Author: David Jenkins, NZPPA CEO

Use it or lose it is one I still hear from time to time.  There is a belief (by some employers) that if the employee does not take their annual holiday entitlement within 12 months of earning it, it can be taken by their employer (lost), which is complete and utter RUBBISH.  Entitlement earned by the employee under the Holidays Act stays as entitlement until used or paid out (on termination or the one week of current entitlement in the current year).

If an employee earns annual leave entitlement provided under the Holidays Act, it should be seen as their entitlement (they own it).  There are only very limited options for when an employer can instruct their employee to take their annual leave entitlement.  It is important that payroll understands the requirements for the different leave situations to ensure employees’ annual leave entitlement is protected and used correctly based on what the employee and employer can do defined by the Holidays Act.

In this article, I am talking about the annual holiday entitlement provided under the Holidays Act.  If you offer additional annual leave, that is an agreed term, and you must follow what has been agreed (the issue here usually is that the additional leave has been provided, but there is no detail on how it will be applied in payroll).  As always, I try to write in payroll plain language.

Can an employer tell an employee when to take their annual holiday entitlement?  Yes/No?

Here are the four situations I want to cover:

• Closedown
• Taking two weeks of annual holidays continuously
• Not less than 14 days’ notice
• Other ways annual holiday entitlement can be taken

Closedown:

Suppose the employer has a customary closedown (which happens every year at the same time).  In that case, it can mean that all or part of the employee’s four weeks of annual holiday entitlement can be directed to be taken at a specific time every year (look at section 29 onwards to find out more).  This would normally be included as part of the employee’s employment agreement.  Under the Act, the employer has to give not less than 14 days’ notice of a closedown (but as it is customary, it would normally be known well before time).

Just a couple of things for payroll to be clear on.  If there are any public holidays during the closedown, then annual leave cannot be used.  There are two variations if the employee takes sick, bereavement or family violence leave during a closedown.  Suppose the employee is advised before the closedown, then sick, bereavement or family violence leave replaces annual leave.  If the employee notifies their employer while on or after the closedown, sick is when the employer MAY (but they can refuse to do this) credit back annual leave.  However, bereavement and family violence leave MUST be credited back.

 

So, an official closedown defined under the Holidays Act is one instance where the employer can tell their employees to take their annual holidays.  But it is important that payroll is prepared for the variations that can appear during the closedown period.

 

Taking two weeks of annual holidays continuously:

An employer cannot have a policy that restricts how an employee takes their annual holidays, such as stating that an employee can only take one week of annual holidays at any time.  Section 18 of the Act states that the employer “must allow the employee to take at least two weeks of annual holiday entitlement in a continuous period” (if the employee wishes to do so).  This does not stop an employer from declining a leave application from an employee if they ask for two weeks, for example:

 

• An employee asks for two weeks of annual leave over a date range. The employer already has two other employees taking their annual holidays, and if a third employee is on leave, the business’s operational requirements may not be met.  For this reason, the employer has every right to decline the employee’s leave request.  The employer should state the reasons why they cannot approve it and encourage their employee to resubmit a leave application for a different set of dates.

 

So, an employer cannot have a blanket instruction or policy where an employee cannot have the ability to take two weeks of annual holiday continuously.

 

Not less than 14 days’ notice:

Under section 19, the employer can give an employee not less than 14 days on when they will be required to take their annual holidays.  This is an entitlement (from the four weeks earned after 12 months of continuous employment), not accrual (8% or annual holidays in advance).  Now, you don’t just jump to section 19 to force your employee to take their annual holidays.  A good employer would sit down (or communicate in the best way at the time) with their employee and discuss why their leave needs to be taken.  It could be because they have accumulated too much leave and it needs to be reduced (based on a documented company policy – no more than four weeks of annual holiday entitlement can be held), or it could be because of government restrictions forcing the business to close (Covid-19 lockdowns).  Perhaps the business is suffering a downturn, and they are looking at ways to reduce liability while at the same time trying to keep the business afloat.

Just an add-on to this, many employers got caught out during the Covid closedowns and even the recent natural disasters in thinking they could just use an employee’s annual holiday entitlement and put them on leave straight away.  It is the employee’s leave (they own it), and in the first instance, a discussion should be undertaken explaining the reason for asking the employee to take leave.  If it is not accepted, then the employer provides notice that they require the employee to now take their annual holiday entitlement (under section 19) using the not less than 14 days.

What this means for payroll is that until the employee takes their annual holidays, then the terms of the employee’s employment agreement apply, and that means the employee would be paid even if they cannot actually work.  The Holidays Act was never written for a pandemic or natural disaster.  So, the key is to talk to your employee in the first instance and only fall back on section 19 when needed.

So, an employer can instruct an employee to take their annual holidays but only after providing not less than 14 days’ notice (but the employer should discuss this with the employee first).

Other ways annual holiday entitlement can be taken

Annual holidays in advance and using annual leave when other leave (sick, bereavement or family violence leave) has been exhausted are other ways annual holidays can be used, but both require the employer to agree.

• Annual holiday in advance:

There is still a lot of misunderstanding about taking leave in advance.  Leave in advance is not using leave (time) stated in the accrual field of your payroll system, as there is no such thing as accrual except as 8% of gross before and after 12 months (it is just presented that way in your payroll system as time because it is easier to understand).  If an employee asks for an annual holiday in advance, it is actually taking entitlement in advance of the 12-month mark (when they get their four weeks of annual holiday entitlement), so in payroll, the payroll system is doing an entitlement calculation being the greater of AWE and OWP.  It then creates a minus in the entitlement field (until they reach the 12-month mark, and it is deducted from the entitlement received).  If the employee terminates their employment before they reach the 12-month mark, the annual holiday paid in advance gets deducted from the 8% paid on termination.

So, an employer can say NO if an employee requests leave in advance.

• Using annual holiday entitlement:

Employees who have exhausted sick, bereavement or family violence leave can request to use their annual holiday entitlement, but the employer may say NO.  The key to this is that the employee must have exhausted the leave type they want to use their annual holiday entitlement for.

So, the employee has the right to request the use of their annual leave entitlement, but again the employer can say no.

In conclusion, annual holiday entitlement is owned by the employee, and they have the right, depending on the situation, to use their entitlement in the way they want, not overruled by the employer.  It is up to payroll to manage this and to ensure that any variation is correctly applied under the requirements of the Holidays Act.

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