There’s a dangerous assumption lurking in boardrooms and accounting practices across New Zealand: “What we don’t know can’t hurt us.” When it comes to payroll compliance, nothing could be further from the truth. In fact, what you don’t know about your payroll obligations could cost you hundreds of thousands of dollars, damage your reputation, and in extreme cases, result in personal liability for directors.
Yet despite these risks, payroll audits remain one of the most neglected areas of financial oversight in New Zealand businesses. Many accountants focus meticulously on GST returns, tax compliance, and financial statements while barely glancing at payroll calculations. Directors sign off on annual accounts without ever questioning whether their employees have been paid correctly under New Zealand employment law.
It’s time for a wake-up call.
The Hidden Crisis: Why Payroll Errors Are More Common Than You Think
New Zealand’s employment legislation is notoriously complex. The Holidays Act 2003 alone has created compliance nightmares for businesses of all sizes, with major employers including government departments, DHBs, and household-name retailers discovering they’ve underpaid employees by millions of dollars. If organisations with dedicated HR and payroll teams can get it wrong, what chance does the average SME have?
The reality is that payroll errors are endemic across New Zealand businesses. Common mistakes include miscalculating annual leave entitlements for employees with variable hours, failing to correctly apply the “average daily pay” versus “relevant daily pay” calculations, not including regular allowances and overtime in holiday pay calculations, incorrectly treating employees as contractors, failing to pay public holidays correctly for shift workers, and errors in parental leave calculations and KiwiSaver employer contributions.
These aren’t minor administrative oversights. They represent systematic failures that compound over time, creating significant liabilities that sit hidden on the balance sheet, waiting to surface at the worst possible moment.
The Ticking Time Bomb on Your Balance Sheet
Here’s what keeps payroll specialists awake at night: the compounding nature of payroll errors. A small miscalculation in how you calculate holiday pay doesn’t just affect one payment. It affects every holiday payment for every affected employee, year after year, until someone notices.
The Limitation Act 2010 provides that employment claims can be brought within six years of the date when the cause of action arose. For ongoing employment relationships with continuing breaches, this limitation period doesn’t even start running until the employment ends or the breach is discovered. In practical terms, this means a business could be sitting on six or more years of accumulated payroll errors, representing a substantial undisclosed liability.
Consider a business with 50 employees where holiday pay has been calculated incorrectly by an average of $20 per week. That’s $1,000 per employee per year, multiplied by 50 employees, multiplied by six years. Suddenly you’re looking at a $300,000 liability that doesn’t appear anywhere in your accounts. Scale that up for larger organisations or more significant calculation errors, and the numbers become truly alarming.
This isn’t hypothetical. It’s the reality facing thousands of New Zealand businesses right now.
Directors’ Guardianship Responsibilities: The Law Is Clear
Many directors operate under the mistaken belief that they can delegate payroll to staff or external providers and wash their hands of responsibility. The Companies Act 1993 makes it abundantly clear that this is not the case. Directors have extensive statutory duties that directly apply to ensuring their company complies with employment obligations, and ignorance is explicitly not a defence.
Section 131 of the Companies Act 1993 requires directors to act in good faith and in what they believe to be the best interests of the company. This is a foundational duty of loyalty arising from the fiduciary relationship directors owe to the company. Allowing systematic breaches of employment law to continue unchecked, whether through active decision or passive neglect, is difficult to reconcile with acting in the company’s best interests when such breaches create substantial financial and reputational liabilities.
Section 134 requires directors to ensure the company complies with the Companies Act and the company’s constitution. While this section focuses on the Act itself, the broader principle is clear: directors are responsible for ensuring the company operates lawfully. Causing or permitting the company to breach employment legislation arguably falls within the spirit of this duty to ensure lawful operation.
Section 136 imposes a duty on directors not to agree to the company incurring an obligation unless the director believes on reasonable grounds that the company will be able to perform that obligation when required. Every employment relationship creates ongoing obligations to pay wages, holiday pay, and other entitlements correctly. If a company’s payroll systems are fundamentally flawed, can directors honestly say they believe on reasonable grounds that these obligations are being met? The Court of Appeal has confirmed that obligations incurred in the ordinary course of trading, including employment obligations, fall within the scope of this duty.
