Leave Entitlements and Other Payroll Questions
When pay-as-you-go provisions can be used
The Holidays Act 2003 allows “pay-as-you-go” holiday pay arrangements in two circumstances only. These are:
- employees on genuine fixed-term agreements of less than 12 months - this reflects the fact that these employees are not expected to
reach the date on which they would normally qualify for annual holidays; and
- employees with a work pattern that is intermittent or irregular (genuine casual work) - this reflects the fact that the employee's
employment pattern may mean it is not meaningful or practicable to attempt to provide them with four weeks paid annual holidays.
Employees paid on a pay-as-you-go basis are not entitled to paid time off for annual holidays.
Employees on genuine fixed term agreements
The entitlement to four weeks paid leave after 12 months' service is sometimes not the best way to deal with holidays when the employment relationship is short-term.
The Employment Relations Act 2000 allows for fixed term employment agreements, if on appointment there is a genuine reason for the fixed term and the reason for the fixed term and how the employment will end are set out in writing in the employment agreement. Examples of genuine reasons are:
“The job is to prune trees in the west block, and your job will cease when all of the trees are pruned. I estimate that this pruning job will take you and your co-workers two months from the start date.”
“This appointment is for a fixed term to cover for an employee who is taking four months' leave. The employee will return on [dd/mm/yyyy] and there will be a hand-over period of one week. As a consequence your employment will cease on [dd/mm/yyyy].”
Where such a fixed-term agreement is for less than 12 months, an employee may agree to the employer adding 8% to the gross weekly earnings in lieu of getting annual holidays or in lieu of getting an aggregated 8% at the end of the fixed term.
Any such arrangement should be included in the employment agreement, and the 8% should appear as a separate and identifiable amount on the employee's pay slip. On the completion of the fixed term, the employee will have received all pay for annual holidays. No further payment will be outstanding and no holidays are available.
If the employee is later employed on one or more further fixed term agreements of less than 12 months with the same employer, then the same arrangement can be made even when there is no break in employment, provided the two parties agree and document the arrangement.
Moving from fixed term to permanent employment with the same employer
If an employee enters into a permanent working arrangement, the payment of the additional 8% annual holiday pay in the employee's regular pay must cease.
The employee will then become entitled to four weeks annual holidays one year after the final fixed term period started. Because the employer has already paid the additional 8% annual holiday pay during the fixed term period, the pay for annual holidays is reduced by the amount of holiday pay already paid at 8% during the final period of fixed term employment.
Where the fixed term agreement is not genuine or exceeds 12 months
If an employer has incorrectly paid annual holiday pay on a pay-as-you-go basis, after 12 months' continuous employment the employee will become entitled to paid annual holidays, and any amount paid on a pay-as-you-go basis may not be deducted from the employee's annual holiday pay.
Examples of circumstances where this occurs are:
- where a fixed term agreement was not genuine
- where a fixed term agreement was for a period of greater than 12 months
Issues to consider with pay-as-you-go arrangements
Fixed-term agreements are in some cases linked to the completion of projects. In these circumstances there is a risk to the employer that the fixed term will exceed 12 months, at which time the employee becomes entitled to paid annual holidays, despite having already been paid on a pay-as-you-go basis.
Therefore, pay-as-you-go arrangements are not recommended where it is possible that the employment will last longer than 12 months.
You should seek to clarify entitlements and renegotiate the relevant employment agreement as soon as it appears likely that a fixed term arrangement will unexpectedly last more than 12 months.
Holiday pay is additional to the minimum wage and must be shown as a separate identifiable component of an employee's pay.
Please note any annual holiday pay (such as pay-as-you-go holiday pay) is not included in the minimum wage rate and must be added on top of and paid with a regular pay.
Employees with a work pattern that is intermittent or irregular (genuine casual work)
Many employees who are described as “casual” are part-time employees whose future employment pattern is actually clear -
for example, supermarket or hospitality employees whose work pattern is established on a fortnightly roster.
These employees are entitled to four weeks leave.
For a minority of employees, however, this clarity is not the case.
Generally, these are employees whose employment is triggered by an event that cannot be accurately anticipated, or whose work pattern can be described as so irregular or intermittent that the concept of four weeks away from work is difficult to apply. In such cases, an arrangement can be agreed to add to their pay 8% of the employee's gross earnings as annual holiday pay.
For these employees, the arrangement must be by genuine agreement and be included in the employment agreement, and the 8% annual holiday pay should appear as a separate and identifiable amount on the employee's pay slip.
At the end of the employment relationship, no additional pay for annual holidays is due.
If an employee agrees to enter into such an arrangement, the employer would be wise to keep it under review to see whether a regular cycle of work has developed.
If this occurs, the employer and employee should enter into a new employment agreement that provides for annual holidays to accrue, and that removes the 8% payment.
Examples of genuinely irregular or intermittent employment
The Holidays Act 2003 contains no reference to “casual work” because the term is colloquially applied to so many types of employment arrangements.
Instead, the Act refers to intermittent or irregular employment.
Here are some examples of intermittent or irregular work for the purposes of the Holidays Act:
- a retired employee who is called back in emergencies to cover for sickness
- specialist tradesperson who is employed only when a particular process (such as repairing a broken machine) is required.