Payroll is where small compliance errors compound. A wrong rate applied every fortnight for three years becomes an arrears calculation, and the employer usually discovers it during an audit, a dispute or a sale.
The core obligations
- PAYE deducted at the correct rate and paid to Inland Revenue by the due date, which depends on your size.
- Payday filing — employment information filed within two working days of each pay run for electronic filers. This is per pay run, not monthly.
- KiwiSaver — automatic enrolment for eligible new employees, compulsory employer contributions, and correct handling of opt-outs and savings suspensions.
- ESCT deducted from employer contributions at the rate based on the employee’s total remuneration.
- Student loan and child support deductions where applicable.
- Record keeping — wage and time records, and holiday and leave records, retained for the required period.
The errors that recur
Wrong ESCT rate. The rate is based on the employee’s total remuneration including the employer contribution, and it needs reviewing when pay changes and for employees who started part-way through a year. Under-deducting creates an arrears position.
Holiday pay on variable earnings. Annual leave must be paid at the greater of ordinary weekly pay and average weekly earnings. Employers who pay only ordinary pay underpay anyone with overtime, commission or allowances. This is the single largest source of remediation liability across New Zealand.
What counts as gross earnings. Overtime, commission, most allowances, productivity payments and the cash value of board and lodging generally count. Excluding them understates leave payments.
Public holiday entitlements — whether the day is an otherwise working day, relevant daily pay for time worked, alternative holidays for working a public holiday, and the transfer rules where a public holiday falls at a weekend.
Casual and variable-hours staff, where the weeks-based framework fits poorly and pay-as-you-go holiday pay has strict conditions that are frequently not met.
The change coming
Parliament has repealed the Holidays Act 2003 and passed the Employment Leave Act, moving annual and sick leave to hours-based accrual from an employee’s first day. A two-year implementation period applies, with the new system starting in 2028.
Until then the Holidays Act continues to apply in full, and existing calculation obligations do not disappear. Employers with known issues should resolve them rather than assuming the new Act writes them off.
Talk to your payroll provider now about their implementation timeline. Cloud providers will handle most of it; older or in-house systems face a genuine project.
Use software, and check it
Manual payroll in a spreadsheet is a false economy for any employer beyond one or two staff. Certified payroll software handles calculation, filing and rate updates.
It does not remove your responsibility. Software configured with the wrong pay categories, wrong ESCT rates or incorrect treatment of allowances will produce consistently wrong answers very efficiently. Have the setup reviewed by someone competent when you implement it, and again after any significant change.
Deductions
You cannot deduct from wages without written consent, and consent must be specific and informed. A general clause in an employment agreement is not sufficient for an arbitrary deduction, and the employee can withdraw consent.
Deductions for till shortages, damage or training costs are areas where employers regularly get this wrong.
Contractors
Misclassifying an employee as a contractor is a recurring and expensive problem. The test is the real nature of the relationship, not the label in the agreement — control, integration into the business, whether the person can work for others, who supplies equipment, and who bears risk.
Where the classification is wrong, the employer faces PAYE arrears, holiday pay, KiwiSaver and potentially personal grievance exposure.
Audit yourself before someone else does
An annual check: sample a few employees across different pay patterns and recalculate their leave payments manually. Confirm ESCT rates. Check that allowances are treated correctly. Verify payday filing is actually completing.
Errors found early cost a correction. Errors found in year five cost a remediation project and interest.
Inland Revenue publishes payroll and payday filing guidance, and Employment New Zealand publishes leave calculation material and free tools. Both free.
General information only, not legal or tax advice.
