Auditor’s approach to assuring compliance with employment standards

Information for auditors who are auditing compliance with employment standards.

The role of the auditor

Compliance with employment standards and minimum employment rights is a legal requirement and a starting point for fairness in the workplace.

Employers who fail to comply with minimum employment standards risk legal sanctions, for example:

  • infringement notices for less significant breaches
  • financial penalties and being banned from supporting visas for migrant workers for serious breaches.

There is a growing social, business, and investor expectation of fairness in the workplace and throughout supply chains. This means the cost of non-compliance for a business can also include loss of customers, loss of contracts, unhappy investors, and exclusion from access to overseas markets.

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.

Audit/Assurance/Certification services

Many auditors and providers of assurance and certification services offer non-financial audits. These may reference environmental, social, and governance (ESG) considerations, with the social aspect often focusing on the United Nations’ guiding principles on business and human rights. However, they often lack fundamental checks for compliance with employment legislation.

Guiding Principles on Business and Human Rights – United Nations(external link)

Guidance for auditors

This guidance will help auditors to design and enhance their employment compliance audit/assurance/certification services and programmes. It focuses on:

  • complexities that increase the risk of non-compliance
  • aspects of employment standards that when not followed can do one or both these things:
    • signal wider non-compliance
    • seriously harm employees or a business financial viability.

Please note this guidance is not a list of employment standards. For more information on these please refer to our guidance for employers.

Employer rights and responsibilities

Self-assessment guide for employers [PDF, 934 KB]

Self-assessment checklist for employers [PDF, 654 KB]

You may wish to use this information to inform the content of any audit flowcharts or checklists you use.

If you find failings, refer to your organisation's internal policy for next steps, for example, investigate further, and make recommendations to management about rectification and remediation. We anticipate this would be based on the severity of the issues and for management to develop an action plan in response.

We expect standard audit approaches will be used for the following:

  • sample sizes
  • conflict of interest identification and resolution for the people conducting the audit
  • the use of privacy waivers and policy around this work, as the auditors will be accessing employees’ personal data.

Key elements of an employment standards compliance audit


Keeping written or electronic employment records is a legal requirement. Employers who fail to do so cannot provide assurance that they are providing minimum entitlements or complying with other employment standards.

The key here is the employer’s understanding of the essential record-keeping requirements and how they meet those requirements in a practical way. This is not just a matter of investing in payroll software. Many failures involve incorrectly set up, operated and automated payroll software.


Individual employment agreements

The requirement to have written employment agreements is a foundation of employment relationships. The absence of written agreements is a red flag and could indicate the employer is non-compliant in other key areas of employment standards.

Form and content of individual employment agreements – New Zealand Legislation(external link)


Many aspects of the payment of wages and salaries are governed by employment standards. Those to which the Labour Inspectorate attaches some priority, and which can be serious breaches if found to be non-compliant, include:

  • payment of at least the minimum wage for each hour worked
  • deductions from wages (legal, consented in writing, and reasonable)
  • no premiums charged to gain or retain employment. 

Wages and time records – New Zealand Legislation(external link)

Holidays and leave

This is an area where compliance can become complicated, especially when the hours of work are variable or the pay structure is not straightforward. Areas where there are common failures include:

  • entitlement to 4 weeks’ annual holidays
  • calculating annual holiday pay
  • entitlement to public holidays and determining the correct payment for them
  • provision of sick leave and other leave entitlements
  • correctly applying relevant daily pay or average daily pay.

Entitlement to annual holidays – New Zealand Legislation(external link)

Key compliance requirements for employers

What auditors need to look out for.

Wage and time records 

Check that employers keep wage and time records for 6 years, and that the records contain all the required information. 

Ways to check compliance

  • Ask the employer about 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 and terminated employees.

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.

Ways to check compliance

  • 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.

Holidays Act 2003 – New Zealand Legislation(external link)

  • Assuming the use of a payroll system means that all recording requirements are being met.
  • Failing 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

Check that employers offer individual employment agreements in writing, and that the employee receives a copy and the business keeps a copy. Employment agreements must not contain anything contrary to the law.

Ways to check compliance

  • Confirm with the employer that these are provided and retained, and ask what system they have in place for offering and retaining agreements.
  • Ask some employees if they were offered and given a copy of their individual employment agreements.
  • Select a sample from a list of employees and witness that there are written employment agreements.

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 mandatory clauses.

Ways to check compliance

  • Review a sample of agreements.
  • Ask a few employees who their employer is and if the job description, place, and hours of work and so on match reality.

Form and content of individual employment agreements – New Zealand Legislation(external link)

  • Failing to accurately reflect the agreed hours in the individual employment agreement. 
  • Failing to include a clause on paying time-and-a-half for work on public holidays.
  • Failing to include a clause covering restructuring.
  • Failing to include closedown clauses when the business has a closedown period.
  • Including clauses that cancel out holiday entitlements, for example, limiting the carry-over of unused annual holidays.
  • Requiring someone to be available for work without paying them to be on standby.
  • Using a trading name instead of the employer’s legal name.

