The effect of the Holidays Act 2003 on small and medium enterprises – a qualitative study
2 INTRODUCTION
2.1 Purpose and context of the research
The purpose of this research is to provide a qualitative picture of the impact of the Act on small and medium enterprises (SMEs); this includes exploring common criticisms of the Act, particularly those relating to the complexity of calculating payments for relevant daily pay and annual leave. The research focuses on SMEs because the compliance costs of regulation are widely considered to be relatively higher for this group.
This research was planned in the context of a wider review of the Holidays Act being supported by the Department of Labour in 2009, and is intended to be complementary to the review work. It has been assumed that the Advisory Group will seek the opinions of and further research from a range of employers and employee and employer representatives such as unions and employers' associations.
2.2 Scope of the research
The research involved 10 independent, private sector businesses with between 1 and 40 employees, located in rural and urban areas of New Zealand. An additional firm with 75 employees was included in the study to provide a point of comparison with a larger business.
2.3 Background to the research topic
2.3.1 The purpose of the Act
The purpose of the Holidays Act is to promote balance between work and other aspects of employees' lives and, to that end, to provide employees with minimum entitlements to annual holidays, public holidays, sick leave and bereavement leave.
2.3.2 Amendments to the Act
Since its inception, the Act has been amended twice to address unintended consequences for employers and employees.
2004 amendment
In 2004 the Act was amended to address some unintended consequences arising from the Act's implementation. Key changes included amending the time and a half rate for working on a public holiday to ensure this isn't added on top of an existing 'penal rate' in an employment agreement and clarifying payment for sickness or bereavement on a public holiday. The Act now provides that if an employee is sick or bereaved on a public holiday on which he or she was going to work, that day is to be treated as an unworked public holiday. That is, the employee is not entitled to time and a half for that day or to an alternative holiday.
2008 amendment
The Holidays (Transfer of Public Holidays) Amendment Act 2008 further amended the Holidays Act 2003 to allow for the transfer of public holidays in certain circumstances. Employers and employees can now agree in writing to transfer a public holiday if an employee is required to start work on one day and finish on another; and one or both of those days are public holidays specified in section 44(1) of the Holidays Act.
2.3.3 Overview of the literature on the effects of employment regulation
There is little research specifically on the effect of holidays legislation on firms however over the last decade a number of studies both in New Zealand and internationally have explored the impact of regulation more generally. These studies have arisen in response to new employment rights legislation (particularly in the UK) and business representatives' view that government imposes significant compliance costs on firms. Attention has been given to both the impact of regulation (Edwards et al 2003, Alexander et al 2004, Dickens et al 2005, Carter et al 2006, Anyadike-Danes et al 2008) and to methods for studying the effect of regulation (Borland 2005, Massey 2003, Kitching 2006).
The methods used to study the effect of regulation profoundly influence data quality and the inferences and policy implications that can be drawn from the studies (Borland 2005, Dickens et al 2005, Kitching 2006). In reviews of research on the effects of regulation on SMEs in the UK, it has been noted that many studies focus on business owners, and regulation as a cost or constraint. Qualitative approaches are suggested to explore the inter-related mechanisms through which regulation causes changes in small business practices and performance (Dickens et al 2005, Kitching 2006).
Effects of employment regulation
In theory, employment regulations change the terms of employers' agreements with workers. They may consequently prompt some adjustment by firms. However the effects of a specific type of employment regulation will depend on other aspects of employment regulation or on labour market policy more generally (Borland 2005).
As noted, methodology deeply influences the findings of research, however, in practice; some general findings from mixed methods studies (Edwards et al 2003, Dickens et al 2005, Carter et al 2006) point to:
- a clear difference between the perceived potential effects of the regulatory regime and the actual experience of workplace legislation
- regulations interacting with sectoral conditions and may exacerbate competitive pressures
- regulation generating multiple influences which can be enabling and motivating as well as constraining
- market competition (and not employment legislation) as the overriding factor affecting business performance.
In relation to the size of firms:
- regulation does not have uniform consequences for small business owners. The effect of any regulation depends on how owners, and others whose actions causally affect them exercise their agency and adapt to regulatory change (Kitching 2006, Anyadike-Danes et al 2008)
- negative effects of workplace legislation tend to increase with firm size - smaller businesses have a degree of informality that can ease their response to workplace legislation. (Edwards et al 2004, Carter et al 2006).
