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Novopay provider Talent2 were unwilling to staff a call centre for stricken teachers in the week before Christmas, documents show.
Then-Associate Education Minister Craig Foss had to call chief executive John Rawlinson to intervene.
Education Ministry acting chief executive Rowena Phair wrote to Talent 2 board chair Andrew Banks last month to say she was "appalled" and it was "unacceptable."
"The impact of this decision would have been that a large number [of] schools' staff would not receive their holiday pay prior to Christmas."
By Christmas, school staff had endured months of problems with their wages, with some going under paid or not paid at all.
The Novopay system - which pays 110,000 school staff went live in August and has been beset with problems. In her letter, dated January 15, Phair said while many if the issue were "part of bedding in a new system, many were not and were entirely avoidable."
She added: "I have no confidence that preventable service problems will not continue in 2013."
Earlier it was revealed, Cabinet ministers gave Novopay the green light just two months after officials considered scrapping the error-riddled payroll system.
Finance Minister Bill English, Education Minister Hekia Parata and Associate Education Minister Craig Foss signed off the project in June last year despite advice there were 147 "software defects".
But documents released by the Government today reveal Education Ministry officials looked at dumping it in April because of a series of problems and missed deadlines.
Novopay went live in August – and by September staff were over- or under-paid, or not paid at all.
The documents also reveal that the roll-out of the flawed system was twice delayed.
In 2010 a 'go-live' date was delayed until 2011. And then in November 2011, it was put back to June 2012. It was eventually activated in August 2012.
The documents, posted on the Ministry of Education website this morning, reveal:
* The tax-payer funded contract is worth more than $100m to Talent2 over eight years. So far, just $16.4 million - out of the $30 million cost to implement the system - has been paid to the Melbourne-based firm.
* Problems with the Novopay system date back to early 2010. Letters and emails released by the Education Ministry today show officials were growing increasingly frustrated by a series of delays in rolling out the complex system for paying 110,000 school staff.
* A year before the $30 million project "went live", supplier Talent2 asked for extra funding and threatened to "de-scope" if they didn't get the cash. A small "goodwill" amount – which has not been divulged – was paid out.
* By April 2012, an internal memo shows officials floated the idea of scrapping Novopay.
* But in June 2012 Government ministers signed off the project going live – despite knowing there were 147 defects.
* The documents also reveal that up until January 6, 14,470 teachers had been underpaid by almost $12m. The Ministry says it works with Talent2 to ensure staff who are affected are paid "at the earliest opportunity."
The contract to roll out a new payroll system was signed with Australian firm Talent2 in 2005. By April 2010 it became clear Talent 2 were experiencing difficulties.
Letters and emails released by the Education Ministry show officials were growing increasingly frustrated by a series of delays in rolling out the complex payroll system for school staff.
In March 2010 education deputy secretary Anne Jackson wrote to Talent2's chief executive warning "significant delays" were "inevitable" and asking for an urgent meeting. She made reference to a decision to bring forward the go live date for North Island schools.
By July it became clear Talent2 had missed a deadline – and wrote to Jackson to acknowledge disappointment.
A year later relations between the Australian firm and the ministry were obviously strained. Talent2 had requested more funding – the amount is withheld – which Jackson said was "not feasible".
She balked at the firms threat to "de-scope" saying: "It is not clear to me why the ministry would agree to this given that Talent2 has been contracted to deliver the existing project scope for an agreed fixed price ... Talent2 has found it more difficult and more expensive to deliver on its contract commitments than it originally estimated, but this does not mean the ministry must accept a higher price or a reduced scope."
By December 2011, Talent2 had failed to meet another deadline and Jackson wrote a strongly worded letter. She said Talent2 was not meeting its contractual agreements and its "performance requires improvement".
SCRAPPING NOVOPAY 'NOT PALATABLE'
In April 2012 – with the final deadline for Novopay approaching – a memo to education secretary Lesley Longstone and her deputy Anne Jackson shows four important deadlines were not met by provider Talent2. The ministry had formally warned the firm it was in breach of the $30m contract.
The document indicates the ministry was thinking about dumping Novopay and instead turning to a "hybrid" system incorporating the previous payroll system run by Datacom. But Novopay and Datacom told officials they would not work together.
"This solution is highly likely to fail," officials advised.
Another option was to abandon altogether the agreement with Talent2. But this was considered "not palatable".
The memo also shows Talent2 threatened legal action if the ministry issued a material breach notice on the contract.
Officials advised: "Talent2 is laying the foundations for an allegation that the ministry is in breach of its good faith obligation."
Talent2 also accused the ministry of "hindering" it's performance in the ministry's management of the project.
The memo recommends Talent2 be allowed to continue – with testing, deadlines and a "healthcheck".
In June last year, a report to English, Parata and Foss, outlined 147 bugs in the system. There were no problems at the most serious level, but 10 at the next level and 105 at "level 3".
Final advice given to the trio said 5913 payslip errors were made during testing but that could be reduced to 773 by last June.
The report said the problems were not "showstoppers".
Four independent advisers – from Pricewaterhouse Coopers, the Social Development Ministry, the Primary Industries Ministry and the New Zealand Transport Agency – gave the system the green light.
"Talent2 now has a proven way of rectifying defects and releasing the fixes," the Education Ministry report said.
The ministers allowed the project to go ahead in August.
'FIX IT OR DITCH IT'
Senior minister Steven Joyce has been tasked with fixing the problems and yesterday announced a ministerial inquiry and extra resources to help schools. Joyce said Novopay would be be scrapped if it could not be fixed, but there were no immediate alternatives.
Education groups have welcomed Government plans to deal with the beleaguered system but want a deadline set for the payroll system to be fixed.
Teachers and principals are expecting major headaches in the next pay round.
NZEI president Judith Nowotarski said people had put up with the trouble-prone system for too long.
"They have been paid wrongly, had their third-party payments affected, and this has caused a lot of people a lot of stress," she said.
School administrators and principals had been working long hours to deal with the errors and the Government announcement was cold comfort for those still dealing with Novopay, she said.
"We need a deadline. This error-ridden system cannot go on," Nowotarski said.
The Government plan was welcome but she said it must also consider compensating schools for the extra hours and money spent out of their own budgets.
Joyce said it was too early to deal with the issue of compensation.
In the short-term, extra resources would be poured into improving the software, supporting schools, extending call-centre hours and documenting the problems.
He said the taxpayer would foot the bill until contractual issues were resolved with provider Talent2 at a later stage.
Joyce said the amount would be "significant".