Author: David Jenkins NZPPA CEO
I write on topics in payroll that I believe are current and timely, and I judge that from the type of questions we get through to the NZPPA PayTech Adviceline. Over the last couple of months, I have seen a trend in questions on how to calculate annual holidays for employees working rotating shifts (such as four days on and four days off).
Of course, you should contact MBIE as they are the foundation of all knowledge with the Holidays Act and will explain the situation. BUT then your world falls apart as their answer will be “as per the Act”, which in plain language means they don’t have a clue and are too scared to take a position and show leadership. So back to me, but not as the foundation of all knowledge, more of a “payroll sinkhole” because I work in the never-ending nightmare of the real payroll world trying to survive dealing with the present Holidays Act!
In this post, I want to talk about thinking before you act on creating and putting in place a rotating roster. I also look at how it will be paid in the employee’s employment agreement and then finally, how to define a week for annual holidays. BUT this is the wrong way around. The starting point must always be what is the week for the employee, and the roster and employment agreement are aligned to always pay annual leave based on what the week is for the employee, so it meets the requirements of the present Act. Areas I do not cover here but are other issues around rotating rosters include public holidays and what is an otherwise working day for the employee when days worked in the week are always different.
So, what is a rotating roster?
All you nine to fivers working Monday to Friday with weekends off are just lucky. There are employees whose work patterns change as they are part of a workplace that is always working. Instead of a fixed work pattern, rotating shifts is an easy way to manage numerous staff while providing effective cover across the business seven days a week, even 24/7. But what it means is the employees’ week is never the same and rotates through a pattern from week to week.
For example, for an employee working four days on and four days off (12-hour days):
- Week 1: M(W) T(W) W(W) T(W) F(OFF) S(OFF) S(OFF) = 48 hours
- Week 2: M(OFF) T(W) W(W) T(W) F(W) S(OFF) S(OFF) = 48 hours
- Week 3: M(OFF) T(OFF) W(W) T(W) F(W) S(W) S(OFF) = 48 hours
- Week 4: M(OFF) T(OFF W(OFF) T(W) F(W) S(W) S(W) = 48 hours
- Week 5: M(OFF) T(OFF) W(OFF) T(OFF) F(W) S(W) S(W) = 36 hours
- Week 6: M(W) T(OFF) W(OFF) T(OFF) F(OFF) S(W) S(W) = 36 hours
- Week 7: M(W) T(W) W(OFF) T(OFF) F(OFF) S(OFF) S(W) = 36 hours
- Week 8: M(W) T(W) W(W) T(OFF) F(OFF) S(OFF) S(OFF) = 36 hours
It takes eight weeks for the roster to reset to where it started. For four of the eight weeks, the employee works actual hours of 48 hours based on 4 x days of 12 hours, and as the rotating roster changes, the employee will go into a period of four weeks where the employee works actual hours of 36 hours based on 3 x days of 12 hours.
Now think about a workplace with multiple employees starting their rotating roster from different days in the week to provide the business with coverage. The company has work to do to get this right as it is based on multiple shift patterns. But for the business and employees (many employees enjoy the flexible work pattern), once set up correctly, it is an effective way to cover off operational requirements when some employees work every day of the week. BUT then there is the Holidays Act 2003!
What are companies doing wrong?
I see three areas where the issues with rotating rosters do not fit with the requirements of the Holidays Act:
- The payroll system will pay based on actual hours worked.
- The employment agreement states the employee gets paid the same every week based on an average.
- When an employee takes annual holidays entitlement, they are being paid based on the average hours.
The payroll system will pay based on actual hours worked
There are a couple of things here. If you have shift workers who are waged workers, there is a requirement to record actual hours worked as part of the wage and time record. If there is a time and attendance system or physical timesheets or another way time worked is recorded and passed on to the payroll system, the system is doing what it should be doing – paying for actual hours worked. I don’t see this as an issue as the payroll system pays the employee based on hours worked.
