6 Common Payroll Mistakes To Avoid

Apr 20, 2022

Everyone makes mistakes from time to time, right? An error here or there is no big deal – except when it really is!

When it comes to managing your payroll, there are some things you really can’t afford to get wrong. If you’re lucky, an error might just cost you time and money to fix. But if you’re unlucky, you could wind up facing some legal troubles on top of it all.

Unfortunately, payroll errors can and do happen to most of us. However, there’s less chance of making a mistake if you know what to watch out for!

In this article, we’ll share the most common payroll mistakes to avoid in your business.

6 Common Payroll Mistakes To Avoid

1. Not Including Bonuses Correctly In Annual Leave Calculations

This is a slightly tricky one that employers often get wrong. Here’s how it works: Under NZ’s Holidays Act, holiday pay is calculated based on employees’ gross earnings, including any ‘productivity or incentive-based payments’ – aka bonuses.

Just to complicate things a little, regular bonuses are included in these calculations, but discretionary bonuses are not. For example, a bonus that comes as an expected reward (i.e. if you achieve this outcome, you will receive a bonus) should be included as part of the gross earnings. However, a no-obligation one-off monetary gift from an employer is not.

Need more in-depth info on bonuses and annual leave? Check out this page on the Employment New Zealand website.

2. Leaving Staff On Casual Contracts When They’re No Longer A True Casual

There is no definition for “casual employees” in NZ employment legislation. But according to Employment NZ, the term applies to an employee who “has no guaranteed work hours, no regular pattern of work, and no ongoing expectation of employment.”

There is no obligation between them or you of offering or accepting work.

Casual employees are entitled to the same rights and responsibilities as regular employees, but annual holidays and leave are managed differently.

Because there are no set hours, it’s challenging to arrange annual holidays for casuals. Instead, they are usually paid an extra 8% on top of their wages or salary – also known as Pay As You Go (PAYG) holiday pay.

This is all fine and dandy as long as your casual employee remains casual. As soon as they start a regular work pattern, they become a permanent part-timer and are entitled to annual holidays.

There’s a great explanation of all this by the crew over at Flexitime if you’d like further insight.

3. Calculating Leave Incorrectly

Even the biggest employers in the country are not immune to making payroll mistakes. Last year, District Health Boards in NZ were faced with the problem of needing to reimburse more than 200,000 staff who were wrongly paid under the Holidays Act – an HR nightmare worth a whopping $1.15 billion!

But they’re not the only ones – the legislation has also tripped up big names like McDonald’s, Te Papa, the Flight Centre, and the Ministry of Business, Innovation and Enterprise (MBIE) itself.

Clearly, the Holidays Act 2003 can be a tad confusing, even for the pros. That’s because employees are entitled to several types of paid leave, provided they meet certain conditions. These employee entitlements can change according to the type of employment contract, so it’s important to get your ducks in a row when it comes to calculating leave.

To help you get your head around it, we have a great in-depth article walking you through the process: Rate of Payments for Leave Taken in NZ.

4. Making Unlawful Deductions

If you’ve made a payroll mistake and overpaid an employee, can you just fix it by deducting it from their next pay?

This is a major no-no. The Wages Protection Act states that you can only make deductions from an employee’s pay if they are required by law (such as PAYE tax, student loan repayments, and child support), or when the employee explicitly – and freely – agrees.

This agreement should be in writing, but it’s not enough just to have a clause in the employment agreement. You must consult with them before making a specific deduction. And they can withdraw consent at any time.

5. Forgetting To Include Future Public Holidays In Final Pay Calculations

Trying to wrap up final pay for an employee who’s moving on? It’s important to know that sometimes, employees are entitled to be paid for public holidays that fall after their termination date.

This only applies to employees who have been with you for at least 12 months, because it has to do with unused annual holidays they may be entitled to when their employment ends.

To work out if this rule applies, imagine that your employee is taking their annual leave from the day after their employment with you has ended. If there is a public holiday within that period (on a day when they would normally have worked), then you must pay them for that holiday in the usual way.

You must also extend the period the annual holidays covers by one day for each public holiday (and consider any other public holidays that fall into that extension).

Need to know more? Employment NZ has the details here.

6. Not Using Integrated Systems

Many payroll mistakes happen because employers may be confused about employment law and mess up some of the details. But often, payroll mistakes happen because businesses aren’t using an integrated system.

If you’re using one system for capturing time, another for managing your HR info, and yet another for running payroll, you’re probably doing manual entry or data formatting, which just increases your chances of making an error at some point.

The more you can automate, systemise, and integrate your payroll system with other software, the less likely you are to make those avoidable payroll mistakes.

Want To Avoid Payroll Mistakes?

We’re only human, so mistakes are an expected part of life. But we can reduce the chances of careless errors by using the right tools for the job and automating where possible.

Using the right payroll software is step one; understanding your responsibilities is step two.

Those two steps alone may be enough to help you avoid the most common payroll mistakes, but if you want to make life even easier, consider outsourcing your payroll management to an expert.

Admin Army provides leading payroll solutions tailored to your needs. We’ll take care of the grunt work, allowing you to focus your time and energy on more important areas of the business.

Contact us today to find out more.

Do you know if your accounting practice is ready to outsource its compliance work?

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