Author: David Jenkins, NZPPA CEO

Yet another area of the Holidays Act we are still getting questions on every week.

To start with, the Holidays Act 2003 is stated in weeks and days and not in hours. This is the case even though you will find the majority of payroll systems are in hours. You cannot use hours unless there is an agreement between the employer and employee (Section 17 of the Act).

There is no definition of a week in the Act so a week is by agreement.  If the week is changed by agreement between the employer and employee then the minimum entitlement earned under the act will change to reflect what has been agreed.

Now, please understand you can always do better than the legislation as the Act is based on minimum entitlement, but the problem with changing entitlement to reflect the week is that it is undermined when based on hours.  This is because when hours are used a change may be seen as an employee losing or gaining a substantial number of hours as a result of the change.  This is an actual misconception based on using hours instead of the correct use of weeks provided under the Act.

To understand the real meaning of the Act you must think in terms of weeks and not hours. Section 16(1) of the Act states:

“After the end of each completed 12 months of continuous employment, an employee is entitled to not less than 4 weeks paid annual holidays.”

Changing an agreed week in hours and the impact on existing entitlement

Example: Kate works a 40-hour week (Mon to Fri) and after 12 months of continuous employment she gets 4 weeks of annual leave entitlement.  In the payroll system, this would be stated as 160 hours.  Kate requests to reduce her working week from 40 hours to 20 hours for family reasons and the employer accepts.  This now means Kate will have an agreed 20-hour week of work.  Kate did not take any annual holiday before the change so as of Monday Kate will now have 4 weeks of 20 hours.  By using hours, it seems as though Kate has lost 80 hours!

Now please put your passions aside. Yes, Kate has worked a 40-hour week for 12 months and why should she be disadvantaged by this change?  But Kate has not been disadvantaged at all.  On Friday she had 4 weeks and on Monday she still had 4 weeks.  If she takes her annual holiday on or just after the change, the value will still be based on a 40-hour week through the use of Average Weekly Earnings (AWE). Ordinary Weekly Pay (OWP) now reflects a 20-hour week and would be the lesser of the two.  If Kate does not take the 4 weeks at the change, in 12 months the 4 weeks of entitlement will reflect the value of a 20-hour week based on the greater of AWE or OWP.

Take the hint: get the employee to take their leave which is what the Act is all about. This is good for the employee and the business as it manages and reduces leave liability.  And for all the fluffy HR practitioners that may be reading this post, it ensures the employee maintains their work-life balance!

If the week is not changed to reflect what the week is, Kate would effectively have 8 weeks of 20 hours of annual holiday entitlement.  How will an employer accommodate this? After all, they often have enough problems getting the employee to take 4 weeks.

So, in a nutshell, the main point from the above to take away is:

• a week is by agreement and when the week changes by agreement any entitlement also changes to reflect what has now been agreed constitutes a week.

When a week defined in hours has been agreed, hours can be retained if the week changes.

There is one situation that can see hours being retained when the week is changed by agreement.  When the employee’s employment agreement states that if the employee works 12 months of continuous employment they will receive 4 weeks of 40 hours, this has then created a defined number of hours that would be retained even on a change of hours.

Example: It is stated in Joe’s employment agreement that after 12 months of continuous employment he will receive 4 weeks of 40 hours.  Joe works for 12 months and receives 4 weeks of 40 hours (160 hours in total).  He then asks for a reduction to 20 hours a week so that he can return to university. This is agreed to by the employer.  As it was previously agreed, the 160 hours already earned are retained and upon the change, there will not be a reduction in these hours.  This then creates a leave liability issue for the employer straight away in trying to manage these hours because it does not fit with the week the employee now works.

So, to manage this an employer needs to ensure the employment agreement aligns with the payroll system, that a week is clearly defined, and that the employee understands the effect changing a week has on their existing annual holiday entitlement.

The Act is written in weeks and if used correctly it is workable and logical, but not many payroll systems use weeks and this is the issue as it is the basis of the Act and has been so since it was implemented on 1 April 2004.

NZPPA supporting NZ payroll since 2007!