What undermines this is when the employee is a waged worker, but some bright spark in the business (without understanding the Holidays Act or payroll) decides to pay them a salary, so each week is just the annual gross divided by 52 (there are also variations on this). But this is where the issues start to appear. If you look at the example provided of the four days on and four days off, in the eight-week cycle, the employee works four weeks of 48 hours and four weeks of 36 hours, and this starts to undermine actual hours worked and what is a week for the employee. Add in the employee doing additional hours such as overtime, and it just creates a mess that should not be allowed in the first place.
Employment agreements provide an average for the week
This is the major issue of this whole area. It is typical to see an employment agreement dumped on payroll (without payroll having any involvement) that promotes the rotating roster but does the following (using the previous example):
- The week is defined as an average (the average of 36 hours and 48 hours would be 42 hours).
- The four weeks of annual holiday entitlement is stated as 42 hours.
- A week of annual holiday entitlement is paid out based on 42 hours, even when the employee would have actually worked 36 hours or 48 hours on that week.
Now, this is an agreed term as there is nothing in the legislation that covers this, and the Holidays Act is based on minimum entitlement. And so, the test for payroll is anything by agreement cannot contract out of the Act. What is agreed can provide the same or better than what the Act does but never less. So, if the employee gets paid 42 hours for annual leave but the week they would have worked was 48 hours, it does not meet the requirements of the Holidays Act as it is less than what would have been provided under OWP Section 8(1) and even OWP Section 8(2) (the four-week average).
How this agreed term is stated or promoted to the employee is they get the same payment every pay period, even if they work 36 hours or 48 hours, and it balances out over the year to be the same.
In payroll terms, this means we are recording actual hours but are forced to pay something else. And in terms of the Holidays Act, a week is now defined as an average.
Annual holiday entitlement is paid based on average hours
The Holidays Act annual holiday entitlement is based on two components: time and money. The legislation uses averages in some situations to determine the dollar value for annual holiday entitlement (AWE and OWP Section 8(2)), but there is nothing in the Act that allows an average to determine time. Also, section 17 states, “employee’s entitlement to four weeks’ annual holidays is to be met based on what genuinely constitutes a working week for the employee”.
So, having an employment agreement stating the week is now averaged means if the employee works no additional hours except for the average hours and they then take annual holiday entitlement on a week that they would have worked 48 hours (using the example stated previously), the week paid does not reflect the actual week (time) the waged employee would have worked. Also, the two calculations required to calculate annual holiday entitlement under section 21 – average weekly earnings (AWE) and ordinary weekly pay (OWP) – would not reflect what has been stated in the employment agreement for the averaged week. This again creates a mess for payroll trying to match the requirements of the employment agreement to those of the Holidays Act.
How to resolve this?
Sorry, there is no magic answer. The current legislation was not designed for real workplaces trying to use flexible working practices. The Act only works when the employee works 9 to 5 Monday to Friday. When it comes to annual holidays, the Holidays Act is all about the week for the employee, so if the employee takes annual holidays and at that time the week is based on 48 hours, AWE will provide a result based on what the gross was for the last 52 weeks divided by 52 and OWP would be based on a week of 48 hours. Doing this reflects the Act’s requirements, whereas just using an average will undermine those requirements.
What about the upcoming new Holidays Act (due some time in 2023) and Fair Pay Agreements? Will that resolve the issues?
That’s easy to answer, no way! The Holidays Act review put forward three calculations to determine annual holidays. Two of those calculations just don’t work with a rotating roster as they are based on 13 weeks (AWE) or ordinary weekly pay. Fair Pay Agreements could see very complex rules around rosters, making this area even more unworkable for payroll.
In conclusion, if a rotating roster is used, the underlining factor must be that the week for the employee can actually be determined, which means it is based on the hours the employee works in the week. And the employee’s employment agreement aligns to this and does not go off on another tangent so payroll can align the week and the calculations to meet the Holidays Act’s requirements. If this is not done, it can create risk and potential liability for the business and even more of a nightmare for payroll with the Holidays Act.
NZPPA supporting NZ payroll since 2007!