A Guide to Employment Law NZ: Holidays Act 2003

The New Zealand Holidays Act is a crucial piece of legislation aimed at ensuring that employees receive their entitled holiday and leave entitlements.

However, there is a significant issue around non-compliance with the Act due to the challenges of applying the legislation in certain situations and the lack of detailed guidance around addressing these situations. 

Employers have a legal obligation to ensure compliance with the Act, and failure to do so can result in significant consequences. The key to ensuring compliance lies in ongoing engagement between employers, employees, and payroll staff or providers. 

So, to help you clearly interpret and understand this complex piece of employment legislation, we’ve compiled a complete guide addressing what you need to know to meet your obligations.

It covers areas such as annual holidays, public holidays, sick leave, bereavement leave, and alternative holidays.

In addition, the Act aims to ensure that employees receive their fair entitlements to time off work and outlines the responsibilities of both employers and employees in relation to these entitlements.

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• Annual Holidays: Employees are entitled to at least three weeks of paid annual holidays after 12 months of continuous service with their employer.
• Public Holidays: Employees are entitled to be paid for 11 public holidays, even if they don't usually work on that day.
• Sick Leave: Employees are entitled to a minimum of five days of paid sick leave per year, which can accumulate over time.
• Bereavement Leave: Employees are entitled to bereavement leave to attend a close family member's funeral.
• Alternative Holidays: Employees can take an alternative holiday instead of the annual holiday, but only with the agreement of the employer.
• Family violence leave: Employees are entitled to up to 10 days of paid family violence leave per year to deal with the impact of family violence.
  
  Note: these are the minimum entitlements under the Holidays Act, and some employees may be entitled to more leave entitlements based on their employment agreement or collective bargaining agreement. 
  

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Calculating Payment for Annual Leave

There are two ways to calculate an employee's annual holiday pay. Whichever method gives the employee a higher pay rate will be used. The two methods are:

• Paying the employee's regular weekly minimum wage at the start of their annual holiday.
• Paying the employee's average weekly earnings from the 12 months leading up to the end of the last pay period before the annual holiday.
  
  

You may be interested in our Guide on How to Calculate Annual Leave in New Zealand, which details exactly how you should calculate your employee’s holiday pay using these two methods.

Calculating Payment for Other Types of Leave (Including Public Holidays)

For all the other types of leave, including public holidays, the Holidays Act requires you to pay your employees according to their relevant daily pay or their average daily pay if the leave or public holiday falls on an “otherwise working day”. 

An "otherwise working day" or OWD is a day that an employee would have normally worked, had they not taken leave. 

What is an Employee’s Relevant Daily Pay?

An employee's relevant daily pay (RDP) refers to the amount of money that an employee would have earned if they had worked on the day in question and includes: 

• Incentive payments such as commission 
• Overtime payments 
• Taxable allowances
• Cash value for board and lodging (where relevant) 

Their RDP does not include superannuation contributions and reimbursements. 

The Holidays Act mentions that individual employment agreements can specify a special RDP rate to make it easier to calculate paid leave days (excluding annual leave), but it must either be equal to or greater than the actual RDP. 

For example

Let’s say your employee works part-time and earns $44,000 per year. 

If you divide that by 52 weeks, he’ll get $846.15 weekly. But, according to their part-time work agreement, your employee works four days a week: Tuesday to Friday. So, their weekly pay must be divided by 4 to calculate their RDP - which is $211.54. 

Over the Easter Weekend, your employee will get paid that rate for the Good Friday public holiday because that is a day they usually work. However, they won’t be entitled to receive their RDP on Easter Monday as they don’t generally work on a Monday. 

What is Their Average Daily Pay?

If it’s not reasonably practical to calculate an employee's relevant daily pay because they work irregular hours, for example, you can pay them according to their average daily pay (ADP). You can calculate their ADP by averaging their gross earnings over the past 52 weeks. 

For example 

Now, let's also have an employee that works irregular hours. According to their agreement, he is allowed to work their own hours provided they work at least 5 hours daily, Monday to Friday. 

