Government has announced that it has accepted all the Holidays Act Taskforce’s recommendations and expects to introduce legislation in 2022. It is universally accepted that most employers have experienced some difficulty in calculating accrual and payment of employee holiday entitlements. In recent years, many employers have been required to recalculate employee holiday entitlements and there have been significant pay-outs to correct errors. With that in mind, the Taskforce sought to make calculating leave payments an easy and simple process, by providing clear rules that employees and employers can use to determine, calculate, and pay leave entitlement accurately.
The Taskforce’s key recommendations are to:
Update gross earning definition
Gross earnings is defined in section 14 of the Holidays Act 2003 (the Act) and lacks clarity about what payments are included. The recommendation is that gross earnings should reflect all cash payments received, except direct reimbursements.
Update pay as you go
Currently pay as you go is defined in section 28 of the Act and allows an employer to regularly pay annual holiday pay of 8 percent of an employee’s gross earnings, in lieu of providing four weeks annual holidays. The recommendation is that pay as you go for employees on fixed-term contracts of less than 12 months should be removed and a more detailed definition of irregular and intermittent work patterns should be developed. Also, employers should be required to review work patterns every 13 weeks to confirm pay as you go eligibility.
Simplify annual holidays calculations
Ability to take annual leave in the employee’s first 12 months
Currently employees are entitled to four weeks paid annual holiday after 12 months of continuous employment. Employees can request annual holidays in advance, but employers are under no obligation to approve a request. The Taskforce recommends that employees should have the ability to take annual holidays in their first 12 months up to the amount they would be eligible for on a pro-rata basis (no right to take more leave than entitled to). Any requested leave above the pro-rata entitlement would be at the discretion of the employer.
Calculating payment for annual holidays
The Act currently prescribes two methods of calculating annual holiday payments. Payments are to be paid at either the greater of:
- Ordinary Weekly Pay (or average weekly earnings over the last 4 weeks if OWP cannot be calculated).
- Average weekly earnings over the last 12 months.
The issue is that employers often do not know when to use one calculation over the other, and have trouble applying them in practice. The Taskforce was supportive of simplifying the payment calculations. It decided that new calculation methodologies should be introduced, but that it would retain the current structure of having one “ordinary pay” calculation methodology, and one “average earnings” calculation methodology.
This is a proposed new calculation methodology to replace Relevant Daily Pay and Ordinary Week Pay calculations. Ordinary Leave Pay will include the base rate for any hours worked in the relevant period, plus pay for any scheduled overtime, allowances, incentive or commission payments that the employee would have received if they had worked during the relevant period.
- Four weeks’ average earnings calculation
Section 8 of the Act states that annual holiday pay should be paid based on average earnings over the last four weeks if the primary definition for an employee’s ordinary weekly pay cannot be calculated. The Taskforce considered that the four-week average earnings calculation should be replaced by a 13-week average earnings calculation alongside the Ordinary Leave pay and 52-week average when calculating annual holiday pay.
The Parental Leave and Employment Protection Act 1987 includes an ‘override’ to the Act. The override stipulates that for any annual holidays that an employee becomes entitled to within 12 months of beginning a period of parental leave, they will only be paid at the rate of their average weekly earnings over the last 12 months. For a parental leave period of 52 weeks, when the employee returns to work, they will only be entitled to $0 per week for annual holidays, as their average weekly earnings during leave is $0. The recommendation is to remove the override so that employees returning from parental leave are entitled to be paid at their full rate for all their annual holidays.
Currently an employee must work six months until they are entitled to family violence leave or bereavement leave. The Taskforce accepted that some employees have little control over when they may need sick leave, family violence leave, and bereavement leave and would benefit from having protections in place in the first six months. The current six-month waiting period may also have negative consequences (i.e. encourage some employees to go to work sick, which raises health and safety concerns) which is not in line with the intention of the Act to promote balance between work and other aspects of employees’ lives. The Taskforce recommend a new test for eligibility. Separately, the government has introduced legislation to increase sick leave entitlements to 10 days per year. This legislation is still working its way through Parliament.
The recommended changes still need to go through the legislative process, and we will all watch with interest to see whether the Taskforce’s guiding principles of certainty, transparency and practicality are realised.