remediation if the provider’s software causes an error.
Review the contract carefully, including compliance claims, warranties, liability limits, indemnities, data access, exit support, timeframes for fixing faults and access to test and audit records.
Make sure the employer can export complete employee, pay, leave, roster, configuration and audit data in a usable format if it needs to check the results or move to another provider.

Where responsibility should sit

Employer responsibility:

Accurate employment agreements and working arrangements
Complete and timely employee, time and pay information
Correct system settings, choices and approvals
Competent payroll processing and review of exceptions
Employee communication, payment and statutory records

Provider responsibility:

Correct legislative calculations and tests
Clear information about capability and limitations
Properly controlled, tested and documented updates
Prompt notice and correction of significant software faults
Evidence of testing and support with provider-caused remediation

The opportunity to avoid repeating the past

The experience under the Holidays Act shows that legislation, employment arrangements, payroll practice and system design cannot be treated separately. MBIE’s own reform work has recognised that employer judgement and poor payroll system implementation contributed to widespread, often unintentional non-compliance. New legislation will not solve that problem if software decisions remain hidden and providers do not have to show that their products work correctly.

The new Act gives us a chance to avoid repeating the same mistakes. We need clear and public technical guidance, standard test cases, provider sign-off, prompt reporting of software faults and contracts that make each party responsible for what it controls.

Employers must accept that they remain responsible for paying employees correctly. Because the liability sits with them, they need the information and authority to question the systems they rely on. Payroll providers should not be liable for an employer’s mistakes, but they must be accountable for their own.

NZPPA’s position

NZPPA recommends that, as part of MBIE’s published implementation timeline for the new Act, MBIE establish a public testing register and formal sign-off process for payroll software providers. This would ensure that testing outcomes are recorded and transparent to employers and payroll practitioners. Payroll providers should be required to explain how their software performs statutory calculations, demonstrate what has been tested, disclose known limitations and defects, and actively support customers where software errors require correction or remediation.

Employers will continue to hold the ultimate responsibility for paying employees correctly and complying with the legislation. However, that responsibility must be supported by genuine and transparent accountability from the payroll providers whose software employers rely on.