Annual Leave entitlements

Annual Leave Entitlements

Under the Holidays Act 2003, employees are entitled to a minimum of four weeks annual holidays after the first year of employment.
The minimum entitlement increased from three to four weeks annual holidays from 1 April 2007.

The key for all employers and employees is:

• working out and agreeing what the entitlement to four weeks paid annual leave means for them; and
• ensuring the employee is correctly paid when they take annual holidays or their employment ends.

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All employees are entitled to four weeks paid annual holidays

On each anniversary of the date of commencing employment on or after 1 April 2007, the employee is entitled to four weeks paid annual holidays. The leave can be taken at any time agreed between the employer and the employee. Employees must be given the opportunity to take at least two of the four weeks leave in a continuous period, if they wish to do so.

Under two circumstances, the date on which the employee becomes entitled to annual holidays is adjusted:

• When the business has an annual close down period
• When an employee takes unpaid leave of more than a week during the year
  

Agreement over what four weeks annual holidays means

An employer and employee may agree on what four weeks annual holidays means in their circumstances. Any agreement should ideally be recorded at the start of the employment relationship even where it is clear what four weeks means. The agreement must be a genuine reflection of the employee's working week.

Where agreement cannot be reached either party can seek the assistance of a Labour Inspector.

Where employees are permanently employed on a constant work pattern establishing their entitlement is easy.

Where an employee is employed on a work pattern that changes during the year, for example going from part-time to full-time work, the employer and the employee should agree how the entitlement to four weeks leave is provided.

Such an agreement may affect annual holiday entitlements the employee has been earning under their previous work pattern. For example the employee's entitlement could be provided as if the employee had been a full time employee for the whole period.

Alternatively the entitlement could be proportionate to the time in each form of work. Where a new agreement is reached, it is strongly advisable to record it in writing.

Payment

Payment for annual holidays is at the greater of the ordinary weekly pay at the time the holiday is taken or the employee's average weekly earnings over the 12-month period before the annual holiday is taken.

When an employee is to take annual holidays, the first step is to determine what portion of the entitlement is being taken, taking into account any agreement of what a week means for that employee. This portion may be a period of weeks, or a period of less than a week.

For example, an employee works 3 days per week and has agreed with their employer that their four week holiday entitlement will be 12 days. When the employee takes a day off work this will be one third of a week of annual holidays.

In this case payment would be a proportion of ordinary weekly pay or average weekly earnings based on the period of leave taken, namely, one third of the greater of those weekly amounts.

Employees during their first year of service

During the first year of employment, three circumstances can arise that require the calculation of the payment due for annual holidays:

• The employee may seek, and the employer may approve, the taking of annual holidays in advance
• The employer may have a regular annual close down of the workplace
• The employee may resign or the employer may terminate the employment
  

When should annual holiday pay be paid?

Employees are entitled to receive their pay for annual holidays before the holiday commences, unless the employer and employee agree that the normal pay cycle will continue undisturbed by the time off work.

This provision is designed to ensure that employees have money available to them to pay for the travel and accommodation expenses involved in a holiday, which often are required either at the commencement of a holiday or earlier.

If an agreement to pay the employee any annual holiday pay in their normal pay cycle is reached, it is advisable to record it either as part of the employment agreement or in writing on a case-by-case basis.

Employment agreements

The annual holiday provisions in the Holidays Act 2003 are deemed to be part of any employment agreement that is silent on the subject of leave.

Many employment agreements contain provisions that vary the provisions of the Holidays Act 2003. Such variations are often to the benefit of the employee – for example, by providing additional annual holidays, establishing a higher rate for annual holiday pay, or providing consultative arrangements about closedowns.

The Act does not prevent the employer providing the employee with enhanced entitlements. However, it is important that the employer and employee review such arrangements to ensure they are consistent with this Act.

In the past, the concept of “overall advantage” was sometimes used to establish whether variations in employment agreements were legal. This concept no longer applies. The Holidays Act 2003 makes clear that each component of holiday arrangements must be at least as favourable to the employees as the entitlements specified in the Act.

