New Zealand has a payroll compliance problem – and it is not a small one.
In 2016, the Ministry of Business, Innovation and Employment (MBIE) estimated that payroll underpayments across the country could affect more than 700,000 employees, with total arrears potentially exceeding $2 billion. Since then, the scale of the problem has only become clearer. Health New Zealand alone has paid more than $657 million in remediation payments to over 83,000 current employees, with payments to former staff still ongoing. Government agencies including the Ministry of Foreign Affairs and Trade, the Department of Corrections, New Zealand Police, and Auckland Council have all disclosed significant underpayments stretching back years.
But this is not just a public sector issue. Private sector employers – from large corporates like McDonald’s and Bunnings to SMEs with a handful of staff – have been caught out by the same underlying problem: the Holidays Act 2003 is genuinely complex, and most payroll systems do not apply it correctly without careful human oversight.
If your business has not yet reviewed its payroll compliance, you should assume there is a problem until you can demonstrate otherwise. And if a Labour Inspector has already been in touch, you need to understand what the remediation process actually involves – because it goes far deeper than simply issuing a few back-payments.
What Is Payroll Remediation?
Payroll remediation is the process of identifying, calculating, and correcting historical underpayments of employee entitlements under the Holidays Act 2003. It may also extend to obligations under the Employment Relations Act 2000, the Minimum Wage Act 1983, and the Income Tax Act 2007 where PAYE has been affected by incorrect leave payments.
A remediation project typically covers a review period of six years – the statutory limitation period for employment-related claims – although some enforceable undertakings and voluntary reviews extend further.
The scope of a remediation is not limited to annual leave. It must address every entitlement category where underpayment may have occurred, including public holidays (s49, Holidays Act 2003), sick leave (s71), bereavement leave (s69A), alternative holidays (s60), and family violence leave (s72A – s72I). Annual leave calculations under s21 and s22 are almost always in scope, and these are typically the most complex and financially significant component.
How Does Remediation Get Triggered?
Remediation projects are triggered in several ways. The most common scenarios include a Labour Inspectorate investigation initiated after a complaint or routine audit, an enforceable undertaking (EU) agreed between the employer and MBIE under s223B of the Employment Relations Act 2000, a self-review undertaken proactively by the employer (often prompted by media coverage, sector-wide issues, or advice from their payroll provider), and due diligence reviews conducted during a business acquisition or sale.
An enforceable undertaking is a formal, legally binding agreement between an employer and the Labour Inspectorate. It sets out specific breaches, names affected employees or categories of employees, imposes compliance deadlines, and requires the employer to demonstrate that both remediation payments and systemic corrections have been completed. Failure to meet the terms of an EU can result in penalties of up to $20,000 per breach for a company, and personal liability may extend to directors.
Why Is Remediation So Complex?
Many employers are surprised by the sheer complexity of a remediation project. There is a common misconception that it simply involves re-running some payroll calculations and issuing top-up payments. In reality, a properly conducted remediation requires a structured, multi-phase approach that touches every element of the payroll system.
Understanding the payroll data is the first challenge. Before any calculations can begin, the auditor must understand how the employer’s specific payroll system codes its transactions. What element code represents ordinary time? Which codes represent annual leave taken, as opposed to terminal leave payouts or accrual entries? How are public holidays distinguished from public holidays worked? Every payroll system uses different conventions, and one incorrect mapping can invalidate the entire analysis.
Deriving the correct pay rates is the second challenge. Under the Holidays Act, different types of leave are paid at different rates. Public holidays, sick leave, bereavement leave, alternative holidays, and family violence leave must all be paid at the employee’s relevant daily pay (RDP) as defined in s9 of the Act – essentially, what the employee would have earned had they worked that day. If RDP cannot reasonably be determined (for example, because the employee’s daily pay varies significantly), average daily pay (ADP) may be used under s9A, but only in limited circumstances.
Annual leave is more complex still. Under s21 and s22, annual leave must be paid at the greater of ordinary weekly pay or average weekly earnings over the preceding 52 weeks divided by 52. This “greater of” rule means that for every single annual leave event in the review period, both calculations must be performed and the higher figure applied.
