Jennifer Mills, Director and Isabella Yu, Intern at Jennifer Mills & Associates, provide an update into the overhaul of the Holidays Act 2003, with changes being expected to be introduced in early 2022.
On 23 February 2021, the Minister for Workplace Relations and Safety, Hon Michael Wood, announced that the Government accepted all of the Holidays Act Taskforce’s recommended changes outlined in its report dated October 2019. The Government expects to introduce legislation in 2022.
As you may recall, this Taskforce, chaired by Law professor Gordon Anderson, was set up in 2018 to suggest improvements to the Holidays Act, following a joint request from unions and employers.
Collectively, the Taskforce made 22 recommendations, and the foreword to the report states that the proposals deliver “the much-needed clarity around holidays, and other leave entitlements and pay, that employers and employees have sought for many years.” In addition to providing clarity, the Taskforce also proposed increased access to some leave entitlements.
In this article, we outline a number of key recommendations proposed by the Taskforce in its report, and what we can expect to see in practice.
The Holiday Act 2003 has received heavy criticism from employers, employees, and others, for being overly complex, making it challenging to apply in practice. The Government has noted a high level of non-compliance with the Act.
The Taskforce’s aim was to make recommendations that would provide clarity and certainty to the 2003 Act. While a variety of employee working arrangements were considered, there was significant emphasis placed on two broad groups:
- For employees with clear, predictable work patterns, the Taskforce wanted to ensure that taking leave and calculating leave payments should be an easy and simple process.
- For employees with uncertainty about some or many aspects of their working arrangements (for example, unpredictable working hours and/or payment rates), the Taskforce wanted to ensure that there are clear prescriptive rules that employees and employers can use to determine, calculate and pay leave entitlements accurately.
The Taskforce has advised that employees who work varied and unpredictable hours will receive the most benefits from these changes.
Throughout their review and while curating their recommendations, the Taskforce was guided by three principles – certainty, transparency, and practicality. These principles ensure that the recommendations clearly set out the employer’s obligations and an employee’s entitlements under the Holidays Act.
Gross Earnings Definition
Employees’ leave payments should reflect all cash payments received, except direct reimbursements
Although ‘gross earnings’ is defined in section 14 of the Holidays Act, there is currently a lack of clarity about what payments are included. There is considerable confusion as to the classification of discretionary payments, cashed-up holidays and redundancy payments. This issue commonly features in litigation regarding the Act. The recent Employment Court decision in Metropolitan Glass confirmed this lack of clarity, causing it to become a hot topic within the Employment Law sphere. The Court of Appeal hearing has since been set for mid-July 2021.
The Taskforce suggested that a clearer and simpler definition of ‘gross earnings’ should be used. The accepted definition for ‘gross earnings’ for the purposes of leave payments is an ‘employee’s leave payments should reflect all cash payments received, except direct reimbursements for costs incurred’. Adopting this simple definition would ease confusion as it would mean that all commission payment and bonuses (with the exception of direct reimbursements for costs incurred) would always be included.
In relation to ‘cashed up’ statutory annual holidays, the Taskforce recommended that it should be included in ‘gross earnings’ but should be excluded from the four or 13-week leave payment calculation. In relation to redundancy compensation, the Taskforce considered that the MetroGlass case currently before the courts on this issue could inform a future decision about whether these payments should be included or excluded.
The new definition could significantly increase the value of Holidays Act entitlements where employees have recently received any discretionary payments, cashed-up holidays, or redundancy payments. The receipt of such payment would significantly increase the employee’s gross earnings, which would significantly increase the value of that entitlement, if using a short-term method of calculation looking at gross earnings over 4 or 13 weeks.
To combat this, the Taskforce proposes that any payments that relate to a period that falls entirely within a reference period (whether the reference period is four or 13 weeks), for example, monthly or quarterly commission payments, should be included in the four- or 13-week average. Payments that relate to longer periods (such as annual bonuses) should be excluded from the four or 13-week average but included in the 52- week average.
Pay as you go
Currently, section 28 allows an employer to regularly pay annual holiday pay of 8 per cent of the employee’s gross earnings, in lieu of providing four weeks of annual holidays (commonly referred to as ‘pay-as-you-go’(PAYG)). PAYG currently only applies to employees on a fixed-term agreement for less than 12 months or works on a basis that is ‘so intermittent or irregular that it is impracticable for the employer to provide the employee with four weeks’ annual holidays.’
