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PD Spotlight - Remedying Holidays Act Headaches

Confused about how to comply with the Holidays Act 1983?Find out how to overcome common compliance issues causing employers headaches...
Many employers in New Zealand are confused about how to comply with the Holidays Act 1983 (the Holidays Act).
Most businesses audited by the Labour Inspectorate have failed to properly calculate holiday entitlements. Even the Ministry of Business, Innovation and Employment was found to have underpaid staff holiday entitlements.
Failure to comply with the Holidays Act can require penalties of up to $20,000, and remediation payments, with $66 million in arrears paid to date.

Why are there compliance issues?
The Holidays Act works best for employees who work regular hours, five days per week.
Since the workforce became more flexible, employers have struggled to comply with the Holidays Act. Staff working irregular hours or receiving irregular pay are more likely to be paid incorrectly.
Employers may struggle making correct Holidays Act payments for staff working variable hours, or receiving variable pay during the year, such as through annual bonuses, sales incentives and special rates.
Issues relating to annual holiday entitlements include: the requirement to pay greater of two calculations; how to determine a working week; and how to manage changes to working hours.

Paying greater of two different calculations
Employers must take care not to just pay staff their usual pay when they take annual holidays.
Employers may inadvertently underpay employees by failing to pay the higher of two separate calculations when an employee takes their annual holiday entitlement.
To calculate an employee’s entitlement to annual holidays, employers must pay the greater of two different calculations: ordinary weekly pay, or average weekly earnings.
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 looks at the earnings an employee would ordinarily receive if they had worked the week or period in question.

Determining a working week
While it’s easy enough to divide a week into a number of days for staff working Monday to Friday, many employees work irregular hours.
It can be difficult to determine a working “week” for the purposes of calculating annual holiday entitlement for staff who work shift work, part time, and overtime. Staff working 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.

How changing hours of work affects annual holidays
An employee’s hours can change during their employment. Perhaps they will agree to a variation in their employment agreement, or they may shift to different hours resulting in a permanent new work pattern.
Changes to working hours require recalculating annual holiday balances, given that a ‘week’ of annual holiday entitlement is based on the work pattern when the holiday is taken.
If an employee increases their working hours, their annual holiday entitlement will remain the same in terms of weeks, but the balance will change in terms of hours.
For example, an employee who increases their hours from 20 hours to 40 hours per week will retain their balance of six weeks’ entitlement of annual holidays. However, the balance will be worth more in terms of hours, given the increase in hours per week.
It is essential that you monitor changes in your employees’ work patterns, and adjust annual holiday entitlement balances accordingly. Any changes in hours should be communicated to payroll.
f annual holidays are recorded in any other unit than a week, the balance of annual holidays must be recalculated.

MBIE Guidance on Holidays Act
The Ministry of Business, Innovation and Employment has published a guide to help employers and payroll comply with the Holidays Act. The Holidays Act 2003 Guidance on annual holidays, domestic violence leave, bereavement leave, alternative holidays, public holidays and sick leave cvan be dowenaloded from the MBIE website.

Julia is presenting the upcoming HRNZ PD Courses:

  • Effective HR Communication. 4th September in Auckland
  • Holidays Act, Parental Leave and Payroll, 30 July in Christchurch
  • Employee Well-being and Mental Illness.
  • Further dates to be announced.