The cumulative underpayment chain is where many remediation projects go wrong. When a shortfall is identified on an annual leave event, that shortfall must be added back into the gross earnings base for all subsequent average weekly earnings calculations within the same rolling 52-week window. Failure to apply this cumulative adjustment understates the correct rate for every subsequent annual leave event, compounding the error throughout the review period.
Terminal holiday pay must be excluded. The final payout of accrued annual leave on termination must be excluded from rate calculations and from the gross earnings base. Including it artificially inflates the average weekly earnings figure and distorts the entire analysis. Identifying terminal payouts in the data is not always straightforward – they may be coded differently across payroll systems, and some systems do not clearly distinguish between mid-employment leave cashouts and terminal payouts.
What Does the Process Actually Look Like?
A properly structured payroll compliance audit follows a systematic methodology. At Paymasters, our approach involves twelve defined steps, starting with a comprehensive intake process and ending with the delivery of fully auditable workbooks and a formal compliance report.
Phase 1 – Intake and data mapping. The engagement begins with understanding the client, the engagement type (self-review, enforceable undertaking, due diligence, or Labour Inspector request), the payroll system in use, and the workforce profile. Every payroll element code must be mapped to a standardised analysis category before any calculations begin. This mapping is confirmed with the client and documented.
Phase 2 – Employee master validation. Contracted hours per day, regional holiday calendars, and daily pay type settings must be validated for every employee in scope. Anomalies such as re-hires with multiple payroll records, changes in contracted hours during the review period, and employees spanning multiple regional holiday jurisdictions must all be identified and resolved.
Phase 3 – Data preparation. The raw payroll data is filtered, scoped, and structured for analysis. Allowances, accrual entries, leave without pay, and deductions are excluded from the gross earnings base. Terminal holiday pay records are identified and excluded. The resulting dataset forms the foundation for all subsequent calculations.
Phase 4 – Leave-by-leave analysis. Every leave event in scope is analysed individually. For public holidays, each statutory and regional public holiday within the review period is checked against the payroll data for every in-scope employee. Missing payments are flagged. Payments that were made are compared against the RDP calculation to identify shortfalls. For annual leave, the “greater of” rule is applied to every event, with the cumulative underpayment chain maintained per employee in chronological order.
Phase 5 – Output and reporting. The results are compiled into fully auditable Excel workbooks with live formulas referencing the source payroll data. A formal compliance report documents the methodology, assumptions, findings, and total shortfall amounts. Where an enforceable undertaking is involved, the report is structured to address each EU clause individually.
Regional and Provincial Holidays – An Often-Missed Element
One area that frequently catches employers out is regional anniversary day compliance. New Zealand has eleven provincial anniversary days, each applicable to employees working in or associated with a specific region. The mondayisation rules that apply to national public holidays do not always apply to provincial anniversaries in the same way, and the dates shift each year based on specific calendar rules.
A Canterbury employer, for example, must ensure that employees assigned to the Canterbury holiday calendar received payment for Canterbury Anniversary Day – which always falls on the nearest Friday to 16 November. An Auckland-based employee of the same employer would instead be entitled to Auckland Anniversary Day, the nearest Monday to 29 January. If the payroll system does not correctly assign regional calendars to individual employees, these entitlements can be missed entirely.
What About the Employment Leave Bill?
The Employment Leave Bill, introduced in March 2026, proposes substantial changes to the leave framework that will eventually replace the Holidays Act 2003. Under the proposed changes, annual and sick leave will accrue from day one in hours rather than being provided as annual entitlements, and public holiday entitlements will be based on a clearer “otherwise working day” test.
However, the Bill explicitly states that employers still have an obligation to remediate employees for historical underpayments that occurred under the current Holidays Act. The proposed 24-month transition period after Royal assent means the current Act will continue to apply for at least two more years, and remediation obligations for the period of non-compliance are not extinguished by the new legislation.
In other words, the Employment Leave Bill does not let employers off the hook for past errors. If anything, it makes it more urgent to complete remediation before the compliance landscape shifts further.