Under the current legislation, employers have found it difficult to identify when this clause applies. This is largely due to the confusion surrounding what an ‘intermittent or irregular’ working arrangement is, especially when an employee requests or agrees to have holiday pay included in their regular pay. There is also no statutory definition of a ‘casual’ working arrangement, even though this term is sometimes used in employment agreements.
The Taskforce recommended that the ability for employers to use PAYG for employees on fixed-term contracts of less than 12 months should be removed. They also recommended that a more detailed definition of an ‘irregular and intermittent’ work pattern should be provided for when PAYG can be used. Furthermore, employers should be required to review employees work patterns every 13 weeks to confirm their PAYG eligibility.
To help with determining whether a working pattern is ‘intermittent or irregular’, the Taskforce proposed a new four-part test and enabling parameters that support the new definition. Such a prescribed approach will mean that employers are only able to pay PAYG in limited and defined circumstances. This will ensure greater clarity with this provision, reduce the risk of employers getting it wrong, and prevent eligible employees from double-dipping.
Annual Holidays Entitlement
Although the Taskforce considered and tested various units of annual holidays, their preferred approach was to retain the existing units. This approach struck a balance between retaining certain aspects of the Act while adding the necessary level of prescription for clarity. Although some employers have sought flexible units to accommodate a range of circumstances, such an approach is likely to over complicate any application of the Act.
Ability to take annual holidays in an employee’s first 12 months
Currently, employees are entitled to four weeks paid annual holidays after 12 months of continuous employment. Employees can request annual holidays in advance, but employers have no obligation to approve this request. This means an employee may not be able to take any time off work during their first 12 months of employment.
The Taskforce recommends that employees should have the ability to take annual holidays in their first 12 months, up to the amount they would be eligible for on a pro-rata basis (i.e., no right to take more leave than entitled to). For example, an employee who had worked in a role for three months could not be unreasonably prevented from taking a week of annual holidays. Any leave that was requested above the pro-rata entitlement would be at the discretion of the employer. If an employer chooses to prohibit such an arrangement, this must be made explicit to the employees.
Such a recommendation was made because it better balances the different needs of employers and employees; and provides employees with the flexibility to take time off before they receive their entitlements. However, this change may be negligible for the many employers who already regularly provide employees with annual holidays in advance.
Parental leave override
Presently, the Parental Leave and Employment Protection Act 1987 includes an ‘override’ to the Holidays Act 2003. This override stipulates that for any annual holidays that an employee becomes entitled to within 12 months of beginning a period of parental leave, they will only be paid at the rate of their average weekly earnings over the last 12 months. For people with a parental leave period of 52 weeks, when they return to work, they will only be entitled to $0 per week for annual holidays, as their average weekly earnings during leave were $0. The override has been scrutinised for being disadvantageous, especially in respect to women, who form the vast majority of New Zealanders who taken parental leave.
The Taskforce recommended that the override be removed. While acknowledging that removing the override will increase the cost for employers, they felt this was far outweighed by the benefits for parents and primary carers of being able to take time away from work to spend time with their new child without being financially disadvantaged.
Means of calculating payment for annual holidays
The current Act prescribes two methods of calculating annual holidays payments. Payments are to be paid at either the greater of:
- Ordinary Weekly Pay (or average weekly earnings over the last 4 weeks if OWP cannot be calculated).
- Average weekly earnings over the last 12 months.
The issue at present is that employers often do not know when to use one over the other, and have trouble applying them in practice. Additionally, payroll systems are not always able to perform the calculations correctly.
The Taskforce was very supportive of simplifying the payment calculations for leave and considered numerous options. A single process was considered. However, the Taskforce ultimately decided that separate methodologies should be retained for calculating annual leave and FBAPS leave.
Ordinary Leave Pay (OLP)
OLP is a new calculation proposed by the Taskforce to replace the existing Relevant Daily Pay and Ordinary Weekly Pay calculations. OLP would include the base rate for any hours worked in the relevant period, plus pay for any scheduled overtime, allowances, incentive or commission payments that the employee would have received if they had worked for the relevant period.
The underlying principle for OLP is that it should capture all payments that the employee would have received if the employee had been at work for the period in question. This is to ensure that, while on paid leave, the employee is paid a minimum of what they would have been paid if they were at work for the relevant period.