Perhaps most significantly, Section 137 sets out the director’s duty of care. Directors must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances. This is an objective test. The courts will assess conduct against what a competent and diligent director would do, regardless of the individual director’s personal experience or knowledge. A director cannot escape liability by claiming they didn’t know about payroll problems if a reasonable director in their position would have made inquiries and discovered the issues.
The courts have made clear that directors must take an active interest in the company and its business affairs. They cannot simply rely on others’ assurances alone. As one legal commentator has noted, it is no longer acceptable for directors to “sit back and let others run the show.” Directors who are scarcely involved in management can still be held liable when problems arise. Cheques signed in blank, unquestioning trust in employees to manage critical functions, failing to understand or review financial information: these patterns of behaviour have all resulted in directors being held personally liable.
Wilful Blindness Is Not a Defence
New Zealand case law makes it crystal clear: a director cannot hide behind ignorance. The duty under Section 137 requires directors to remain informed about the company’s position. This includes reviewing financial statements, understanding cash flow, monitoring liabilities, and knowing when compliance issues may be arising. Failing to stay informed is itself a breach of duty.
While Section 138 allows directors to rely on reports, statements, financial data, and professional advice from employees believed to be competent and reliable, or from professional advisers, this protection has significant limitations. Directors must act in good faith when relying on such information, must make proper inquiry where circumstances indicate a need for this, and must have no knowledge that their reliance is unwarranted. Simply accepting assurances that “payroll is fine” without any verification or questioning does not satisfy the standard of a reasonable director.
When was the last time you asked your payroll team to explain how they calculate holiday pay for employees with variable hours? Have you ever asked for evidence that your systems comply with the Holidays Act 2003? If the answer is never, you may be failing in your duty of care.
Personal Liability for Employment Breaches
Beyond the Companies Act duties, directors face direct personal liability under employment legislation. The Employment Relations Act 2000 provides that a “person involved in a breach” may be personally liable to pay penalties. This includes any person who has been “in any way, directly or indirectly, knowingly concerned in, or party to, the breach.”
In the landmark case of Labour Inspector v Southern Taxis Limited, the Court of Appeal considered the level of knowledge required to establish liability for a person involved in a breach. The Court held that directors’ knowledge of the primary facts is what matters, not their belief about whether those facts constitute a breach. In that case, directors genuinely believed their workers were contractors rather than employees, but the Court found this irrelevant. Because the directors knew the essential facts of the working arrangements, they were personally liable for the company’s failure to pay minimum employment entitlements, regardless of their mistaken belief about the legal characterisation of the relationship.
The implications are profound. You cannot escape personal liability by claiming you didn’t know your payroll calculations were wrong. If you knew the facts, you knew how holiday pay was being calculated, you knew employees had variable hours, you knew the systems in place, then you had the knowledge required for potential liability. Your genuine but mistaken belief that everything was compliant provides no protection.
Recent cases have seen directors ordered to personally pay tens of thousands of dollars for employment breaches, including situations where the company has been liquidated and the director might otherwise have thought they were protected by the corporate veil. Officers of companies, including directors and those in positions of significant influence over management, have been held personally liable for breaches of minimum employment standards including failures to pay correct wages, holiday pay, and public holiday entitlements, and failures to keep proper wage and time records.
The Broader Legal Landscape: Consequences of Non-Compliance
The consequences of payroll non-compliance extend far beyond simply repaying what’s owed.
Under the Employment Relations Act 2000, employers who breach minimum employment standards can face penalties of up to $20,000 per employee for individuals and $40,000 per employee for companies. The Labour Inspectorate has the power to issue infringement notices, demand notices, and improvement notices, and can prosecute serious or repeated breaches. These penalties can be imposed cumulatively, and some employers have been ordered to pay substantial amounts when multiple breaches affecting multiple employees are established.
The Holidays Act 2003 requires employers to keep detailed records of leave entitlements and payments for at least six years. Failure to keep adequate records can result in the Employment Relations Authority drawing adverse inferences against the employer when determining what was actually owed. If you can’t prove you paid correctly, the Authority may well conclude that you didn’t.
The Wages Protection Act 1983 prohibits unlawful deductions from wages and requires that wages be paid in full when due. The Minimum Wage Act 1983 sets out requirements for minimum wage payments, with significant penalties for breaches.
