It seems in recent years, we have, in a series of waves, realised how tricky the Holidays Act is to interpret and apply. We now know many employers, including many government departments, have historically got it quite wrong. In my practice now more than ever I am having to examine and assess holiday payments that might not have been right. In this post I want to explore one simple concept: holidays accrue by weeks.
The Holidays Act 2003 provides that after 12 months of continuous employment, an employee is entitled to 4 weeks annual leave. The Act goes on to provide that the employer and employee can agree on how that is assessed, based on the employee’s usual work pattern. When an employee takes leave, they are to be paid “at a rate that is based on” the greater of the employee’s ordinary weekly pay at the beginning of the holiday or average weekly pay in the 12 months before.
Many (all?!) payroll systems tend to account for annual leave on an hourly basis or sometimes at the rate of 8%. Often this figure is shown on payslips so employees know what their current ‘accrual’ is and can manage their leave entitlement around planned holidays etc. It is an approach which is usually convenient for both employees and employers, but also, almost always wrong.
Consider this particular scenario: an employee is employed on a part time basis working 20 hours per week over three days. At the end of one year, she has 80 hours of annual leave showing as accrued. Then, due to changes in the business, she takes on a full time role, working 40 hours a week over five days. Two months into the full time role, she wishes to take an extended holiday. How much leave does she have available to her?
I can tell you that her annual leave entitlement is much more than the 80 hours showing on the payslip. Her untaken annual leave entitlement is four weeks. The rate of pay for that leave is calculated at the time it is taken, based on her ordinary rate of pay at the start of the leave. She is entitled to take four weeks of annual leave at the rate she is paid for her 40 hour per week arrangement because she becomes entitled to annual leave by weeks, and rate of pay is calculated at the time of the holiday.
How does this play out in reverse? An employee has worked 40 hours per week over five days for 12 months and becomes entitled to four weeks annual leave. Then, in order to take up a course of study, he negotiates a part time arrangement whereby he works 20 hours per week over three days. In the lead up to exams, he wants to take annual leave to assist with his preparation. This employee’s leave is paid based on his average earnings in the preceding 12 month period – so if the leave is taken at the start of the part-time period, the rate of pay will be fairly close to his full time rate of pay. However, if it is taken say, 11 months into the part time period, it will be very close to his 20 hour rate of pay.
How then should an employer treat an employee who takes one day of annual leave? My suggestion is that it is incorrect to reduce the annual leave balance by a day or a number of hours. Rather the annual leave balance should be reduced by the portion of a week that the day represents for that employee – for a 5 day a week employee, that is 1/5th of a week, if the employee usually works six days a week, it is 1/6th. For a 3 day a week employee it is 1/3rd of a week. And the pay for that day should be “based on” – ie the same proportion of – the weekly pay or average pay for the week at the day on which the leave is taken.
For both employees and employers – beware the impact of moving from part to full time or vice versa. You may be able to prevent disappointments down the track by having a clear conversation at the time of the change.
