Updated article and republished because we are getting a lot of questions on this presently

Author: David Jenkins. NZPPA CEO

The Holidays Act is a minimum entitlement piece of legislation meaning you cannot provide less, but you can always provide more.

This post is about clearly separating minimum leave entitlements provided by law from any additional leave provided by agreement to an employee.  So firstly, why bother doing this? Is this just more work for an already overworked and underappreciated payroll professional?

The answer to this is no, by separating out minimum from additional leave it helps you manage leave overall and it assists in ensuring compliance with the legislation.  If anything, this is a best practice activity and is to the benefit of payroll.

In this post I will use the example of annual holiday entitlement, but this applies to additional leave to any of the leave types provided under the Holidays Act such as sick and bereavement.

Here is a simple way of putting this into context.  If all annual leave provided to an employee is placed in one big pot (annual holiday entitlement by law and additional annual leave by agreement), how will they be differentiated over time?  By placing all minimum entitlement in its own pot, you can clearly demonstrate that the rules for that type of leave have been followed.  Leave provided in addition to what the law provides does not have to follow any of the rules for minimum entitlement.

Separating and making extra annual holiday entitlement work for the business, an example:

ABC Limited provides an additional week of annual holidays to their employees.  It is an agreed term and has been included in employees’ employment agreements.  It is useful to code this week differently from minimum entitlement as it does not need to follow the rules set by the Act (why create any additional nightmare on top of what the Act currently provides).  As it is provided by agreement, the employer can create agreed terms in its use, such as:

  • It’s paid at the ordinary rate: No greater of AWE and OWP rubbish, simple and easy to administer and you can clearly define the cost to the business in providing this additional benefit to the employee.
  • It cannot be cashed up: The purpose of providing additional leave is for an employee to take it. It will also mean it is part of gross earnings and will inflate the leave rate, and if cashed up on termination it is included in the 8% accrual.
  • Use it or lose it: You do not want to add or create a leave liability. Again, you could state you get the week this year and you must use it or lose it this year. It’s a good way to motivate the employee to take leave.
  • Achieve a performance target to earn it: Many employers provide additional leave with the employee doing nothing to qualify for it. If an employer wants to ensure a return on investment, then link additional leave to performance. If the employee performs, they get it. If they don’t perform, they don’t get it.  As long as the performance target is fair and achievable, then both the employee and employer win.

If the business does not manage the additional leave that has been provided to the employee and doesn’t get some form of return on investment (increased employee productivity, retention, being an employer of choice), this leave will become an expectation for the employee that they are getting “something for doing nothing in return” and it becomes a major additional cost to the business that really cannot be justified.

Issues when you combine minimum and extra entitlement in the same field

If you do combine leave into one field or pot, then there are issues.  Firstly, it makes it harder to show you have followed the rules because there may have been cashing up of minimum and extra entitlement but how do you show it was for different leave entitlements? This becomes even harder when you cannot actually define a week and a day for an employee.  Adding to that can create real issues with leave liability when the leave is not taken as all leave in the one pot is treated the same and at the same rate.

So, with minimum entitlement annual holidays you must show for example:

  • That the employee received four weeks after 12 months of continuous employment and that week is in relation to what a week would be to that employee.
  • That you have not paid out more than a week of annual holidays in any one entitlement year, but extra entitlement is a matter of agreement and you can pay the lot out if you agree at any time.
  • If the week is paid out of minimum annual holiday entitlement (in the current entitlement year), then it is not part of the gross earnings for leave but cashing up a week of extra entitlement is.
  • Annual holiday entitlement on termination extends from the termination date forward and the employee gets any public holiday in that period, extra entitlement by agreement does not do this.
  • Annual holidays accrue at 8% of gross earnings if the employee terminates prior to or after 12 months, but it is typical when additional annual holiday is provided that the accrual is set at a higher rate. For instance, four weeks (8%), five weeks (10%), there is no need to set accrual at 10% just because you provide an additional week, the law clearly states that it is 8% only.  It means the employer is providing an additional week and if the employee leaves before or after 12 months then that accrual is being paid out at a higher accrual rate. This is not what the law says and is not required unless agreed, which in most cases it isn’t.

To really manage annual holidays especially when you provide additional leave, I would advise using at least four codes to clearly define, track, manage and report on the differences between them instead of treating them all the same.

  • Annual holiday minimum entitlement [provided by law]: The four weeks provided after 12 months continuous employment. A maximum of one week of this entitlement may be paid out if the employer agrees (this must be part of the holiday and leave record).  The record held by payroll will show current and old entitlement held and is taken from this field.
  • Annual holiday entitlement earned while on parental leave [provided by law]: This is the same as the leave type above but only AWE can be used to calculate its value when the leave is taken. It never reverts to the greater of OWP and AWE.
  • Annual holiday additional entitlement [provided by agreement]: This covers anything which is better than what the Act provides.
  • Accrual balance [provided by law]: Stated as 8% of gross earnings from the start to the end before 12 months, or from the last entitlement date to the end date after 12 months. It is commonly used in payroll systems and is shown as time, but actually it only represents money under the Act.

The other major benefit of doing this is that a MBIE labour inspector can only look at minimum entitlement, and leave provided by agreement is not in their area of control.  It would take a case ending up at the Employment Relations Authority to look at an agreed term (if there were issues with its interpretation etc).

In conclusion, as stated at the start of this post I have used the example of annual holiday entitlement to show the problem with combining leave, but this could be applied to sick or bereavement as well (with different rules applied).  It is wise and practical to separately code different types of leave provided to an employee (by law and by agreement), so payroll can check and demonstrate that the rules for that type of leave have been followed.  It assists in compliance and the overall management of leave and so should be best practice for payroll.

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