The Real Cost of Getting It Wrong
The financial consequences of payroll non-compliance extend well beyond the back-payments themselves. Remediation projects require significant investment in data extraction, expert analysis, report preparation, and in many cases, legal advice. For a business with 20 employees over a six-year review period, the total cost can easily run to tens of thousands of dollars – and for larger employers with complex workforce arrangements, the figures can be substantially higher.
Beyond the direct financial cost, there is the reputational impact. Employees who discover they have been underpaid – even unintentionally – lose trust in their employer. Where an enforceable undertaking is involved, the terms may require the employer to contact former employees, including those who left years ago, to arrange payment. Managing that outreach process, verifying bank details (including international accounts for employees who have moved overseas), and maintaining a compliant audit trail adds further complexity and cost.
As MBIE has consistently stated, it is the employer’s legal duty to ensure their employees’ holiday and leave entitlements are correct and meet minimum employment standards. Employers cannot contract out of their responsibilities under the Act, even if employees agree.
Why DIY Remediation Rarely Works
Some employers attempt to conduct their own remediation using spreadsheets or by adjusting their existing payroll software. This approach rarely produces a compliant result for several reasons.
The calculations are genuinely complex. The “greater of” rule for annual leave, the cumulative underpayment chain, the 52-week rolling window for average weekly earnings, the exclusion of terminal holiday pay, and the correct application of RDP versus ADP all require specialist knowledge and meticulous attention to detail. A single formula error can invalidate thousands of calculations.
The output must be auditable. If a Labour Inspector reviews the remediation, they will expect to see live formulas, documented assumptions, source data cross-references, and a clear methodology. A spreadsheet of hardcoded numbers with no audit trail will not satisfy compliance requirements.
The payroll system itself may need fixing. Identifying historical underpayments is only half the problem. The employer must also demonstrate that the systemic issues causing the underpayment have been corrected going forward. This often requires changes to payroll system configuration, leave policies, employment agreements, and internal processes.
How Paymasters Can Help
Paymasters provides independent payroll compliance auditing services for New Zealand employers. Our methodology is payroll-system agnostic – we apply the same rigorous, legislation-grounded approach whether the employer uses iPayroll, Smartly, MYOB, PaySpace, or any other system.
With 30 years of payroll compliance experience, zero negative Labour Inspectorate reviews, and Inland Revenue Professional Group recognition, we bring a depth of knowledge that most employers simply cannot replicate in-house. We have worked through enforceable undertakings, self-reviews, and due diligence engagements across a wide range of industries and workforce configurations.
Our deliverables include fully auditable BAPS (public holiday, sick leave, and bereavement leave) workbooks, annual leave workbooks with live formulas, formal compliance reports, and where required, terminated employee outreach trackers and communication templates.
If you are facing a Labour Inspector review, considering a proactive self-audit, or navigating the due diligence process for a business acquisition, contact us for a confidential discussion. The earlier you engage expert support, the better the outcome – both financially and in terms of your ongoing compliance.
Key Takeaways for Employers
Payroll remediation is not optional – it is a legal obligation under the Holidays Act 2003, reinforced by the Employment Relations Act 2000. The complexity of the calculations, the volume of data involved, and the requirement for auditable outputs mean that most employers cannot complete a compliant remediation without specialist support.
The Employment Leave Bill does not eliminate historical obligations. Regional and provincial holidays are frequently missed. The cumulative underpayment chain in annual leave calculations is the single most common source of error. And the cost of getting it wrong – in back-payments, penalties, legal fees, and lost employee trust – far exceeds the cost of getting it right the first time.
Sources and References:
- Holidays Act 2003 (New Zealand Legislation) – s9, s9A, s21, s22, s49, s60, s69A, s71, s72A – s72I, s81
- Employment Relations Act 2000 – s65, s223B
- Minimum Wage Act 1983
- Income Tax Act 2007 – Subpart RD (PAYE obligations)
- MBIE, Holidays Act 2003 Guidance (Employment New Zealand)
- Employment New Zealand, Leave and Holidays Guide (2021)
- MBIE, Holidays Act Reform – Employment Leave Bill (March 2026)
- Health New Zealand, Holidays Act Remediation Payments Update (December 2025)
- RNZ, Holiday pay errors could top $2b (June 2016)
Published by The Paymasters Limited | paymasters.co.nz | 0800 399 729