Why employers don’t get holidays

Last year the government had the opportunity to change the way employee leave is determined by New Zealand businesses. The Holidays Amendment Act came into effect on 1st April 2011.

We were hoping that the changes would make it easier for businesses to understand their obligations to employees with regards to holiday entitlements. The Department of Labour received recommendations on changes from a ministerial advisory group comprising employer representatives and union representatives.

In the end a few minor changes were made to tweak calculations here and there but unfortunately the opportunity to make life easier for NZ businesses was missed. In summary the changes included -

• The ability for employees to cash in one week of annual leave
• Transferring public holidays to another day
• The option of using Average Daily Pay for public holidays, sick days and alternate days if the Relevant Daily Pay cannot be easily determined.

On the face of it the use of Average Daily Pay seems to be a change that would make it easier to determine how much to pay a casual employee for a day off. However, the calculation of Average Daily Pay involves working out how much the employee has earned over the previous 12 months and dividing by the number of days worked over the same 12  months.

Sure we have computer systems like FlexiTime and spreadsheets that can help us calculate these amounts, but not easily. Particularly if you have changed the system you use to calculate employee pay in the last year, which, with the advent of software as a service and new and more advanced computer based systems, many employers are choosing to do.

Imagine the difficulty of calculating this for the small employer who still records pay and holidays in a book. You may think that Average Daily Pay is only an option if the Relevant Daily Pay cannot be determined so there shouldn’t be a need to get into the intricacies of summing up the last year’s pay amounts. However, with a changing pattern of work and a move towards more flexible employment relationships, many more employees are falling into this category of varying work hours which means that the amount they would have received on a particular day is difficult to determine.

Although Average Daily Pay is difficult to calculate it is probably the fairest amount to pay an employee for a day off. But it is interesting how the changes to the Act have created inconsistencies in the way pay amounts are calculated for different types of leave. For annual leave we are to use the higher of the Average Daily Pay or the Ordinary Daily Pay, ordinary being the average over the last 4 weeks.  Dropping the Ordinary Daily Pay rate was one of the recommendations from the employer representatives of the ministerial advisory group. The argument being that paying an employee for annual leave based on a daily rate calculated using only the last 4 weeks created a situation where employees could increase their annual leave pay rate by working more in the 4 weeks preceding their holiday.

The recommendation was not adopted in the Act and we now have an inconsistency between annual leave pay and pay for statutory holidays and sick days.

Other differences also exist between what types of earnings should be included in the 4 week average and 12 month average. All this makes it incredibly difficult for a small business owner to determine what should be paid to employees for leave. The result of these difficulties is often that the employer simply pays the employee their normal hourly rate and both parties are blissfully unaware that they are not paying the rate as prescribed by the law.

It seems the intentions of the law should be -

• to ensure that staff have time off from their normal weekly work to allow them to relax, spend time with their family and sharpen the saw.
• to ensure that during time off from work that the employee receives pay in order to continue to meet ongoing commitments and not be disadvantaged by taking time off.

So how can we achieve these goals and yet keep the calculation of leave pay rates simple enough that employers and employees know what they are entitled to and is fair for both parties?

One of the most common areas of confusion with the existing rules for annual holiday leave is the split between the amount an employee accrues during a year as holiday pay and the amount due to them after completing a year of employment. Holiday Pay is accrued at 8% of the gross earnings during the employment year and once they complete the year this dollar amount then becomes a balance of leave available to them in terms of days.

So if an employee finishes after being employed for more than a year they are paid two separate amounts – holiday pay at 8% of their gross earnings since their last anniversary date and the dollar amount of the annual leave due at their last anniversary. This is needlessly confusing for employers as it mixes different calculations involving total gross earnings since the last anniversary, average pay rate in the last 12 months and 4 weeks and annual leave due at the last anniversary date in days.

An old joke goes along the lines that it’s great owning your own business because you can take half days off if you want, and you get to choose whether it’s the first 12 hours or last. This joke demonstrates the principle that a day of work can mean different things for different employees. How do you determine the value of 4 weeks annual leave, particularly with employees working variable or casual hours and receiving different benefits? In some cases employees are paid bonuses and overtime payments that must be taken into account when calculating the value of annual leave owing.

So how do other countries manage the requirement to pay employees for leave? In Australia employees are also entitled to 4 weeks annual leave, the leave accrues during the year based on the hours worked, so an employee who works 2.5 days per week will accrue 10 days over a year. When the leave is taken it is paid at the employee’s base pay rate, however, many agreements and awards provide for leave loading - this is typically 17.5% of your base rate of pay and is paid on top of your normal weekly earnings during your annual leave. Casual workers are not entitled to annual leave.

