A Week by Any Other Name

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A Week by Any Other Name

There’s been a lot of talk lately about the validity of leave being recorded in hours as opposed to weeks, specifically that because the law refers to holidays in weeks that it can’t be done using hours.

If an employee has an agreed number of hours per week then it is completely valid to record weeks of leave as hours. We have a constant multiplier as hours per week that we can use both when accruing leave and when it is taken.

Many employees have an agreement that they are to work 40 hours per week. When they reach an anniversary they are entitled to 4 weeks of leave, or as is likely shown on their payslip, 160 hours. If they have been working more than 40 hours per week and been paid extra for the additional hours, this will be factored into the rate they receive when taking leave. A higher average weekly gross earnings when divided by the agreed 40 hours per week results in a higher hourly rate.

Let’s take a quick look at what the Holidays Act actually says about weeks.

Firstly, Section 17 –

How employee’s entitlement to annual holidays may be met

  1. An employer and employee may agree on how an employee’s entitlement to 4 weeks’ annual holidays is to be met based on what genuinely constitutes a working week for the employee.

We take this to mean that where the number of hours in a working week varies for an employee, the employee and employer can come to an agreement on how the entitlement to 4 weeks is to be met. For example an agreement could be made that the working week is a fixed number of hours e.g. 40 hours, or the 4 weeks could be made up of 4/52 of the actual number of hours worked.

Secondly, Section 21 –

Calculation of annual holiday pay

  1. If an employee takes an annual holiday after the employee’s entitlement to the holiday has arisen, the employer must calculate the employee’s annual holiday pay in accordance with subsection (2).
  2. Annual holiday pay must be—
  1. for the agreed portion of the annual holidays entitlement; and
  2. at a rate that is based on the greater of—
  1. the employee’s ordinary weekly pay as at the beginning of the annual holiday; or
  2. the employee’s average weekly earnings for the 12 months immediately before the end of the last pay period before the annual holiday.

 

Leave is to be paid at a rate based on the greater of the ordinary weekly or average weekly pay as described above. The ordinary weekly pay is defined as the earnings over the last 4 weeks divided by 4.

The reference to the rate being based on weekly pay is a clear indication that, if less than a week is taken, the payment must be based on the weekly pay. If only an hour is taken as leave, which is valid, then the rate for the hour must be the portion of weekly pay that an hour represents.

If the leave entitlement is recorded in hours then it may be reasonable to determine the ordinary hourly rate by dividing the earnings over the last 4 weeks by the number of hours worked in the last 4 weeks. This would take into account increases in hourly rate from things such as bonuses, time and a half penal rates, etc.

Alternatively, one could argue that regardless of the number of hours worked, an employee is entitled to 4 weeks of pay based on the ordinary weekly rate. Where anomalies arise with this approach is when an employee’s work hours fluctuate over the year, particular in the case where hours increase.

For example a student may work only a few hours per week during a university year, let’s say 4 hours per week. During the holidays they make themselves available for 40 hours per week. After working 4 weeks full time, they would then be entitled to take 4 weeks off and be paid the full weekly rate for the leave taken. In this case the leave paid to the student would be nearly half the gross earnings they had received in the previous 12 months, considering they also receive holiday pay of 8% on that leave payment it becomes quite a bizarre example of the law gone wrong.

We haven’t been able to find any case law indicating whether or not leave can be accrued as 4/52 of the hours worked and then paid out at the higher of the ordinary or average hourly rate. However, the Ministry of Business, Innovation and Employment (MBIE) indicates that this approach is agreed to sometimes between employees and employers on their website –

Where an employee has an irregular or changing work pattern over the entire 12-month period, so there is no pattern to the hours worked and the hours and days of work are entirely irregular the principal of four weeks annual leave and reaching agreement on what will constitute “four weeks” in terms of time away from work, still apply.  In such cases where the hours and days of work are irregular and intermittent employers and employees sometimes agree to accrue time towards annual leave on the basis of 4/52 for every hour worked.

If leave is accrued at 4/52 of hours worked, how do we ensure that the employee still receives their entitlement to 4 weeks leave each year and that the pay they receive for those hours takes into account an increasing hours per week work pattern?

The first thing is to ensure that all hours worked and leave taken is recorded correctly using timesheets. A payroll system that creates pay from timesheets, like FlexiTime, is fundamental in ensuring that you are complying with the Holidays Act.

In the same way that a constant number of hours per week allows us to determine the number of hours 4 weeks represents, we can use the average number of hours per week for the previous 12 month period at each anniversary, to determine the equivalent number of hours per week for each anniversary entitlement where hours per week vary.

Say, for our student example above, the employee has accrued 4/52 of hours worked and they worked 352 hours in their first year so have accrued 27 hours at the first anniversary. The average hours per week is 6.77 (352/52). The earnings in the first year were $7,040 ($20 x 352).

A couple of years later they still have some remaining entitlement of the 27 hours from their first anniversary. They are now working 40 hours per week at the same hourly rate ($20 p/h) and receive earnings per week of $800. They want to take leave of 1 day. How much should they be paid and how many hours should their leave balance be reduced by?

Let’s assume that we know what portion of a week 1 day is. For our example let’s assume that 1 day is 0.2 weeks.

This means, if using the ordinary weekly pay, they will receive 0.2 x $800= $160.
The average hours per week for the year the leave being taken was accrued was 6.77 hours. 0.2 of a week is equivalent to 1.354 hours. So the leave balance for that year would reduce by 1.354 hours.
The employee’s payslip could either show 8 hours (40 x 0.2) @ $20 p/h or 1.354 hours @ $118.17. Both result in the employee receiving $160 for the day of leave taken.

In summary, it is wrong to say that a payroll system that records leave in hours cannot be compliant with the Holidays Act. It becomes a matter of determining how many hours a week is equivalent to. We believe that MBIE need to provide more direction on how to account for the anomalies between their recommendation to accrue leave based on 4/52 of hours worked, while meeting the legislative requirements of weekly leave rates.

FlexiTime provides two methods of accruing annual leave, either as 4 weeks per year based on a normal hours per week or as 4/52 of the hours worked.

 

FlexiTime is flexible payroll software for New Zealand businesses. With online timesheets, FlexiTime makes it easy to track the hours your employees work and pay them accurately.

Try FlexiTime free for 30 days.

 


Author

Robert Owen
robert.owen@flexitime.co.nz

Founder & CEO of FlexiTime.

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