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Your people are one of your organisation's greatest assets, but did you know that they can also be one of your greatest risks?
While the risk of not complying with New Zealand's Holidays Act is generally low for employees that work the same hours week-to-week, the risk increases when variability (in time or payments) is introduced or if payroll processes aren't regularly reviewed.
Below are some important questions to answer to ensure that you are complying with the Holidays Act and are aware of the types of employment situations to watch out for.
Employees are entitled to four weeks of annual leave for each year of continuous employment.
Wherever possible, the definition of a week for annual leave should be agreed upon between you and your employee and recorded in the employment agreement. However, if you have an employee who works variable hours/days, determining what a week is for them can be complicated because it's constantly changing.
If your payroll system holds annual leave balances in hours or days, then, to remain compliant, these balances need to be recalculated on an ongoing basis to reflect the employee's ever-changing week. This can be a complex and time-consuming task to manage. However, when annual leave is held in weeks, no recalculation is necessary because the underlying balance in weeks remains constant regardless of the variability in working days or hours.
Download our guide to learn more.
Keeping annual leave balances in units other than weeks may result in failing to comply with the Holidays Act if your employee's work patterns change. That's because what genuinely constitutes a working week for them has probably changed.
A week is defined at the time annual leave is taken and not when it is earned/accrued. If annual leave balances are kept in any unit other than a week, a recalculation of the balance is necessary.
For example, an employee who starts at 20 hours per week would be set up in the payroll system to receive four weeks of 20 hours (80 hours) on their 12-month anniversary. Midway through the following year, their hours increase to 40 hours per week. In order to remain compliant, their annual leave balance will need to be recalculated so that they retain the same entitlement in weeks, i.e. four weeks of 40 hours (160 hours).
This is why holding annual leave balances in hours or days need recalculating whenever work patterns change. However, when held in weeks, no recalculation is necessary because the underlying balance in weeks remains constant.
Download our guide to learn more.
Only two types of employees can be paid their annual holiday pay as part of their regular pay instead of receiving their four weeks of annual leave, i.e. 8 per cent PAYG holiday pay. They are either on a genuine fixed-term contract lasting less than 12 months or their work is so intermittent or irregular that it is impracticable to provide four weeks' annual leave.
A common cause of non-compliance is when these employees aren't regularly reviewed to check if they continue to qualify to be paid PAYG holiday pay. If the fixed term is extended to more than 12 months, or if their work pattern changes to become regular, the employee will no longer qualify to PAYG holiday pay and they must move to receive four weeks of annual leave.
Unfortunately, payroll is one of the things you can't just set and forget, so it's important to review your payroll settings regularly.
Visit the Employment New Zealand website for more information.
Gross earnings are used for a number of leave payment calculations. If all of the components of gross earnings are not included in the relevant calculations for leave, an employee will likely be underpaid leaving your organisation at risk of not complying with the Holidays Act. That's why it's so important to regularly check that your payroll system is correctly including (or excluding) employee payments in gross earnings.
Allowances, bonuses (except truly discretionary bonuses), commissions, overtime, and even the cash value of board and lodgings should be included in gross earnings. Note, it will be rare for a payment to be legitimately excluded from gross earnings. Therefore, you should seek advice from Employment New Zealand before doing so.
Visit the Employment New Zealand website for more information.
There are special rules around paying out (or cashing up) annual leave, so it pays to check these closely.
Employees can request to cash up to one week (of their four weeks minimum annual leave entitlement) in each entitlement year unless the organisation has a business policy stating otherwise. An employee's old entitlement can't be paid out from previous periods nor can they cash up annual leave they haven't yet become entitled to until their next yearly anniversary.
These rules don't apply to any contractual annual leave entitlement over and above the employee's minimum four weeks, e.g. a fifth week may be cashed up by agreement. For more information, visit Employment New Zealand.
Visit the Employment New Zealand website for more information.
The term ‘casual’ doesn't appear anywhere in the Holidays Act.
All employees, regardless of employment status, are entitled to receive sick leave (and bereavement leave and family violence leave) if they meet the required criteria:
a) they have six months' current continuous employment, or
b) they have worked for six months for an average of 10 hours per week and at least one hour every week or 40 hours every month.
Even if your employee’s work pattern varies in future and they no longer meet the qualifying criteria, they can still use their existing unused sick leave balance which doesn't expire. Up to 10 days of unused sick leave must be carried over to a maximum of 20 days’ current entitlement in any year.
Consider running regular reports from your payroll system to help you determine if your casual employees might now qualify for sick leave, as failing to do so runs the risk of non-compliance.
Visit the Employment New Zealand website for more information.
There is a special rule that requires employees to be paid for public holidays which fall after their employment has ended (i.e. after their termination date). This means that the employee's termination date is notionally extended by any entitled annual leave not taken, e.g. if three weeks of annual leave is owed, then it will be added on to the employee's termination date.
The employee is entitled to be paid for any public holidays that fall within their termination date and the notionally extended date, provided they would normally have worked on the day that the public holiday falls on. This rule isn't always followed, so it's best to check that your payroll termination processes are up to date.
Visit the Employment New Zealand website for more information.
If an employee takes a continuous period of leave without pay for more than one week (not including unpaid sick, bereavement, or family violence leave), there are two approaches:
You should check that your payroll system is able to handle requests for extended leave without pay depending on either approach your business decides on.
This payroll compliance decision tool is intended to provide general information of an educational nature only. It is not intended as a substitute for specific professional advice on any matter and must not be relied upon for that purpose. We expressly disclaim any liability to you or your business in relation to the information contained in this tool, and you rely on any information solely at your own risk. As individual circumstances differ, you should seek appropriate professional advice.