This means, for example, that an employer cannot provide an employee with an extra week of annual holidays in exchange for the employee giving up their public holiday entitlements.

Record keeping

Good record keeping protects the employer in the case of a dispute and ensures that an employee's entitlements are correctly met.

The Holidays Act 2003 keeps the requirement to maintain a holiday and leave record in addition to the requirement to maintain a wage and time record. This record may be written or electronic.

You may amend your current records to include the additional information, but you must ensure that all the following information is recorded in a manner that enables the employee to verify entitlements (new requirements in italics):

• the name of the employee
• the date employment commenced
• the days on which an employee works, if the information is relevant to entitlement or payment under the Holidays Act
• the date the employee last became entitled to annual holidays
• the employee's current entitlement to annual holidays
• the employee's current entitlement to sick leave
• the dates any annual holiday, sick or bereavement leave was taken
• the amount of payment for any annual holidays, sick leave and bereavement leave taken
• the dates of and payment for any public holiday worked
• the number of hours worked on any public holiday
• the date on which the employee became entitled to any alternative holiday for any public holiday worked
• the dates and payment of any public holiday or alternative holiday on which the employee did not work, but for which the employee had an entitlement to payment
• the cash value of board and lodgings provided
• the cash value of any alternative holidays that the employee has surrendered for payment
• the date of termination

• the amount of pay for holidays on termination

It would also be useful for employers to record the date on which employees become entitled to sick and bereavement leave, to avoid any dispute over whether the employee is entitled to this leave.

Calculating “ordinary weekly pay” and “average weekly earnings”

 Both “ordinary weekly pay” and “average weekly earnings” need to be calculated and the greater figure used for the employee's annual holiday pay.

Ordinary weekly pay

“Ordinary weekly pay” represents everything an employee is normally paid weekly, including:

• regular allowances, such as a shift allowance
• regular productivity or incentive-based payments (including commission or piece rates)
• the cash value of board or lodgings, and
• regular overtime
• Intermittent or one-off discretionary payments are not included in ordinary weekly pay.

For many people, ordinary weekly pay is quite clear because they are paid the same amount each week.
Where ordinary weekly pay is unclear for any reason, the Act provides an averaging formula for working it out. Ordinary weekly pay is established by:

• Going to the end of the last pay period

• From that date go back

• 4 weeks, or
• if the pay period is longer than 4 weeks, the length of the pay period
• Take the gross earnings for that period
• Deduct from the gross earnings any payments that are irregular or that are discretionary
• Divide the answer by four

Sometimes an employment agreement will include a specified ordinary weekly pay. If this is the case, the figure in the employment agreement should be compared with the actual ordinary weekly pay (whether it is clear or averaged), and the greater of the two should be used as “ordinary weekly pay”.

Average weekly earnings

“Average weekly earnings” are determined by calculating gross earnings over the 12 months prior to the end of last payroll period before the annual holiday is taken, and dividing that figure by 52. The following payments make up gross earnings and should be included in the calculation:

• salary and wages
• allowances ( not reimbursing allowances)
• all overtime payments
• piece work payments
• at risk, productivity or performance payments
• commissions
• payment for annual holidays and public holidays
• payment for sick and bereavement leave
• the cash value of board and lodgings supplied
• amounts compulsorily paid by the employer under ACC (i.e. the first week of compensation)
• any other payments that are required to be made under the terms of the employment agreement.

Unless the employment agreement says otherwise, reimbursement payments and discretionary or ex-gratia payments (for example, genuinely discretionary bonuses) are not included in these calculations; nor are payments made by ACC or when an employee is on voluntary military service.       

Taking annual holidays in advance of entitlement

Employees can ask to take paid annual holidays in advance of becoming entitled to them – either because they have not completed 12 months of service, or because they have used all of their entitlement. In these circumstances, approval is at the discretion of the employer, unless a right to take annual holidays in advance is included in the relevant employment agreement.

The payment for holidays taken in advance is still based on the greater of the employee's ordinary weekly pay or average weekly earnings - see the fact sheet titled: Annual holidays – calculating “ordinary weekly pay” and “average weekly earnings”)

To calculate average weekly earnings where the employee has less than 12 months' service, the gross earnings from starting work until the last pay period before the holiday are divided by the number of weeks worked.