Unfortunately, the inclusion of the phrase ‘would have received’ in the definition of OLP represents a counter-factual analysis or a discretionary analysis. This is counter to the objective of the Taskforce’s recommendations and may not have eliminated the need for human decision making. Moreover, the working appears similar to the existing wording for an employee’s ‘relevant daily pay’, which is used to calculate FBAPS. This could import the same difficulties into the new calculation of OLP. In its totality, we are unsure whether the proposed and accepted changes go far enough to provide sufficient methodology to ensure compliance.
Four weeks’ average earnings calculation
Section 8 of the Act states that annual holiday pay should be paid based on average earnings over the last four weeks if the primary definition for an employee’s ordinary weekly pay cannot be calculated.
The Taskforce considered whether the four-week average earnings calculation should be replaced by a 13-week average earnings calculation. However, testing undertaken by the Taskforce noted that removing the four-week average earnings calculation could disadvantage some employees in particular situations (e.g., employees who take leave just after a busy period of work for whom the four-week average earnings calculation is used because it is not possible to calculate OWP). The Taskforce, therefore, considers that further work would be required to determine whether a four- or 13-week averaging period would be the most appropriate period to consider alongside OLP and the 52-week average when calculating annual holiday pay.
The Taskforce identified that the closedown provisions in the current Act are confusing and have the potential to disadvantage employees. The recommendations made are intended to provide greater transparency and certainty, while simultaneously reducing negative outcomes for employees.
Employee not entitled to annual holidays
Interestingly, the Taskforce has advised that the requirement that holidays are paid out at 8 per cent and an employee’s anniversary date is reset should be removed. This will be a welcome sight for many employers and employees. However, the Taskforce has noted that it should not prevent anniversary dates from being reset by agreement.
Minimum notice period
The Taskforce noted that the minimum notice period for closedowns appeared to be disproportionate to the impact closedowns can have on employees; and there were particularly negative consequences for employees not entitled to holidays at the time of a closedown.
As such, the Taskforce suggested that there be a minimum 14-day notice period for any ‘agreed’ closedowns. This recommendation appears to address the reality for many businesses that are required to close whenever the country enters a ‘lockdown’. Prescribing a minimum notice period will significantly affect employers and affect their ability to mitigate their losses when faced with circumstances outside of their control.
In light of this change, it will be imperative for businesses to have broadly drafted business interruption provisions to best enable them to mitigate losses in the circumstances.
Other General Changes
There are also several other general changes relating to closedowns we can expect to see, which were recommended by the Taskforce.
- Employers should have an obligation to inform incoming employees, in writing, if their business has a ‘customary’ closedown, with an indication of the general time of year and length of this closedown. This should happen before the prospective employee signs the employment agreement.
- The Act should note that a new business can establish the ‘custom’ of a closedown, but they must provide a reasonable notice period to all existing employees.
- Employees should be able to take holidays in advance beyond their ‘pro-rata’ entitlement in the event of a ‘customary’ closedown, but employers may not compel employees to do this.
Entitlement start date
At present, an employee must work six months until they are entitled to family violence leave or bereavement leave. The Taskforce recognised that employees have little control over when they may need sick leave, family violence leave and bereavement leave and would benefit from having protections in place in the first six months. The current six-month waiting period may also encourage some employees to go to work sick, which raises health and safety concerns and is not in line with the intention of the Act to promote balance between work and other aspects of employees’ lives.
The Taskforce proposed that eligible employees should be entitled to one day of sick leave from their first day of employment, with an additional day per month of employment until the full entitlement of five days is reached after four months. Employees should have the ability to take sick leave, and family violence leave in units of less than a day on a proportionate basis for time and pay with a minimum amount of a quarter of a day.
Allowing employees to take entitlement in less than whole days
The Act considers sick leave and family violence leave in days and does not explicitly allow for these types of leave to be taken in units of less than a day. For example, if an employee works for part of the day and then goes homesick, this may be counted as using a whole day of sick leave.
This is potentially unfair for employees and can reduce their sick and family violence leave entitlements at a faster rate than actually used. In practice, many employers allow their employees to take sick leave in part days. However, the Taskforce saw a clear benefit in this applying to all employees as it would protect employees’ entitlements to these types of leave and provide clarity to employers and employees.
The Taskforce also considered whether employees should have the ability to take bereavement leave, alternative holidays, and public holidays in units of less than a day. However, it concluded that allowing for partial bereavement leave could create a situation where employees feel compelled to shorten their bereavement leave, while allowing for partial alternative holidays and public holidays. This would not align with the purpose of these provisions.
