Someone asks for their leave balance. You check it, and the number looks wrong.
Not wildly wrong. Just enough that you can't explain it in one sentence.
It usually traces back to something nobody wrote down. Hours that changed during a busy patch and never changed back on paper. A start date that was adjusted verbally. A Friday finish agreed with a manager who has since left.
None of it was careless. It was all sensible at the time. It just never made it into a form the payroll could see.
What "custom and practice" means
In employment, custom and practice is the way things are actually done in your business, as opposed to what's written in the employment agreement.
Most of the time, the two line up. When they don't, the way things are actually done can start to carry weight of its own. A practice that's consistent, long-standing, clear and well known - and that people have come to rely on - can be argued to have become part of the employment relationship, even though it was never written down.
In plain terms: if you've done something the same way for long enough, your people may reasonably believe it's part of the deal.
Where it shows up in payroll
The arrangements I see most often:
Hours that quietly settled. An employee on a minimum-hours or "as required" agreement who has worked the same four days a week for two years.
Bonuses paid by habit. A bonus described as a discretionary payment, but paid every year. That develops an expectation, and means it can no longer be treated as discretionary.
Overtime rates nobody agreed. Time and a half after 5pm, because that's what the previous owner did.
Extra leave. A birthday day off, or the days between Christmas and New Year given as paid leave, every year.
Changed days. Someone who moved from five days to three, with their agreement and payroll settings still showing five.
Each one is a small gap between the paper and the reality. In payroll, small gaps compound.
Why it matters most for annual leave
Annual holiday entitlement under the Holidays Act is four weeks. Not 20 days, and not 160 hours. Four weeks.
Days and hours are just a way of representing those weeks for a particular employee, and that depends on what a working week genuinely is for them. The Act allows you and your employee to agree on what a working week is, based on how they actually work.
That's where custom and practice comes in. If someone's agreement says three days but they've worked four days a week for the past year, their "week" may now be four days - and four weeks of annual leave is 16 days, not 12.
The same applies in reverse. If someone has two weeks of leave left and permanently moves from five days to three, their balance is still two weeks. In days, that's now six, not ten. Leave the old number sitting in the system, and you're recording a different amount of time off from what they're actually entitled to.
And an employment agreement can't reduce the minimum. If a clause gives less than the Holidays Act does, the Act wins. If it gives more - say, 20 days for someone who works three days a week - that promise may still stand, and payroll shouldn't quietly cut it back to 12.
What it means for you
The practical risk is that your payroll is running on the agreement, while the employment relationship is running on the practice. Leave balances, holiday pay, public holiday entitlements and final pays all get calculated from one version, when the other may be the one that counts.
It also makes changes harder. Removing a long-standing arrangement can look like changing the employment agreement itself. That usually calls for a proper, good-faith process - and often agreement - rather than a quiet change to a payroll setting.
How to get the paperwork back in line with reality
Compare the agreement with what actually happens. Start with hours, days and rosters. Look at what each person has actually worked, not just what they're contracted for.
List the informal arrangements. Allowances, overtime rates, extra leave days, early finishes. Note how long each has been in place and how consistently.
Agree what a working week is. For anyone whose pattern isn't a standard week, agree how their annual leave will be represented and deducted, and record that agreement rather than relying on a software default.
Update the paperwork. Vary agreements where the reality has changed. Put temporary arrangements in writing, with a reason and a review date.
Check the leave balances. Reconcile days or hours back to weeks, especially for anyone whose pattern has changed.
Take advice before removing anything long-standing. If an arrangement has been in place for years, treat changing it as a change to the employment relationship.
The fix isn't a new system
None of this is solved by software. The system will apply whatever it's told, consistently, every pay run.
The fix is getting the arrangement and the record to say the same thing. It's also one of the best things you can do ahead of the new leave legislation, which will be applied to the agreements and work patterns you already have.
If there's a balance in your payroll you can't fully explain, I'd love to help you trace it.
About the author
Karyn Campbell is a New Zealand payroll consultant and founder of Payroll Consult. With 5+ years running her own consultancy and a background in payroll software – including roles across client support, onboarding, and partnership management at a leading NZ payroll provider – Karyn brings a rare combination of technical knowledge and real-world compliance experience. She works with business owners, bookkeepers, and payroll teams across New Zealand, specialising in payroll audits, system reviews, and fixing complex payroll issues for teams that don’t work a typical 9-5.