To calculate average weekly earnings where the employee has been employed for more than 12 months but is taking annual holidays in advance of entitlement, the calculation covers the 12 months prior to the end of the last pay period before the holiday.

When an employer approves annual holidays in advance, the employee should be asked to agree in writing that the employer be able to reduce any final pay to recover from the employee the amount of any overpayment of holiday pay that might result from taking annual holidays in advance.

When pay-as-you-go provisions can be used     

The Holidays Act allows “pay-as-you-go” holiday pay arrangements in two circumstances only. These are:

• Employees on genuine fixed-term agreements of less than 12 months - this reflects the fact that these employees are not expected to reach the date on which they would normally qualify for annual holidays; and
• Employees with a work pattern that is intermittent or irregular (genuine casual work) – this reflects the fact that the employee's employment pattern may mean it is not meaningful or practicable to attempt to provide them with four weeks paid annual holidays.
• Employees paid on a pay-as-you-go basis do not later become entitled to time off for annual holidays.
• Employees on genuine fixed term agreements

The entitlement to four weeks paid leave after 12 months' service is sometimes not the best way to deal with holidays when the employment relationship is short-term.

The Employment Relations Act allows for fixed term employment agreements, if on appointment there is a genuine reason for the fixed term and the reason for the fixed term and how the employment will end are set out in writing in the employment agreement. Examples of genuine reasons are:

• “The job is to prune trees in the west block, and your job will cease when all of the trees are pruned. I estimate that this pruning job will take you and your co-workers two months from the start date.”
• “This appointment is for a fixed term to cover for an employee who is taking four months' leave. The employee will return on [dd/mm/yyyy] and there will be a hand-over period of one week. As a consequence your employment will cease on [dd/mm/yyyy].”

Where such a fixed-term agreement is for less than 12 months, an employee may agree to the employer adding 8% to the gross weekly earnings in lieu of getting annual holidays or in lieu of getting an aggregated 8% at the end of the fixed term.

Any such arrangement should be included in the employment agreement, and the 8% should appear as a separate and identifiable amount on the employee's pay slip. On the completion of the fixed term, the employee will have received all pay for annual holidays. No further payment will be outstanding and no holidays are available.

If the employee is later employed on one or more further fixed term agreements of less than 12 months with the same employer, then the same arrangement can be made even when there is no break in employment, provided the two parties agree and document the arrangement.

Moving from fixed term to permanent employment with the same employer

If  an employee enters into a permanent working arrangement, the payment of the additional 8% annual holiday pay in the employee's regular pay must cease.

The employee will then become entitled to four weeks annual holidays one year after the final fixed term period started. Because the employer has already paid the additional 8% annual holiday pay during the fixed term period, the pay for annual holidays is reduced by the amount of holiday pay already paid at 8% during the final period of fixed term employment.

Where the fixed term agreement is not genuine or exceeds 12 months

If an employer has incorrectly paid annual holiday pay on a pay-as-you-go basis, after 12 months' continuous employment the employee will become entitled to paid annual holidays, and any amount paid on a pay-as-you-go basis may not be deducted from the employee's annual holiday pay.

Examples of circumstances where this occurs are:

• where a fixed term agreement was not genuine
• where a fixed term agreement was for a period of greater than 12 months
  

Issues to consider with pay-as-you-go arrangements

Fixed-term agreements are in some cases linked to the completion of projects. In these circumstances there is a risk to the employer that the fixed term will exceed 12 months, at which time the employee becomes entitled to paid annual holidays, despite having already been paid on a pay-as-you-go basis.

Therefore, pay-as-you-go arrangements are not recommended where it is possible that the employment will last longer than 12 months.

You should seek to clarify entitlements and renegotiate the relevant employment agreement as soon as it appears likely that a fixed term arrangement will unexpectedly last more than 12 months.

Holiday pay is additional to the minimum wage and must be shown as a separate identifiable component of an employee's pay.

Please note any annual holiday pay (such as pay-as-you-go holiday pay) is not included in the minimum wage rate and must be added on top of and paid with a regular pay.