Adding to this last point, case studies of the effects of employment regulation in New Zealand carried out by the Department of Labour in 2000, found that in small firms, employers were often relatively unaffected directly by regulation, while medium and large employers went to some lengths to follow many requirements. Actual compliance was variable, and sometimes employers avoided regulation through the structure of their employment relationships.
Knowledge & compliance
In relation to most of the above mentioned research, it is by no means certain that employers participating have an understanding of the regulation in question or are complying with it. Meager et al's (2002) UK survey of awareness of employment rights legislation found different levels of knowledge were associated with:
- the visibility of the law and the length of time it had been established
- publicity and controversy
- effort put into publicising different rights
- the existence of a visible enforcement body, and
- its relevance to particular groups.
Meager et al noted that active compliance requires employer awareness of duties and rights, and found variability here too, with smaller firms often not aware.
This is supported by other research in the United Kingdom. Only one-fifth of employers in firms with fewer than 50 employees in the large telephone survey for the Department of Trade & Industry by Blackburn and Hart (2002) felt confident or very confident of their knowledge of employment rights legislation, and that confidence waned when the depth of knowledge was investigated. Dickens et al (2005) also found that employer knowledge varied by size of enterprise and business sector and reflected perceived relevance and experience of particular rights rather than the length of time the legislation had been in existence.
Dickens et al further noted that the individualised, private law model characteristic of most of the individual rights legislation leaves individual workers to enforce their legal rights against employers. This places an importance upon awareness of rights and a capacity and willingness to enforce them.
2.3.4 Employers' response to the Holidays Act 2003
Employers' associations' submissions to government over the past six years have criticised both the increased direct costs placed by the Act on employers and the complexity of the calculations required to administer the Act thus increasing compliance costs (see, for example, submissions from the Hospitality Association of New Zealand 2003, BusinessNZ 2004, Meat Industry Association 2004, Tourism Industry Association New Zealand 2004, the Small Business Advisory Group's 2006 report to government, and the Ministry of Economic Development's Quality Regulation Review Sector Studies Report 2007).
KPMG and BusinessNZ have surveyed firms annually on their perceptions of compliance costs. The Holidays Act 2003 has had the highest compliance cost trend score[1] in all but two of the annual surveys carried out between 2003 and 2008. The survey authors thus consider that the Act has the characteristics of poor quality regulation.
While we would expect an increase in compliance costs because of changes, regulatory changes that are of poor quality create a substantive shockwave in the years after the changes were made. [Our data] clearly shows that the perception of compliance costs for the Holidays Act has not come back down to anywhere near the level exhibited in 2003, before the changes took effect.
KPMG/Business NZ (2007)
The survey series also shows, however, how employers view the compliance costs of the Act compared to other employment regulation. In each of the six annual surveys (beginning in 2003) the Holidays Act has consistently been respondents' fifth placed priority after tax, ACC, the Health & Safety in Employment Act 1992, and the Employment Relations Act 2000.[2]
A different approach to the study of compliance costs was taken by Alexander et al (2004). Their study involved interviews and employers using log books to record time and money spent on regulatory compliance. This method enabled employers' perceptions to be explored more deeply than is possible in a survey. The study found that a 'striking feature of the results is that different firms have different attitudes to compliance costs. Some firms in the sample perceived compliance as a serious issue that was preventing them from expanding their business, others saw compliance as being only a minor issue, or in some cases no issue at all.'
There is little research available to illuminate how firms worked with the previous Holidays Act. Case studies of three different industries carried out by the Department of Labour in 1999 found that, overall, the Holidays Act 1981 was applied with little difficulty by employers and employees. Exceptions to this related to the provision of a day in lieu for casual employees working on public holidays. There was some deliberate non-compliance reported by employers and employees in relation to this requirement. Finally there is no work on the marginal compliance costs of the Act, above and beyond that which employers would face preparing a payroll in the absence of the Act.