This system removes the requirement to calculate the average and ordinary pay rate incorporating different types of payments and also eliminates the unfair situation of paying an employee a higher than normal rate because of extra overtime worked in the 4 weeks prior to the leave being taken. It is simple to calculate, as the accrued amount of leave can be calculated each pay and added to a total leave balance. The leave loading method is fair in that it incorporates extra overtime and bonus payments as a flat rate available to all employees.

The changes to the Holiday Act missed a great opportunity to simplify an overly complex and onerous system that most small businesses and their employees know little about and in most cases ignore because of its complexity. If we are to become competitive with Australia we have to make changes to outdated legislation that worked in the days when the 40 hour week was the norm.

Using FlexiTime to record expenses

A thread on the Xero LinkedIn Group has been discussing the use of Xero to allow expenses to be flagged for inclusion in client invoices. A recent comment by John says -

I guess the two key issues for me are

a) ease of turning them into an AR invoice as I need to submit these disbursements alongside my normal invoicing with the various expenses listed and totalled. By that I mean my disbursement costs need to be totalled separately to the normal cost of my services and ideally on the same invoice if you understand what I mean. I guess a suggestion would be to have an “apply to contact/AR invoice” box on all expenses and APs.

b) The ability to be able to analyse my business finances with and without the cost and repayment of these expenses included in the detail as they are not a true bottom line cost of my business but of theirs.

As an aside – but related – it would be good to be able to have a mileage option in expenses. I invoice clients for mileage incurred as a disbursement. I also naturally incur it for myself as well. I know I can easily total it up myself in the meantime.

FlexiTime’s integration with Xero gives users the ability to easily create AR invoices in Xero. Normally the receivable is for time worked, FlexiTime providing a simple UI for entering time for client work and that time being used to generate client invoices.

One of the powerful features of FlexiTime is it’s ability to create different work or projects to record time against and to associate the work with pay codes to pay employees for time worked. This relationship means that for a single time entry both the account payable detail and accounts receivable detail can be determined.

What this means is that a slice of time worked can be used to create the Xero accounts payable invoice for paying the employee as well as the accounts receivable invoice for billing the client.

To make life even easier when recording work in addition to recording the hours worked you can also record amounts for expenses. These expense amounts are included as separate line items on both the AP and AR invoices and can be set to post to different GL accounts.

As well as monetary amounts you can specify to units to be kilometres and easily specify the rate per kilometre for employee re-imbursement and a multiplication factor for client billing. So you might set the re-imbursement rate for vehicle expenses to be $0.60 and the charge rate to the client to be 1.5 times the re-imbursement.

John says 

Ideally I would like to retain all the invoicing and receipt management facility within Xero as I find it easier to compartmentalise it that way.

We think a better compartmentalisation of functionality is to include the recording of expense amounts for re-imbursement and client billing in the same place that time is recorded. In the same way that employee time is used to create invoices for payroll and billing so too are client expenses, it is therefore logically to keep the recording of these two items in the same place. Automatically sending the invoices to Xero then creates the facility to track payment and reconcile bank transactions against those invoices.

For information on how to handle expenses in FlexiTime see http://support.flexitime.co.nz/entries/267254-how-do-i-invoice-clients-for-expenses and http://support.flexitime.co.nz/entries/267250-how-do-i-reimburse-employees-expenses.

Sending Invoices

This week we’ve added a much requested feature to invoicing in FlexiTime – emailing invoices. We’ve taken the opportunity to also make invoice printing and sending to Xero a lot simpler as well. Now, instead of having buttons on the invoice for finalise, print and time audit report we now just have a single Send button on the Billing screen.

You select the invoices you want to send and click the Send button. The Send Options window then asks if you want to -

• Print
• Email
• Include Time Report
• Create Invoices in Xero
• Mark as Sent

Include time report attaches a detailed time report to the invoice for all time included in the invoice, with description level detail from time entries. It also shows a complete time approval audit log.

As you can see we’ve also got rid of finalising invoices and instead have adopted a similar concept from Xero – mark as sent. When an invoice is marked as sent the work invoice totals are updated and the invoice no longer shows by default on the Billing screen. To show sent invoices simply enter a date range encompassing the invoice date and click Refresh.

You can now also resend your invoice to Xero, although because you can’t have two invoices in Xero with the same number you will need to make sure the invoice is deleted from Xero before resending it.

Best of all you can email invoices to clients automatically. An invoice is emailed to the billing email address of the client, unless the work invoice detail level is selected as Invoice per Job, in which case the invoice is sent to the client contact approver email address. As for printing you can also specify to include the time report with the invoices if required.