Why employers don’t get holidays

Why employers don’t get holidays

Last year the government had the opportunity to change the way employee leave is determined by New Zealand businesses. The Holidays Amendment Act came into effect on 1st April 2011.

We were hoping that the changes would make it easier for businesses to understand their obligations to employees with regards to holiday entitlements. The Department of Labour received recommendations on changes from a ministerial advisory group comprising employer representatives and union representatives.

In the end a few minor changes were made to tweak calculations here and there but unfortunately the opportunity to make life easier for NZ businesses was missed. In summary the changes included –

  • The ability for employees to cash in one week of annual leave
  • Transferring public holidays to another day
  • The option of using Average Daily Pay for public holidays, sick days and alternate days if the Relevant Daily Pay cannot be easily determined.

On the face of it the use of Average Daily Pay seems to be a change that would make it easier to determine how much to pay a casual employee for a day off. However, the calculation of Average Daily Pay involves working out how much the employee has earned over the previous 12 months and dividing by the number of days worked over the same 12  months.

Sure we have payroll software like FlexiTime and spreadsheets that can help us calculate these amounts, but not easily. Particularly if you have changed the system you use to calculate employee pay in the last year, which, with the advent of software as a service and new and more advanced computer based systems, many employers are choosing to do.

Imagine the difficulty of calculating this for the small employer who still records pay and holidays in a book. You may think that Average Daily Pay is only an option if the Relevant Daily Pay cannot be determined so there shouldn’t be a need to get into the intricacies of summing up the last year’s pay amounts. However, with a changing pattern of work and a move towards more flexible employment relationships, many more employees are falling into this category of varying work hours which means that the amount they would have received on a particular day is difficult to determine.

Although Average Daily Pay is difficult to calculate it is probably the fairest amount to pay an employee for a day off. But it is interesting how the changes to the Act have created inconsistencies in the way pay amounts are calculated for different types of leave. For annual leave we are to use the higher of the Average Daily Pay or the Ordinary Daily Pay, ordinary being the average over the last 4 weeks.  Dropping the Ordinary Daily Pay rate was one of the recommendations from the employer representatives of the ministerial advisory group. The argument being that paying an employee for annual leave based on a daily rate calculated using only the last 4 weeks created a situation where employees could increase their annual leave pay rate by working more in the 4 weeks preceding their holiday.

The recommendation was not adopted in the Act and we now have an inconsistency between annual leave pay and pay for statutory holidays and sick days.

Other differences also exist between what types of earnings should be included in the 4 week average and 12 month average. All this makes it incredibly difficult for a small business owner to determine what should be paid to employees for leave. The result of these difficulties is often that the employer simply pays the employee their normal hourly rate and both parties are blissfully unaware that they are not paying the rate as prescribed by the law.

It seems the intentions of the law should be –

  • to ensure that staff have time off from their normal weekly work to allow them to relax, spend time with their family and sharpen the saw.
  • to ensure that during time off from work that the employee receives pay in order to continue to meet ongoing commitments and not be disadvantaged by taking time off.

So how can we achieve these goals and yet keep the calculation of leave pay rates simple enough that employers and employees know what they are entitled to and is fair for both parties?

One of the most common areas of confusion with the existing rules for annual holiday leave is the split between the amount an employee accrues during a year as holiday pay and the amount due to them after completing a year of employment. Holiday Pay is accrued at 8% of the gross earnings during the employment year and once they complete the year this dollar amount then becomes a balance of leave available to them in terms of days.

So if an employee finishes after being employed for more than a year they are paid two separate amounts – holiday pay at 8% of their gross earnings since their last anniversary date and the dollar amount of the annual leave due at their last anniversary. This is needlessly confusing for employers as it mixes different calculations involving total gross earnings since the last anniversary, average pay rate in the last 12 months and 4 weeks and annual leave due at the last anniversary date in days.

An old joke goes along the lines that it’s great owning your own business because you can take half days off if you want, and you get to choose whether it’s the first 12 hours or last. This joke demonstrates the principle that a day of work can mean different things for different employees. How do you determine the value of 4 weeks annual leave, particularly with employees working variable or casual hours and receiving different benefits? In some cases employees are paid bonuses and overtime payments that must be taken into account when calculating the value of annual leave owing.

So how do other countries manage the requirement to pay employees for leave? In Australia employees are also entitled to 4 weeks annual leave, the leave accrues during the year based on the hours worked, so an employee who works 2.5 days per week will accrue 10 days over a year. When the leave is taken it is paid at the employee’s base pay rate, however, many agreements and awards provide for leave loading – this is typically 17.5% of your base rate of pay and is paid on top of your normal weekly earnings during your annual leave. Casual workers are not entitled to annual leave.

This system removes the requirement to calculate the average and ordinary pay rate incorporating different types of payments and also eliminates the unfair situation of paying an employee a higher than normal rate because of extra overtime worked in the 4 weeks prior to the leave being taken. It is simple to calculate, as the accrued amount of leave can be calculated each pay and added to a total leave balance. The leave loading method is fair in that it incorporates extra overtime and bonus payments as a flat rate available to all employees.

The changes to the Holiday Act missed a great opportunity to simplify an overly complex and onerous system that most small businesses and their employees know little about and in most cases ignore because of its complexity. If we are to become competitive with Australia we have to make changes to outdated legislation that worked in the days when the 40 hour week was the norm.

Robert Owen
robert.owen@flexitime.co.nz

Founder & CEO of FlexiTime.

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