2.4 Research method
A qualitative approach to this research was used to explore the understanding of the Act by both employers and employees, and how this understanding affected the employers' response to the Act. Data was collected through semi-structured interviews, with some review of documents (pay roll data, pay slips and employment agreements).
Employers and one employee from each firm were interviewed face to face by a Department of Labour researcher. Where the employer did not administer the payroll and leave for the firm, the payroll administrator in the firm was also interviewed. The employee was selected by the employer or the researcher. Criteria for selection included one or more of the following: willingness to participate, having characteristics of interest to the research such as irregular working hours, and availability (on a break or after work).
SMEs were the focus of this research because there was no research available on how employers were applying the Act, and the literature suggested that in SMEs, employers' knowledge and compliance may be more variable than in larger firms (Blackburn & Hart 2002).
The sectors selected (transport, manufacturing, retail and hospitality) were the focus of the research because these sectors tend to employ at least some staff whose daily or weekly working hours varied. Submissions to government on the Act over the past six years suggested that these working arrangements made application of the Act more challenging for employers.
The purpose of this qualitative study is to provide an insight into how the Holidays Act 2003 affects small and medium businesses in particular contexts. The study does not use a representative sample and cannot be used to generalise statistical relationships to the broader small and medium business population.
This research adds to the work on the effects of employment regulation in New Zealand by asking employers to describe their understanding of the provisions of the Act and asking employees about their understanding of their entitlements. This was designed to enable a comparison of employers' perceptions of the complexity of the Act with what they actually do in applying the provisions.
2.5 Research questions
Participants were asked questions that fell broadly under the following categories:
- contextual information about the business and number and type of employees
- perceptions and awareness of the Act and information sources
- impact of the Act on the firm
- views on possible changes to the Act and to the treatment of public holidays.
2.6 Sample
Eleven firms were involved in the research between March and May 2009. The sample incorporated businesses with a range of size and sector characteristics (see Table 1 below). Sample businesses were identified with the assistance of employers' associations and the Department of Labour's regional labour market knowledge managers. All businesses satisfied the following criteria:
- independence - not part of, or owned by, large companies
- employment - employed 1-40 people (the study included one larger employer - of 75 staff - to provide a point of comparison)
- sector - businesses operated in the manufacturing, transport, retail or hospitality sectors.
The sample businesses were located within the Greater Auckland to Greater Wellington area, and the Canterbury region. This criterion was set to ensure diversity of rural/urban areas and to contain the costs of the research.
| Number of employees (excluding owner) |
Length of time (years) current owner has had business |
|
|---|---|---|
| Retail (n=2) | 3 | 10 |
| 7 | 9 | |
| Hospitality (n=3) | 4 | 1 |
| 3 | 2 | |
| 75 | 8 | |
| Transport (n=3) | 2 | 22 |
| 14 | 2 | |
| 37 | 3 | |
| Manufacturing (n=3) | 10 | 45 |
| 3 | 6 | |
| 38 | 3 |
2.7 Limitations of the research
Potential participants in the research were approached through employers' associations and the Department of Labour's regional labour market knowledge managers. Respondents thus self-selected by agreeing to participate. It can be assumed that employers who were knowingly not complying with the Act would be unlikely to agree to participate. Researchers were unable to locate any firm (which met the size and sector criteria) in which employees were paid commission or productivity bonuses. This omits a sector of businesses that has expressed particular dissatisfaction with relevant daily pay under the Act.
Footnotes
[1] The Business NZ-KPMG compliance cost survey seeks to measure the costs of complying with legislative and regulatory requirements as well as respondents’ perceptions of changes in the compliance burden and the helpfulness or otherwise of central and local government agencies. The compliance cost trend score is a sum of the weighted average scores of each of the proportions of respondents selecting ‘large rise,’ ‘modest rise,’ ‘no change,’ ‘modest fall,’ and ‘large fall.’ The higher the score the more costs are perceived to have increased. The maximum possible score is 5 and the minimum possible score is 1. The cost trend score does not attempt to assign a monetary amount. The survey is based on business owners’ recall at a point in time.
[2] Between 2003 and 2008 somewhere between 16 percent (2003) and 40 percent (2004) of respondents have ranked the Act as a compliance cost priority for their business.