Minimum wage

Check that employers pay at least the applicable minimum wage.

Ways to check compliance

  • 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 hourly pay per hour if the employee is 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 worked.
  • Review samples of wages and time records.

Wages and time records – New Zealand Legislation(external link)

  • Failing to record all hours of work as work. Examples include deliberate exploitation, travel time, sleep overs, work-required training, and team meetings prior to 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 for a period to the point that they are not receiving the minimum wage.
  • Failing to top up pay to the minimum hourly wage when required, if workers are on piece rates.
  • Failing to pay workers for all their hours worked.
  • Failing to pay workers all their hours while on training.

Wages without deduction

Check what deductions employers are making. Any deductions that are not legally required must have the employee’s written consent.

Ways to check compliance

  • Ask the employer if they make deductions from employee wages. If so, check what they are for. If they are not for legal purposes like tax, is there a written consent from the employee?
  • Ask some employees if deductions have been made from their wages and, if yes, have they given a written consent to do so?
  • Review a sample of wages and time records and any written consent. Include some employees who have ended their employment.
  • Making unreasonable deductions for business costs. Examples of what is unreasonable include deductions for breakages or theft by customers, recruitment expenses and personal protective equipment required to perform the job.
  • Failing to get employees’ 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 retain a job.

Ways to check compliance

  • Ask some employees if they have to pay any money to get or retain their jobs.
  • Check a sample of employment agreements for any disguised premiums like unlawful bonds or penalty clauses.
  • Making employees pay to get or retain 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.

Annual holiday entitlement

Check how annual holiday entitlements and pay are being calculated.

Ways to check compliance

  • Ask the employer about their understanding of employees’ entitlement to 4 weeks of annual holidays.
  • Ask the employer how they calculate annual holiday pay.
  • Check a sample of holiday and leave records to establish if they meet the legislative requirements. Include records for employees who have ended their employment 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% instead of holiday pay. If they are, check if the practice meets the conditions for this to happen. For example, do varied days and hours of work make it too difficult to calculate annual leave? Do fixed-term employment agreements last under 12 months?
  • Check if the right methodology is being used to calculate annual holidays. Annual holidays must be paid at the higher of:
    • the average weekly earnings, meaning the employee’s average weekly earnings for the 12 months just before the end of the last pay period before the annual holiday, or
    • the ordinary weekly pay, meaning the employee’s ordinary weekly pay at the beginning of the annual holiday.

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, which is based on formula of 4/52 for each hour worked from the start date of employment rather than providing 4 weeks entitlement, or 4 weeks of annual holidays, after 12 months of service.
  • Failing to set up payroll software correctly.
  • Assigning the role of payroll to an untrained, unqualified, or unsupported person.
  • Using only the average weekly earnings or the ordinary weekly pay — not the higher of the 2 as required by the law.
  • Failing to give 4 weeks’ leave to employees with variable working patterns.
  • Failing to increase holiday entitlement when employees increase their hours of work.
  • Failing to include all applicable gross earnings in holiday calculations.

Public holiday pay

Check how employees are being paid for public holidays.

Ways to check compliance

  • Ask the employer to explain their understanding of the public holiday entitlements and how they are applied in their business.
  • Ask employees if they are given a choice whether to work on public holiday (if not as part of their contractual arrangement).
  • Review a sample of records to look at the patterns of work around public holidays.
  • Check if employees are receiving the right entitlements when working on public holidays.
  • Ask employees how public holidays are treated regarding payment for working and entitlement to pay if not worked.
  • Check a sample of records for how relevant daily pay is calculated.

Holiday and leave entitlements – New Zealand Legislation(external link)

  • Believing ‘casual’ employees (or people on rosters) are not entitled to public holidays.
  • Failing to apply the ‘otherwise working day’ rule when an employee does not work on public holidays.
  • Incorrectly determining the ‘Mondayisation’ of a public holiday.
  • Incorrectly determining ‘relevant daily pay’ — for example, employers may fail to include regular overtime in relevant daily pay.
  • Failing to give employees a choice about working on public holidays.
  • Failing to pay time-and-a-half, or failing to give employees an alternative holiday when they are entitled to one.
  • Changing rosters to avoid paying holiday pay.

Employment status

Employment standards apply only to employees and not to genuine volunteers and self-employed contractors.

Sometimes employees are incorrectly classified as contractors or volunteers and do not receive their minimum employment rights. This can happen due to lack of knowledge or on-purpose through sham contracts, which are intended to avoid employer responsibilities and costs. In other cases, there may have been an intention to enter into a contractor relationship where the real nature of the relationship is employer and employee.

Where an audit finds workers who are classed as contractors performing the fundamental work of a business, the real nature of the relationship should be tested. Conduct tests to ensure that the right type of relationship is applied:

  • intention test
  • control vs independence test
  • fundamental/economic reality test.

Employment law does not include a definition for contractor versus employee, but guidelines have developed out of court decisions.

Employee or contractor?

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