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Auditing compliance with employment standards
Information about how to audit compliance with employment standards.
Compliance with employment standards is a legal requirement and a starting point for:
- fairness in the workplace, and
- preventing worker exploitation.
Employers who do not comply with employment standards are operating unlawfully and risk:
- financial penalties (fines)
- being banned from supporting visas for migrant workers
- their business’ reputation and credibility with their customers, investors and trading partners.
There is a growing social, business, and investor expectation of fairness in the workplace and throughout supply chains. This growing awareness is increasingly requiring organisations to provide assurance that they, and the businesses they engage with, are respecting their employees' minimum employment entitlements. To read more, visit:
Scope of employment standards audit
This guidance is to help you assess whether an organisation is complying with employment standards in the following areas:
- record-keeping
- individual employment agreements
- wages
- holidays and leave.
It does not cover all employment standards. It’s focused on where there are:
- common failures
- complexities that make it harder for employers to comply with the law and increase the risk of non-compliance
- aspects of employment standards that, if not followed, can:
- signal wider non-compliance
- seriously harm employees or a business’ financial viability.
You can find more information about employment standards here:
Employer rights and responsibilities
Who this guidance is for
This auditing guidance can be used by anyone carrying out an in-house audit, as well as third-party auditors, for example, providers of assurance and certification services. There are many companies and industry bodies who do compliance and social practice audits — this information can help ensure their audits include fundamental checks for compliance with employment law.
Audit approach
We expect standard audit approaches to be used for:
- sample sizes
- identifying and managing any conflict of interests for the people doing the audit
- managing privacy, for example, using privacy waivers, as you will have access to employees’ personal information.
If you find failings during the audit, follow your organisation's policy for what to do next, for example:
- investigate further
- make recommendations to management about how the failings should be addressed. Proposed actions should be based on how serious the issues are.
Record-keeping: what to look for
Keeping written employment records is a legal requirement (records can be electronic). Employers who fail to do this cannot demonstrate that they are complying with employment standards.
The key here is how well the employer understands the record-keeping requirements and how they meet those requirements in a practical way. If employers use payroll software, they need to understand the calculations the software does, and be sure those calculations are right. Mistakes often happen because organisations have not set up or operated software correctly.
Wage and time records
Check that employers keep wage and time records for 6 years, and that the records contain all the required information. To check compliance, you can:
- ask the employer who keeps the wages and time records and how they are kept
- review a sample of the records for different types of employees, for example:
- employees working fixed or set hours and days
- employees on flexible and variable working patterns
- employees who do not work there anymore.
Wages and time records – New Zealand Legislation(external link)
- Assuming that the accountant (or similar) is keeping the required records.
- Assigning the role of record-keeping to an untrained or unsupported person.
- Keeping wage records but not time records.
- Entering the hours of work as a total amount and destroying the detailed time records.
Holiday and leave records
Check that employers keep holiday and leave records for at least 6 years, and that the records contain all the required information. To check compliance, you can:
- ask the employer about who keeps the holiday and leave records and how they are kept
- review a sample of the records for different types of employees.
- Assuming that because the employer uses a payroll system, all recording requirements are being met.
- Forgetting to update the payroll system when employee conditions change, for example, when hours increase.
- Taking a ‘set and forget’ approach to record-keeping.
- Assigning the role of record-keeping to an untrained or unsupported person.
- Recording payments when leave is taken but missing from leave balances.
- Failing to clearly record the earning and balance of alternative holidays.
Individual employment agreements: what to look for
Having written employment agreements is a foundation of employment relationships and a legal requirement. An absence of written agreements is a red flag that could indicate the employer is not complying with other employment standards. Employment agreements must not contain anything contrary to the law.
Creating an employment agreement
Form and content of individual employment agreements – New Zealand Legislation(external link)
Employment agreements
Check that the employer offers each employee an individual employment agreement in writing, and that the employee receives a copy and the employer keeps a copy to hand. To check compliance, you can:
- ask what system they have in place for offering and retaining employment agreements
- ask some employees if they were offered and given a copy of their individual employment agreement
- select a sample from a list of employees and ask to see their employment agreement.
Form and content of individual employment agreements – New Zealand Legislation(external link)
- Assuming an ‘old school’ approach of verbal agreement is sufficient.
- Assuming that the rules are different for ‘casual’ employees.
- Assuming the rules are different when employing friends and family.
- Failing to create and keep employment agreements during busy periods.
- Failing to include a job description and all the mandatory clauses.
Mandatory clauses
Check that individual employment agreements contain all the mandatory clauses. To check compliance, you can:
- review a sample of agreements
- ask a few employees who their employer is and if the job description, place, and hours of work and other details about their job match their actual work situation.
- Failing to accurately reflect the agreed hours in the individual employment agreement.
- Failing to include a clause on paying time-and-a-half for working on a public holiday.
- Failing to include a clause covering restructuring.
- Failing to include a closedown clause if the business has a closedown period.
- Including clauses that cancel out holiday entitlements, for example, a clause that does not allow employees to carry over unused annual holidays.
- Requiring someone to be available for work without paying them to be on-call.
- Using a trading name in the agreement instead of the employer’s legal name.
Wages: what to look for
Many aspects of how wages and salaries are paid are regulated by employment standards. The most important requirements — which the Labour Inspectorate looks for and could be serious breaches if not complied with — are:
- employers pay at least the minimum wage for each hour worked
- deductions from wages are legal, agreed in writing with the employee, and reasonable
- employers do not change employees a premium (a fee) to get or keep a job.
