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Holiday Pay Entitlements: get it wrong and you may pay twice

It is important for employees to have the opportunity for rest and recreation and it’s important to employers that they don’t have to pay for that rest twice! Employers have the responsibility to ensure that they are providing the correct annual leave entitlements to their employees.

Holiday pay entitlements 4The general rule in the Holidays Act is that an employee is entitled to at least four weeks’ annual leave after 12 months continuous employment. However, an alternative ‘pay-as-you-go’ arrangement is allowed, but only where the employee is employed for a fixed term of less than 12 months or they work such intermittent or irregular hours that it is impracticable for the employer to provide them four weeks’ annual leave. Employees must agree to the pay-as-you-go arrangement in the employment agreement, and the holiday pay must be paid at a rate of at least 8% of the employee’s gross earnings and be identifiable.

Many employers use the pay-as-you-go method very freely. However, a recent Employment Relations Authority determination shows it should be used carefully. In Cross v D Bell Distributors Limited Mr Cross claimed his employer, D Bell Distributors (DBD), had not paid him his full entitlement of annual leave accrued during his employment. Mr Cross worked for DBD from September 2015 to December 2016 and was paid holiday pay through an 8% pay-as-you-go arrangement.

DBD contended that the nature of Cross’s employment was intermittent and he agreed to the 8% pay-as-you-go arrangement in his employment agreement. The Authority found that DBD fell short of the necessary conditions on several fronts. Firstly, the work that DBD had Mr Cross do was typically over 120 hours a fortnight, 6 days a week and was not intermittent or irregular by any understanding. Providing Mr Cross with annual leave was not impracticable for the employer either as DBD could have arranged drivers to cover Mr Cross.

While Mr Cross did sign an agreement allowing for pay-as-you-go holiday pay, because he was employed to do regular work, the pay-as-you-go arrangement was unlawful. Mr Cross’s agreement to pay-as-you-go had no effect as any agreement that restricts or reduces an employee’s rights under the Act is unlawful. Mr Cross had not been provided with his full annual leave entitlement for the period of employment with DBD.

The Authority then determined that where an employee has been paid his annual leave entitlements on a pay-as-you-go basis, but during their employment becomes entitled to accrue annual leave instead, the employee is entitled to his full annual leave entitlement for the period worked. The employer is required to provide the entitled annual leave or equivalent termination pay, on top of any previous payments already made under the pay-as-you-go arrangement. DBD was ordered to pay Mr Cross an additional 8% of his gross earnings for the entire period of his employment as his employment had ended. DBD could not recover the previous pay-as-you-go holiday payments. Further, DBD was ordered to pay an additional penalty of $3,000 for breaching the requirements of the Act.

This determination highlights the risks to employers of incorrectly paying holiday pay rather than giving annual leave. When seeking to use a pay-as-you-go arrangement for an employee’s annual leave entitlements, an employer must be certain they do in fact fall within the conditions required by the Act and regularly review the arrangement to ensure this remains the case. The conditions are strict. Annual leave is a minimum entitlement and cannot be excluded or reduced in any circumstances. Doing so is unlawful.

If an employer gets this wrong, they will be required to effectively pay annual leave entitlements twice. Employers can also be liable for a penalty of up to $10,000 for breaching the Act. While this penalty may appear harsh, the Authority has made it clear that “failing to meet the statutory obligation to provide rest and recreation was a severe breach of an important social protection”.

The Authority’s decision sends a strong message that employers cannot avoid the financial and logistical requirements of correctly arranging annual leave. Where an employer wrongfully uses the pay-as-you-go system, they may have to face heavy financial consequences.