This week it has been reported that thousands of people have been getting short changed on their holiday pay, including the Police, who reportedly had to back-pay more than $30 million earlier this year to current and former employees.
The Ministry of Business, Innovation and Employment (MBIE) Labour Inspectorate, have established that out of 20 investigations of other employers completed, holiday pay has been calculated incorrectly affecting around 24,000 employees. Though details are still limited the problem appears to be around employees who have fluctuating pays from week to week receiving additional pay on top of their normal salary and wages. With some blaming the complexity of the Holidays Act it seems that the risk of underpayments could be widespread in the private and public sector.
Coincidentally, earlier this month the Commissioner released her operational position on the calculation of PAYE on holiday pay, as this too can be an area of uncertainty. The statement outlines the different tax treatments of holiday pay which might be taxed as “salary or wages” or “extra pay”. Determining whether a holiday pay payment is one or the other comes down to when the payment is made to the employee rather than how the holiday pay is calculated. Extra pays are taxed differently to avoid the overpayment of PAYE over the year, so it is important to correctly define what type of holiday pay payment is being made for tax purposes. Especially as many employees who receive just salary and wages do not get an assessment at the end of the year to ensure the correct amount of PAYE has been paid.
As a result of incorrect information on the IRD website, it is possible that employers may have over or under deducted employees’ holiday pay. The Commissioner’s statement advises that they will not be actively correcting any incorrect deductions prior to 1 April 2016, but if an employee establishes they have been overtaxed they can request a personal tax summary.
So it seems like it might be a good time to review how holiday pay is being calculated and taxed in your business, your client’s businesses or for yourself.