Holidays Act: Winners and Losers
May 23, 2016
Earlier in the season Jake and I headed along to watch the Hurricanes play the Chiefs. It came down to one point in the end, the Chiefs very happy to come away the winners, the Hurricanes very unlucky losers. As they say, rugby was the winner on the day.
The main argument for not changing the Holidays Act is that there will be some losers in the process; individuals who will be disadvantaged compared with the current legislation.
In earlier blogs we’ve suggested a simpler approach to the handling of leave. We’ll call this approach ‘Pro Rata Accruals’ – the units and value of leave that accrue are a set proportion of what is worked and paid.
Let’s look at some of those situations where someone may lose out under the new approach.
The main losers as a result of a Pro Rata Accruals approach are those who currently have higher ordinary pay than their historic average pay rate. This was raised as an issue when we suggested this approach to the Hon. Michael Woodhouse, the Minister of Workplace Relations.
There are three main ways in which the four week averaged Ordinary Weekly Rate becomes higher than the twelve month Average Weekly Rate:
1) The employee received a pay rise 2) Their work pattern has changed and they have been working longer hours in the last 4 weeks than previously 3) They receive additional payments as well as their regular hourly pay such as overtime, commission or bonuses in the last 4 weeks
Now let’s see who are the winners and losers in these scenarios, and what can be done to level the playing field.
Employee pay increase
Take a simple case of a salaried employee who receives a pay increase. Any annual leave they take after that point shouldn’t change their regular salary payment. On the face of it, our Pro Rata Accrual proposal hits a snag here. Leave accrued before the salary increase has a lower value, so when taken it would reduce their new regular salaried amount.
The solution to this was hidden in this blog post, and I thought it worth reiterating here. If using the Pro Rata approach, any pay rate increase is also applied to the dollar value of leave. If I get a 5% pay rise, and have 50 hours of leave valued at $2000, then that value is increased to $2,100. As well as my pay increase I’m essentially being given $100 for leave. That way those salary pay slips will remain constant when that leave is taken.
At first glance it seems harsh on the employer that they’re having to give extra money to the employee for their leave balance. However that’s exactly what happens now with the ordinary rate. Any leave taken is automatically paid out at the higher rate. The rate calculation under the Pro Rata Accrual approach is exactly the same as that using an Ordinary Weekly Rate calculation.
If the employee were to leave the next week, with the Pro Rata Accrual approach they would receive that extra $100, simple as that. With current legislation it depends on timing. As described in this blog post, it would only be factored in if they had any leave left over from their previous entitlement. If considering leaving a job, it may be worth sticking around a week or two to cross your leave anniversary. In general, the Pro Rata approach would work in favour of the employee where they finish after receiving a pay rise.
I think it’s great that the exact impact of a pay rise on the value of an employee’s leave is known and not hidden away in future calculations.
This gets a little more complex where an employee’s pay has multiple components, such as a salary amount and a commission. If only the salary is increasing and the commission is unchanged, then there would need to be an evaluation of what proportion of their leave value is from salary. A simple summing of the last 12 months earning of each type, then allocating the increase to the appropriate proportion of the outstanding balance can be done. This is the most complex calculation required by Pro Rata Accruals, but it’s hardly taxing, would never be required for the majority of employees, and would only ever be done annually at most.
Changing work patterns
Under the Holidays Act, if an employee takes a week of leave after working one day a week for a year followed by five days a week for one month, the ordinary weekly rate calculation means they will be paid for all five days and still have a balance of 15 days. That employee would be very disadvantaged under our Pro Rata approach. If paid out five days they would have almost no leave left at all.
But let’s flip that around. Let’s say they worked five days a week for their first month, and then a year at one day a month. In this case the Pro Rata approach would be slightly to their advantage since the Average Weekly Rate of the Holidays Act would no longer register the first month, whereas this would still be factored in to the Prorated earnings.
The key though is that in both examples, where the employees have put in identical total effort, the Pro Rata approach will mean the value of the leave paid and remaining is the same. That just seems fairer to me. They’ve put in identical effort, why should their leave be as dramatically different as the Ordinary Weekly Rate makes it?
So yes there are some winners and some losers, but it’s ultimately fairer across the board.
Additional and Variable Payments
I think any rules that can be manipulated by adjusting the timing of one’s effort should be avoided. Take the example of an employee receiving monthly commission based on sales in the previous month. Currently as their commission varies from month to month so does their ordinary pay rate. If planning on taking holidays over Christmas, then it is very much in their best interests to defer their October sales until November so their December commission gets a boost, as does the rate at which their Christmas holidays will be paid out at. In some situations this impact can be huge.
Any rules that allow this sort of rort are intrinsically wrong – much fairer is that each chunk of commission earned confers the same holiday accrual, regardless of the timing of that holiday.
Once again there will be winners and losers, but overall New Zealand will be the winner on the day. The improvement in fairness and understandability should benefit everyone.
Go the ‘Canes!!
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