Firstly, giving an employee annual holidays in advance is a privilege and not a right under the Holidays Act.
In this post I want to cover some of the misunderstandings and issues when giving annual holidays in advance. Most employers do allow employees to take their annual holidays in advance. This is about your culture but it is important to follow a few guidelines and check that your payroll system is actually meeting the requirements of the Act so you do not end up with additional, unexpected issues that just add to the overall nightmare that is the Holidays Act 2003.
So, let’s get the basics in place first:
- The employee requests an annual holiday in advance and it is totally up to the employer to say “yes” or “no”. Be professional and show good faith in making your decision. I always advise that the application and approval process is in writing or online so a paper trail is in place if any issues occur. Good recordkeeping always helps payroll.
- Providing annual holidays in advance to an employee is nothing to do with accrual (8%); it is about giving leave in advance of entitlement. So, if approved you are actually giving entitlement that the employee would receive at the 12-month mark in advance of it being earned. It is not about cashing up the 8% accrual earned to that point. You can only cash up the 8% while employed when the employee has agreed to have the 8% paid out each pay period under Section 28 (pay as you go) or under a closedown.
- Another way to look at it is by thinking of “accrual” as only money because the employee has not reached 12 months of continuous employment and 8% of gross earnings applies. However, “entitlement” is money and time because the employee has reached 12 months of continuous employment and this has now become 4 weeks of annual holiday entitlement. There are two calculations under the Act (see below) and the higher of the two is used to determine the value of the annual holidays.
The calculation to use when annual holidays in advance is provided
As stated, annual holidays in advance is about getting entitlement before it is due, so that means an entitlement calculation must first be undertaken.
The Holidays Act Section 22 defines how this is done. Just like when an employee takes annual holiday at the 12-month mark from their 4 weeks of entitlement, the greater of Average Weekly Earnings (AWE) and Ordinary Weekly Pay (OWP) must be done.
There is one issue with this which is that AWE is a 52-week average divided by 52. If the employee has not been continuously employed for 12 months, the divisor for AWE must be reduced to reflect the time that the employee has actually worked (whole or part weeks).
- For example, if the employee has only been employed for 3 months and has requested 1 week of annual holiday in advance which has been approved, payroll will calculate AWE based on the gross for that 3-month period divided by the number of weeks (whole or part). This will then provide the value for AWE. The requirements for OWP are as normal: the value of the week if the week can be defined or a 4-week average if the week cannot be determined (not the greater of the two).
- The outcome of the above when the greater of AWE and OWP is applied would be a negative leave balance that shows in the entitlement field. If the accrual field is reduced that is totally wrong as this is not cashing up annual leave.
Issues with payroll systems providing annual holiday in advance
One additional issue to those above is that a number of payroll systems do not reduce the divisor for AWE. In fact, I see this all the time when auditing payroll systems. In most cases this is not a configuration issue but is more about how the payroll system has actually been designed. So, it is important to check your system and if it is not a configuration issue take your payroll provider to task on not providing a compliant payroll system. It is not acceptable for payroll to be forced to do manual workarounds to ensure compliance when the payroll system should at the very least follow the requirements of the legislation.
Also, be careful of some payroll systems that add entitlement into the accrual field so only one field is displayed. This is rubbish and these bubble-gum payroll providers should go back to making eftpos systems!
What happens if the employee does not return from leave in advance or leaves soon after?
So, sometimes when the employer goes out of their way to assist the employee by providing annual holidays in advance, they turn around and decide not to come back or leave prior to reaching 12 months of continuous employment!
In general, when an employee owes the employer money the Wages Protection Act 1983 applies, but under the Holidays Act Section 23(2)(a) the employer can recover any annual holiday entitlement paid in advance from an employee’s termination pay. The employee cannot remove their consent from this as it is stated in the Holidays Act. However, this is only for annual holiday entitlement paid in advance, anything else that is owed is covered by the Wages Protection Act and the employer must have the employee’s written consent and the employee could remove that consent even after giving written permission. Please note this does not cover sick or bereavement leave paid in advance as there is no section of the Holidays Act that allows for recovery like annual holiday entitlement.
One thing that should be kept in mind to ensure at least annual holiday entitlement can be recovered is to only provide it in advance based on what the employee has accrued. For example, an employee has been employed for 3 months and in the accrual field is showing a week. If the employee then asks for 2 weeks’ holiday in advance and the leave is given, you can recover one of the 2 weeks but will have to fall back on the Wages Protection Act and the employee’s written consent to recover the second week.
So, in conclusion, providing annual holiday entitlement is common practice in New Zealand and all good for an employer to do as long as some basic requirements are followed. Check how calculations are being undertaken in your payroll system and if there are issues resolve them. Decide if the business will provide annual holiday in advance greater than what has been accrued as it is up to the employer taking into account the risk associated with it.
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