Section 138A of the Companies Act 1993 creates a criminal offence for serious breaches of a director’s duty to act in good faith and in the best interests of the company, where the director acts in bad faith, believes the conduct is not in the company’s best interests, and knows it will cause serious loss. The penalties include up to five years imprisonment or a fine of up to $200,000. While this represents the extreme end of consequences, it underscores how seriously the law treats director misconduct.
Section 301 of the Companies Act allows a court, on the application of a liquidator or creditor, to order a director who has been guilty of negligence, default, or breach of duty to repay money or contribute compensation to the company’s assets. This power has been exercised in numerous cases where directors have failed in their duties, with orders sometimes running into hundreds of thousands or even millions of dollars.
Why Accountants Must Lead the Charge
Accountants are trusted advisors to their clients, providing guidance on financial management, tax planning, and business strategy. Yet many accountants treat payroll as someone else’s problem, something handled by the bookkeeper, the payroll bureau, or the HR team.
This abdication of responsibility needs to end.
Payroll is not just an administrative function. It’s a significant area of legal and financial risk that demands professional attention. When you sign off on a set of accounts without reviewing payroll compliance, you may be endorsing financial statements that materially misrepresent the company’s liabilities.
Consider the professional standards that apply to chartered accountants. The Code of Ethics requires members to act with professional competence and due care, and to be alert to situations that may create risks. Ignoring a known area of widespread non-compliance hardly seems consistent with these obligations.
As an accountant, you have the analytical skills to identify payroll risks and the professional standing to elevate these issues with directors and business owners. You understand the importance of compliance systems, internal controls, and risk management. It’s time to apply these skills to payroll.
The question every accountant should be asking their clients is simple: when did you last have your payroll audited? If the answer is “never” or “I don’t know,” that’s a red flag that demands attention.
The Real Cost of Getting It Wrong
Beyond the direct financial costs of remediation and potential penalties, payroll non-compliance carries significant hidden costs that can damage your business in lasting ways.
There’s the reputational damage to consider. News of employment breaches travels fast, particularly in the age of social media. Employees talk, and prospective employees research. A reputation as an employer who underpays staff makes it harder to attract and retain talent.
Then there’s the impact on employee morale and trust. Discovering that you’ve been underpaid, even unintentionally, damages the employment relationship. Staff who feel they’ve been treated unfairly are less engaged, less productive, and more likely to leave.
Consider also the management time and distraction involved in dealing with a compliance investigation or remediation project. These can drag on for months or even years, consuming resources that should be focused on running and growing the business.
And let’s not forget the human element. Your employees are real people who depend on being paid correctly. Getting payroll wrong isn’t just a compliance issue; it’s a matter of fairness and respect for the people who help make your business successful.
The Path Forward: Taking Action Today
Addressing payroll compliance doesn’t have to be overwhelming. Here’s a practical approach for accountants and directors ready to take responsibility.
The first step is to commission a payroll health check. Engage a specialist payroll professional to review your current processes and calculations. This should include a review of your Holidays Act compliance, PAYE and KiwiSaver calculations, employment agreement terms, and record-keeping practices. Think of it as a warrant of fitness for your payroll system, and critically, evidence that you have taken reasonable steps to verify compliance.
Next, you need to assess your exposure. If issues are identified, work with your advisors to quantify the potential liability. This will help you make informed decisions about remediation and disclosure. Consider whether provisions should be made in your financial statements.
Then develop a remediation plan. Work with legal and payroll specialists to develop a plan for addressing any identified issues. This may involve self-reporting to the Labour Inspectorate, which can sometimes result in more favourable outcomes than waiting to be investigated.
It’s essential to implement robust systems going forward. Ensure your payroll systems and processes are fit for purpose. This includes regular reviews, clear documentation, and appropriate training for staff involved in payroll processing. Don’t just fix the past; prevent future problems.
Finally, build payroll into your governance framework. Directors should receive regular reporting on payroll compliance as part of their standard board pack. Payroll audits should become a regular part of your annual review cycle, not a one-off exercise. Document that you have asked the questions, received the reports, and taken action where needed. This documentation could prove invaluable in demonstrating you exercised reasonable care, diligence, and skill if issues ever arise.
