Confused about how to comply with the Holidays Act 1983?
As summer holidays draw closer, employers should know how to pay staff their correct annual leave entitlements.
We will debunk four myths around paying annual holiday entitlements for Holidays Act compliance.
Myth 1: New Zealand employers are calculating annual holiday pay correctly
The Holidays Act may be easy enough to interpret for staff working regular hours, 5 days a week. However, it has proven a nightmare for employers whose staff work irregular hours or receive irregular pay.
Many New Zealand employers audited through the Labour Inspectorate have underpaid staff annual holiday entitlements.
Large employers like the Auckland Council, the New Zealand Police, and even the auditing body, the Ministry of Business, Innovation and Employment, have fallen foul of the law with holiday pay.
Myth 2: Staff receive their usual pay when they take annual holidays
Employers need to do more than just pay staff their usual pay for annual holidays. Employers must work out two different calculations – ordinary weekly pay and average weekly earnings – and pay the greater of the two separate calculations.
The sum of "average weekly earnings" is the total of an employee's gross earnings over the last 52 weeks, divided by 52. This calculation includes the value of all allowances, overtime, penal rates, incentive payments, contractual bonuses and other regular payments earned in the period.
"Ordinary weekly pay" refers to the earnings an employee would ordinarily receive had they worked that week or period. It includes regular allowances, such as a shift allowance, regular productivity or incentive-based payments, the cash value of board or lodgings provided by the employer, and regular overtime payments.
Myth 3: All staff work the same 'working week'
It can be difficult to determine a working "week" for the purposes of calculating annual holiday entitlement for staff working irregular hours, such as shift work, part time, and overtime. Staff in hospitality, retail and health are more likely to work hours outside the standard working week.
Employers can agree with staff on what genuinely constitutes a working week for annual holiday entitlement. The first step is to identify a pattern of work that could be used to determine a working week.
Myth 4: It is best to record annual holiday entitlements in hours
Recording annual holiday balances in hourly units can be misleading, particularly if work patterns change. It is better to record annual holiday balances in weeks, given that the Holidays Act refers to "weeks".
Where annual holidays are recorded in any other unit than a week, the balance of annual holidays must be recalculated when there is a change to hours.
If an employee increases their working hours, their annual holiday entitlement remains the same in terms of weeks, but will change in terms of hours. For example, an employee who increases from 20 working hours to 40 working hours per week will retain their balance of 6 weeks' entitlement of annual holidays.
However, the balance of annual holiday entitlement will be worth more in terms of hours, given the increase in hours per week.
The Ministry of Business, Innovation and Employment has published a guide to help employers and payroll comply with the Holidays Act.