To calculate their average daily pay, you must establish their gross earnings over the last 52 weeks. According to your records, that amount was $29,000, which they earned over 260 days, including paid holiday leave and public holidays (but not unpaid leave). 

So, their ADP would be $29,000 divided by 260 days which equals $111.54, which you’ll pay them for both Good Friday and Easter Monday because those are days that they would ordinarily work. 

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This option is only available for employees who meet certain criteria, such as being on a fixed-term agreement of less than 12 months or working in a job with irregular hours, making it impractical to provide four weeks of annual leave. 

In these cases, employers must pay their employees a minimum rate of 8% of their gross earnings as holiday pay. The PAYG method helps ensure employees receive their full holiday entitlements regularly and consistently, even if they don’t take four weeks of leave.

For example 

If you have a casual employee that works 16 hours a week at an hourly rate of $23, you must use the following formula to calculate their gross earnings with holiday pay: 

• Gross earnings (excluding holiday pay) = number of hours x hourly rate.

• Holiday pay = gross earnings (excluding holiday pay) x 0.08.
• Gross earnings + holiday pay = total gross earnings, including holiday pay

Their weekly gross earnings are: 16 x $23 = $368. 

And their holiday pay is: $368 x 0.08 = $29.44

So, their total gross earnings for the week, including PAYG holiday pay, is $368 + $29.44 = $397.44.

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This non-compliance has resulted in companies facing costly fines of up to $20,000. 

To address these challenges, the New Zealand government established a task force to reassess the Act and propose changes. The task force's recommendations have been accepted and will be introduced as a bill in 2023, which will go through a review process before becoming law.

The key changes include the following: 

• Different calculations for holiday payments 
• Employees will be entitled to some types of leave sooner
• Pay-as-you-go (PAYG) details will be clarified 
• Parental leave will no longer affect annual leave pay on return to work

So, you should keep an eye out for these changes so that you can apply them and remain compliant with the Holidays Act. 

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Over 200 employers have been found to be in violation of the Act, resulting in thousands of underpaid employees and millions of dollars in combined losses. 

The cost to rectify these violations and maintain compliance has also been a significant burden for these organisations.

We’ve found that organisations who adopt a cloud payroll system to help them manage their compliance obligations have managed to mitigate this burden and successfully navigate the complexities of the Act in several ways:

• Compliance: The software is designed to ensure compliance with the Holidays Act and other relevant regulations, reducing the risk of costly non-compliance fines.
• Automated calculations: The software automates holiday pay calculations based on the Holidays Act, reducing the risk of manual errors and saving time.
• Real-time information: The software provides real-time information on an employee’s holiday entitlements, making managing leave requests and approvals easier.
• Accessibility: The software can be accessed from anywhere with an internet connection, making it convenient for both the employer and employees to view and manage payroll information.
• Record keeping: The software maintains accurate records of all holiday pay transactions, providing a clear audit trail for compliance purposes.

Adopting a cloud payroll solution for your business can be a daunting task, particularly when it comes to complying with the complexities of the Holidays Act. 

Pay Cat is here to help. 

Our team of experts can guide you through the transition to a cloud payroll solution, ensuring that your business stays up-to-date with all regulations and requirements. With our solutions, you can expect to streamline payroll processes, enhance data security, and have immediate access to payroll data. 

Pay Cat will work with you to tailor a payroll solution that fits your unique needs and provides ongoing support. So don't let the challenges of the Holidays Act and payroll overwhelm you. 

Contact Pay Cat to experience the advantages of a cloud payroll solution for your business.

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However, its complex wording and numerous stipulations have caused confusion and compliance issues for many employers. 

To ensure that your business stays compliant and avoids potential fines, employers should avoid a "set and forget" or "one size fits all" approach to payroll, as this carries a high risk of non-compliance with the minimum standards and legal obligations set out in the Act.

If you want to learn more about adopting cloud payroll software, book a demo with Pay Cat today.