The Novopay service is at a critical point and may not be fixed for up to two years, new documents show.
Fairfax Media has obtained a copy of the Briefing to Incoming Minister Steven Joyce, who recently picked up responsibility for sorting out the embattled pay system.
The document was leaked to the education sector and eventually to media.
In it officials said a fundamental re-design of the model was required and that would need changes to the contract with Talent 2 and more funding.
"Talent 2 hold all the incentives, levers and management information required to improve the service and make the operation as efficient as possible.
"In other words, the Ministry has no say in how the service is designed."
The contract would need to be varied to give the Ministry more control, officials advised.
"We can expect it to take 18 to 24 months before the Novopay system is delivering at the level that we expected - let alone being able to deliver genuine benefits to school users."
The system went live with several known defects, which is normal, but new defects continued to arise which Talent 2 could not deal with, officials said.
They said staff had been overpaid, underpaid or not paid at all and schools had lost confidence in the IT system and the service provided by Talent 2.
Novopay was at a "critical point", they said.
"The Novopay system is producing too many errors... The majority of Novopay users, who are school payroll administrators and principals, have found the change to Novopay difficult and frustrating. They have complained that Novopay has generated significant additional work and stress."
Officials said the support provided had been insufficient and the problems most schools have are too complex for the help desk staff to deal with.
"Once the Novopay service is stabilised and schools are becoming more confident, we will need to address the issue of compensation to schools."
Meanwhile errors continued to be found and reported.
"Media attention is high and schools' tolerance is low."
Problems with the system had also highlighted a lack of robustness within schools for dealing with the collective agreements, they said.
"Novopay was built in business rules that are consistent with the collective agreements and prevent these [flexible] practices."