Opinion: David Grindle: A cautionary tale - calculating annual leave under Holidays Act 2003

Calculating holiday pay can be confusing. If you are in doubt, Whangārei employment law specialist David Grindle recommends getting legal advice. Photo / Getty Images

EMPLOYMENT LAW

Some employers may find they need a holiday themselves after trying to work out what they are obliged to pay their employees under the Holidays Act 2003.

Complex and confusing, the current act has historically left thousands of workers short-changed for annual leave.

Consequently, some government departments and employers have received large and unexpected bills for underpayment of annual leave provisions.

While successive governments have signalled their intention to overhaul the act, it hasn't happened yet.

The 2020 Employment Court decision in Metropolitan Glass & Glazing Ltd v Labour Inspector, Ministry of Business and Innovation and Employment contains some important lessons for employers and employees alike, even though the court's decision is, in part, subject to an appeal.

The case

The Labour Inspectorate and Metropolitan Glass jointly filed proceedings in the Employment Court after being unable to agree on payments to be included in holiday pay calculations.

They sought answers to two questions:

1. Whether payments made by Metropolitan Glass under a discretionary bonus scheme were part of "gross earnings" and should be included for the purposes of calculating holiday pay in accordance with the act.

2. How annual holidays should be treated during a business's customary closedown period and whether it was appropriate for Metropolitan Glass to allow certain staff to take leave in advance, as opposed to paying them 8 per cent of their gross earnings at the closedown date.

Bonus scheme payments

Metropolitan Glass maintained that its bonus scheme did not form part of the employment agreement, was discretionary in nature and therefore did not constitute gross earnings and could be excluded from any holiday pay calculation.

The court disagreed, concluding that an employment agreement can be evidenced from "components in more than one place".

The court found that the bonus scheme was captured under the definition of gross payments in the act and that the bonus scheme payments should be included when calculating holiday pay.

This decision is now under appeal.

Treatment of annual holidays

The court in Metropolitan Glass decided that employees who are not entitled to annual holidays at the commencement of a closedown period (i.e. if an employee has not completed 12 months of continuous employment or has used up all of their leave entitlement at the commencement of the closedown):

• Must be paid 8 per cent of their gross earnings since the employee commenced employment with the employer, or since the employee last became entitled to annual holidays, less any other relevant amounts paid to the employee.

• That their anniversary date (for the purposes of calculating annual leave) must be shifted.

Prior to this decision, the general understanding was that it was open to the employer and employee to agree not to pay 8 per cent gross earnings and, instead, to treat some or all of the closedown period as annual leave in advance, or unpaid leave, and for the employee to retain his/her anniversary date.

The court has clarified that this general understanding is incorrect – any agreement between the parties to treat some or all of the closedown period as annual leave in advance or unpaid leave can only be in addition to the payment of 8 per cent.

This aspect of the Metropolitan Glass decision is not under appeal and represents the law.

Calculating holiday pay during a business shutdown can be confusing – if you are in doubt, we recommend seeking legal advice.

• David Grindle is director in charge of the Employment Law team at WRMK Lawyers. He has practised in this area of the law for 17 years.