Employees with a work pattern that is intermittent or irregular (genuine casual work)

Many employees who are described as “casual” are part-time employees whose future employment pattern is actually clear – for example, supermarket or hospitality employees whose work pattern is established on a fortnightly roster.

These employees are entitled to four weeks leave.

For a minority of employees, however, this clarity is not the case. Generally, these are employees whose employment is triggered by an event that cannot be accurately anticipated, or whose work pattern can be described as so irregular or intermittent that the concept of four weeks away from work is difficult to apply. In such cases, an arrangement can be agreed to add to their pay 8% of the employee's gross earnings as annual holiday pay.

For these employees, the arrangement must be by genuine agreement and be included in the employment agreement, and the 8% annual holiday pay should appear as a separate and identifiable amount on the employee's pay slip.

On the termination of the employment relationship, no additional pay for annual holidays is due.

If an employee agrees to enter into such an arrangement, the employer would be wise to keep it under review to see whether a regular cycle of work has developed. If this occurs, the employer and employee should enter into a new employment agreement that provides for annual holidays to accrue, and that removes the 8% payment.

Examples of genuinely irregular or intermittent employment

The Holidays Act 2003 contains no reference to “casual work” because the term is colloquially applied to so many types of employment arrangements. Instead, the Act refers to intermittent or irregular employment.

Here are some examples of intermittent or irregular work for the purposes of the Holidays Act:

• retired employee who is called back in emergencies to cover for sickness
• specialist tradesperson who is employed only when a particular process (such as repairing a broken machine) is required
  

Effects of unpaid leave       

When an employee takes unpaid leave of more than a week during the year, this can be managed in three ways:

• The employer can choose to extend the time required before the employee becomes entitled to annual holidays by the period of unpaid leave in excess of one week. That is, if an employee takes two weeks' unpaid leave, she or he becomes entitled to annual holidays one week after the anniversary of the starting date of employment;
• The employer and employee can agree that an employee's average weekly earnings calculation will be modified to reflect the number of whole or part weeks greater than one week that the employee was on unpaid leave. For example, if an employee takes two weeks' unpaid leave during the year, it can be agreed that the annual-holiday pay is calculated on the basis of a 51-week year, not on the basis of 52 weeks;
• The employer and employee can agree that the unpaid leave will have no effect on the employee's annual holiday entitlement.

The first week of unpaid leave does not affect either the date on which the employee becomes entitled to annual holidays or the divisor of 52.

Time while an employee is on ACC, parental leave or leave for voluntary military service does not affect the anniversary date for annual holiday purposes.

Regular annual close downs

The method of calculating the annual holiday entitlement is different where the employer chooses to instigate an annual closedown on a regular basis.

This close down can occur either:

• across the entire workplace (for example, where a company closes over the Christmas/New Year period), or
• for part of an enterprise (for example, where the factory closes for maintenance while the office, dispatch and sales departments remain open).

The employer may implement such a closure once a year and require employees to take leave during the period of the closedown, even where this requires employees to take leave for which they are not fully reimbursed.

The employer is required to provide employees at least 14 days' advance notice of the closedown.

For employees in their first year of employment, the level of annual holiday pay for the period of the closedown can be established by:

• the employer paying the employee 8% of gross earnings to date, or
• the employer and employee agreeing to the employee taking annual holidays in advance and being paid even though the leave has not yet accrued - employees who take annual holidays in advance of entitlement.

For all employees whose work is subject to a regular annual close down, the employer can nominate a date which will be treated as the date that the closedown begins on and on which the employees become entitled to annual holidays. This date must be reasonably connected to the timing of the regular annual close down. For example, where there is a Christmas close down the date could be set at 15 December to ensure that it always comes before the annual close down commences.

An employer who wants to shut down their operations more than once in any year can do so with the agreement of their employee or employees, but cannot direct them to take annual holidays utilising the above provisions. Nor is the date of entitlement to annual holiday adjusted by a second close down.

Source:  http://www.ers.dol.govt.nz/annualleave

© Crown copyright [2005]

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