Wages and time records – New Zealand Legislation(external link)
Minimum wage
Check that employers pay at least the applicable minimum wage. To check compliance, you can:
- ask the employer if they know what the current minimum wage rates are
- ask the employer about how pay is calculated, for example, hourly rate, salary, commission, piece rates or allowances
- ask the employer about hours of work and what work employees complete in that time
- calculate the employee’s hourly rate if they’re paid piece rates
- ask some employees about their hours of work, what work they complete in that time and if they are paid for all hours they work
- review samples of wages and time records.
Wages and time records – New Zealand Legislation(external link)
- Failing to update the minimum wage on 1 April for employees earning the minimum wage.
- Failing to record all hours of work as work. Examples include:
- deliberate exploitation
- travelling time
- sleepovers
- work-required training
- team meetings before and after shifts. Another example is asking employees to start work 15 minutes earlier to set up shop, or to finish later to clean up, but not paying them for it.
- Failing to pay a new employee, or paying them a reduced rate while they are receiving on-the-job training.
- Allowing a salaried employee to work long hours to the point that they are not earning the minimum wage.
- Failing to top-up pay to the minimum hourly wage if employees are on piece rates (if required).
- Failing to pay employees for all the hours they work.
- Failing to pay employees all their hours while they’re on training.
Deductions
Check what deductions employers are making. Any deductions that are not legally required must have the employee’s written consent. To check compliance, you can:
- ask the employer if they make deductions from employee wages. If yes, check what they are for. If they are not legal reasons like tax, has the employee given written consent?
- ask some employees if deductions have been made from their wages and if yes, have they given written consent for this?
- review a sample of wages and time records and any written consent for deductions to be made. In your sample, include records for employees who do not work there anymore.
- Making unreasonable deductions for business costs. Examples of what is unreasonable include:
- deductions for breakages or theft by customers
- recruitment expenses
- personal protective equipment required for the job.
- Failing to get the employee’s written consent to make a deduction.
- Deducting wages when employees leave without working out their notice period.
Charging employees for jobs
Employees must never have to pay to get or keep a job (this type of charge or payment is called a ‘premium’). To check compliance, you can:
- ask some employees if they had to pay any money to get or keep their job
- check a sample of employment agreements for any disguised premiums like unlawful bonds or penalty clauses.
- Making employees pay to get or keep a job.
- Including clauses in employment agreements that require employees to repay costs when their employment ends, for example, costs for on-the-job training.
Holidays and leave: what to look for
This is an area where compliance can be difficult, especially if employees have variable hours of work or the pay structure is not straightforward. Areas where we see common failures include:
- not giving each employee their entitlement to 4 weeks of annual holidays
- calculating annual holiday pay incorrectly
- not giving employees their entitlement to public holidays or paying them incorrectly
- not giving employees their sick leave or other leave entitlements like bereavement leave, parental leave or family violence leave
- incorrectly applying ‘relevant daily pay’ or ‘average daily pay’.
Entitlement to annual holidays – New Zealand Legislation(external link)
Annual holiday entitlement
Check how annual holiday entitlements and pay are being calculated. To check compliance, you can:
- ask the employer to explain their understanding of employees’ entitlement to annual holidays
- ask the employer how they calculate annual holiday pay
- check a sample of holiday and leave records to see if they meet legal requirements. Look at records for employees who do not work there anymore and those with variable working hours
- check if commission has been included in holiday pay (if employees receive commission)
- check if staff are being paid 8% pay-as-you-go instead of paid annual holidays. If they are, check that their work situation qualifies them for pay-as-you-go. For example, do varied days and hours of work make it impossible to calculate annual leave? Do fixed-term employment agreements last under 12 months?
- check if the correct methodology is being used to calculate annual holidays. Annual holidays must be paid at the higher of the employee’s:
- average weekly earnings — their average weekly earnings over the 12 months leading up to the end of the last pay period before they take the annual holiday, or
- ordinary weekly pay — their ordinary weekly pay at the beginning of the annual holiday.
Calculating holiday and leave pay
Calculation of annual holiday pay – New Zealand Legislation(external link)
- Assuming payroll software calculations are correct. Most payroll systems have a process for ‘accruing’ annual holidays based on the hours employees work rather than providing 4 weeks of annual holidays after 12 months of employment.
- Setting up payroll software incorrectly.
- Assigning the role of payroll to an untrained, unqualified or unsupported person.
- Using only average weekly earnings or ordinary weekly pay to determine payment for annual holidays — not the higher of the 2.
- Failing to give employees with variable working patterns their annual holiday entitlement.
- Failing to increase annual holiday entitlement when employees increase their hours of work.
- Calculating gross earnings incorrectly.
Public holiday pay
Check how employees are paid for public holidays. To check compliance, you can:
- ask the employer to explain their understanding of public holiday entitlements and how they make sure employees get these
- ask employees if they are given a choice about working on public holiday (if they’re not required to as part of their employment agreement)
- review a sample of records to look at patterns of work around public holidays
- check if employees are receiving the correct entitlements when working on public holidays
- ask employees what they are paid:
- for working on a public holiday
- if they do not work on a public holiday
- check a sample of records to see how relevant daily pay is calculated.
Holiday and leave entitlements – New Zealand Legislation(external link)
- Believing ‘casual’ employees (or employees on a roster) are not entitled to public holidays.
- Failing to apply the ‘otherwise working day’ rule when an employee does not work on a public holiday.
- Incorrectly determining if a public holiday will be observed on a Monday or Tuesday.
- Incorrectly calculating ‘relevant daily pay’ — for example, employers may fail to include regular overtime in relevant daily pay.
- Not giving employees a choice about working on public holidays.
- Failing to pay time-and-a-half for working on a public holiday, or not giving employees an alternative holiday when they are entitled to one.
- Changing rosters to avoid paying public holiday pay.