Conclusion: The Cost of Inaction Is Too High
Payroll compliance in New Zealand is complex, but complexity is not an excuse for inaction. The risks of getting it wrong, including financial penalties, reputational damage, personal liability, and the human cost of underpaying your employees, are simply too significant to ignore.
The law is clear. Directors have a duty to exercise care, diligence, and skill. Directors must act in the best interests of the company. Directors cannot hide behind ignorance. Directors who know the essential facts can be held personally liable for employment breaches, even if they genuinely believed they were complying with the law.
Accountants need to stop treating payroll as outside their remit. Directors need to stop assuming everything is fine because no one has complained. The absence of complaints doesn’t mean the absence of problems; it usually just means the problems haven’t been discovered yet.
It’s time to get your head out of the sand.
At Paymasters, we specialise in helping New Zealand businesses get payroll right. Whether you need a comprehensive payroll audit, assistance with Holidays Act remediation, or ongoing payroll management, our team of specialists can help you navigate the complexity and ensure compliance.
Contact us today to discuss how we can support your business. Because when it comes to payroll compliance, what you don’t know can hurt you.
Sources and References
Legislation
Companies Act 1993 (NZ) – Sections 131, 134, 135, 136, 137, 138, 138A, 300, 301. Available at: legislation.govt.nz
Employment Relations Act 2000 (NZ) – Including provisions on persons involved in breaches and penalties. Available at: legislation.govt.nz
Holidays Act 2003 (NZ) – Leave calculations and record-keeping requirements. Available at: legislation.govt.nz
Limitation Act 2010 (NZ) – Six-year limitation period for employment claims. Available at: legislation.govt.nz
Wages Protection Act 1983 (NZ) – Prohibition on unlawful deductions. Available at: legislation.govt.nz
Minimum Wage Act 1983 (NZ) – Minimum wage requirements and penalties. Available at: legislation.govt.nz
Case Law
Labour Inspector v Southern Taxis Limited [2021] NZCA 507 – Court of Appeal decision on director personal liability for employment breaches and the knowledge required.
Yan v Mainzeal Property and Construction Limited (in liquidation) [2023] NZSC 113 – Supreme Court guidance on directors’ duties under sections 135 and 136.
Sojourner v Robb [2006] 3 NZLR 808 – Duty to act in best interests extends to creditors when company is of doubtful solvency.
Robb v Sojourner [2007] NZCA 493; [2008] 1 NZLR 751 – Court of Appeal on director duties and fiduciary obligations.
Legal Commentary and Resources
Simpson Grierson, “Mainzeal decision provides guidance on directors’ duties”. Available at: simpsongrierson.com
Blackwood Montagna, “Directors’ duties in New Zealand: What every business owner needs to know” (December 2025). Available at: bmlegal.co.nz
McVeagh Fleming, “Directors’ Duties – What Directors Need to Know”. Available at: mcveaghfleming.co.nz
McVeagh Fleming, “Section 131: Duty of Directors to Act in Good Faith and in Best Interests of Company”. Available at: mcveaghfleming.co.nz
Parry Field Lawyers, “Duties and Liabilities Imposed On A Director of A New Zealand Company” (October 2025). Available at: parryfield.com
Parry Field Lawyers, “Who is a ‘Reasonable’ Director when it comes to Duties?” (October 2024). Available at: parryfield.com
Young Hunter Lawyers, “Navigating Director Duties – what are the obligations and what has changed?”. Available at: younghunter.co.nz
LegalVision New Zealand, “Directors Duties in New Zealand” (December 2024). Available at: legalvision.co.nz
Lane Neave, “Director personally liable for employment breaches” (August 2024). Available at: laneneave.co.nz
DTI Lawyers, “Director personal liability for employment law breaches”. Available at: dtilawyers.co.nz
Harkness Henry Lawyers, “Personal Liability as an Employer? Damn straight.” (March 2024). Available at: harknesshenry.co.nz
Rainey Collins Lawyers, “Personal liability for breaches of minimum employment standards”. Available at: raineycollins.co.nz
McDonald Vague Insolvency, “Delinquent Directors”. Available at: mvp.co.nz
Mondaq/Lowndes Jordan, “Directors must perform their duties properly or face potential liability” (July 2016). Available at: mondaq.com
Disclaimer: This article provides general information only and does not constitute legal advice. For advice specific to your circumstances, please consult a qualified legal professional.