Leave it for now: Holidays Act changes are still two years away

Significant changes to employees’ leave entitlements have been enacted by Parliament this week – but there’s no need to panic yet; the changes will only take effect two years after the Employment Leave Act (Act) receives Royal Assent.

While the new Act is unlikely to significantly affect workplaces where workers are salaried and work regular hours, the changes for workplaces where irregular and varied hours are worked (eg, in hospitality, health and retail, and where overtime or shiftwork is a feature) are likely to be enormous.

The lead-in time is, perhaps, a little disappointing, given how long New Zealand has been waiting for holidays law reform. However, the new law involves significant changes to systems of leave accruals and payments and, therefore, payroll providers will need time to update their product to be compliant with the new law.

The goal of the changes is to simplify the leave regime in New Zealand and make it easier for both employers and employees to understand their entitlements and be paid for them correctly.  We will need to wait and see whether the new law solves all of the problems employers have experienced, but some things will certainly be clearer from the outset.

The principal changes that have been enacted include:

Payment for leave

The new law simplifies payments for leave. It removes the various different calculations and instead uses the same hourly leave pay rate for all types of leave.

The hourly leave pay rate will be based on the employee’s hourly rate or the employee’s annual salary and their contracted work hours. It will include fixed allowances, but will not include bonuses, commissions and variable allowances.

Impact:

Removing the need to make multiple calculations, or different calculations across different types of leave, should make it easier for employers to pay in accordance with the law and for employees to understand their pay.

Annual leave

Annual leave will accrue from the first day of employment in direct proportion to the number of contracted hours of work.

The rate of accrual will be 0.0769 hours (4/52) per contracted hour. For most full-time workers, this will provide four weeks’ leave per year.

Employees will be able to take their annual leave in hours, rather than days.

Any extra hours worked by a waged worker on top of their contracted hours will not accrue annual leave. However, a “leave compensation payment” will be made in that pay period at the rate of 12.5% of the worker’s ordinary hourly rate for the hours worked.

Any extra hours worked by a salaried worker will not attract extra pay where the employment agreement specifies that the salary will compensate the worker for some additional hours.

The current special rules for people recently returned from parental leave will be removed, meaning that their annual leave pay will be calculated in the same way as other employees.

Each year employers and employees can agree to “cash up” up to 25% of an employee’s outstanding leave balance.

Impact:

The changes mean that employees will be entitled to take annual leave during their first year of employment, rather than having to wait until they had completed 12 months’ service. The disadvantage currently experienced by parental leavers will be removed.

The changes should also be simpler for employers, who will no longer need to identify what an “ordinary working week” looks like for employees.

Finally, the changes give both parties to the employment relationship more control over payment in lieu of accrued leave balances.

Sick leave

Sick leave will accrue from the first day of employment in direct proportion to the contracted hours of work.

The rate of accrual will be 0.0385 hours (2/52) per contracted hour. For most full-time workers this will provide the equivalent of 10 days’ leave per year.

There will be a cap of 160 hours (again, the equivalent of 20 full-time days). Once an employee has accrued 160 hours’ leave, no further leave will accrue until the employee has used some of their entitlement.

Employees will be able to take sick leave in hours rather than days.

Impact:

The changes to the sick leave regime should remove the perceived unfairness that currently exists for part-time employees who currently receive the same number of days of leave regardless of the number of days they usually work in a week.

Bereavement leave and family violence leave

All employees will be able to access both types of leave from the beginning of their employment.

The entitlements will still be a specified number of days, but employees will be able to take part days of leave.

Public holidays and alternative holidays

A new test will be introduced to clarify whether a public holiday would be an “otherwise working day” for an employee. The test will be based on whether the worker has worked 50% or more of the relevant day (eg, Mondays if the holiday falls on a Monday) in the previous 13 weeks. The outcome of that test will identify what the employee is entitled to be paid for public holiday.

Alternative holidays will be accrued at a rate of one hour for every hour that is worked on a public holiday that is otherwise a working day.

Casual workers

Currently employees whose work is intermittent (casual) or irregular such that they don’t have an ordinary working week can receive “pay as you go” holiday pay at 8% of gross earnings in the pay period.

Under the new law, all employees who have no contracted hours will receive a leave compensation payment of 12.5% of their ordinary hourly wage in every pay period. This is instead of accruing annual leave and sick leave.

The ‘bump up’ in rate reflects the practical reality that most casual employees never receive paid sick leave because they don’t have ordinary working days.

Pay statements/pay slips

Payslips will become compulsory.

If you have any questions about the proposed changes, our Employment Team is here to help.