New test for eligibility
Under the current Act, employees are eligible for sick leave, family violence leave, and bereavement leave if:
- they have six months’ current continuous employment with the same employer, or
- they have worked for the employer for six months for:
- an average of 10 hours per week, and
- at least one hour in every week or 40 hours in every month.
As the Taskforce’s recommendations have been accepted, and as identified by the Taskforce, this definition would no longer be appropriate.
The Taskforce recommends that a new test be established for eligibility for sick leave, family violence leave, and bereavement leave. The following criteria for such a test was set out as follows:
- All employees with agreed hours and an expectation of continuous employment should be eligible for family violence leave and bereavement leave from the first day of employment.
- All employees with agreed hours and an expectation of continuous employment should be eligible for sick leave from the first day of employment. Sick leave days should build up from one day’s sick leave from their first day of employment to a full entitlement of five days after four months.
- ‘Agreed hours’ refers to the hours that the employer and employee have agreed that the employee will work, as outlined in the employment agreement. ‘Expectations of continuous employment’ refers to the expectation that the employee will not have any periods of unpaid leave that are longer than one week.
- Employees with no agreed hours or who are not expected to work continuously should be subject to an ‘hours test’ applied after 13 weeks. This test requires that the employee works on average at least 10 hours a week over the preceding 13 weeks. If the employee meets this threshold, they become eligible for sick leave, family violence leave, and bereavement leave. If they do not meet this test, it is repeated after the next 13-week cycle to see if they meet the hours requirement or have been working continuously.
- All employees should be eligible for sick leave, family violence leave, and bereavement leave after six months of continuous employment.
Extended bereavement leave
Bereavement leave is intended to help employees emotionally recover from their loss before returning to work, and to allow them to take care of matters to do with the bereavement. The Taskforce believes that eligibility for three days’ bereavement leave should be extended, to recognise that the loss of extended family could equally bereave employees, and to support cultural practice and varied family arrangements.
Therefore, the Taskforce proposes to extend the coverage of bereavement leave to include – stepfamily, in-laws, cultural family groups, and aunts/uncles/nieces/nephews. Bereavements of this type would provide for three days bereavement leave to an eligible employee.
The Government has proposed that the changes are expected to be introduced in early 2022, which will then go through the full parliamentary process. Factoring in the time it will take the prospective legislation to pass, this should allow employers plenty of time to familiarise themselves with the changes and ensure their practices have been updated.
The ability to comply with these changes will necessarily depend on the draft and final legislation. At a high level, a prescriptive process ought to be easier to comply with. While the Taskforce’s recommendations provide a greater degree of certainty on the process, there are still counter-factual calculations that must be made, which leaves room for non-compliance.
The Taskforce noted that the issues that cause non-compliance with the current Act should be considered in the design of the compliance and enforcement mechanisms to support any revised Act. This work should also consider the ability of different parties to raise concerns in relation to the Act, the appropriate enforcement mechanisms available to the different stakeholders (for example, which options are available to which parties) and the appropriate avenues for these concerns to be pursued. The Taskforce noted that the development of the appropriate compliance and enforcement mechanisms for any revised system would require further design and policy work.
Ultimately, the question remains as to whether the Taskforce’s recommendations will ultimately make the Holidays Act more workable. This is yet to be seen; however, the draft legislation will certainly provide greater clarity on this point.
Jennifer Mills is highly regarded as one of New Zealand’s leading employment and health and safety lawyers, with a wealth of experience in employment litigation, industrial relations, health and safety, complex restructures, large scale Holidays Act issues, executive remuneration and regulation, executive exits and immigration law. She regularly advises on novel and complex legal issues and is passionate about providing her clients with effective tailored solutions. She has been listed as a ‘leading individual’ in the Asia Pacific Legal 500 and is rated one of the leading employm ent lawyers in the world, by Chambers Global. Connect with Jennifer via email or LinkedIn
Isabella Yu is currently studying towards a Bachelor of Laws (Honours) and Bachelor of Commerce (majoring in Economics and International Business), at the University of Auckland. She joined Jennifer Mills and Associates in February 2020. Isabella is supporting our staff with legal research, opinions, drafting documents and is eager to assist our clients. She hopes that through her work experience she will be able to apply the skills she is learning in her studies in a practical and tangible way. Connect with Isabella via email.