Pay as you go holiday pay

Normally, holiday pay can only be paid to an employee in New Zealand if they take annual leave, cash in annual leave (a maximum of one week per year may be cashed in), or on termination of employment.

There is an exception, however, for holiday pay to be paid on a ‘pay as you go’ basis if the employee’s employment will last less than a year or if they are a casual employee whose work is so intermittent, eg on a ‘as required’ basis, that it’s impractical to work out whether the employee is on annual leave or simply in between periods of engagement.

Holidays Act 2003 requirements

The Holidays Act 2003 is clear about when an employer may pay holiday pay with the employee’s pay. The circumstances in which this may occur are limited to where:

  • The employee is employed in accordance with section 66 of the Employment Relations Act 2000 on a fixed term agreement (ie an agreement which is to end on a specified date or event) for less than 12 months; or
  • Work is so irregular or intermittent that it is impracticable for the employer to provide the employee with an annual leave entitlement.

In these situations, holiday pay may only be included in the employee’s ordinary pay if:

  • The employee agrees in their employment agreement;
  • The annual holiday pay is an identifiable component of the employee’s pay; and

Annual holiday pay is paid at a rate no less than 8% of the employee’s gross earnings.

If an employer incorrectly pays holiday pay with ordinary pay, and the employee’s employment has continued for 12 months or more, then despite those payments the employee becomes entitled to 4 weeks’ paid annual leave under section 16 of the Act.

In other words, despite having received holiday pay during their first year of employment, the employee is still entitled to 4 weeks’ paid holiday. There have been Employment Relations Authority determinations where this has held to have been the case.

Case example: Pay slips

The case of Reid v Barmuda Ltd (2009) shows the need to clearly indicate “pay as you go” holiday pay on the employee’s payslip.

This claim for holiday pay was brought by Reid, a Labour Inspector, on behalf of Moore, a former employee of the company.

Moore had been employed by the company, first on a casual basis, then on a fixed-term employment agreement. The employment agreement provided for “pay as you go” holiday pay. The employer’s payroll system recorded the holiday pay separately from Moore’s wages, however the payslips given to him by the employer did not.

The Employment Relations Authority determined that Moore was first employed on a casual basis then on a fixed-term agreement of less than 12 months, so he could be paid his holiday pay on a “pay as you go” basis. The employment agreement allowed this, and the holiday pay was paid at the appropriate rate.

However, the wages and the holiday pay component should have been separated on Moore’s payslips.

The employer was ordered to pay Moore 6% holiday pay (the rate for holiday pay at the time) for the period from 1 April 2004 to 15 April 2004 (the period during Moore’s employment where the Holidays Act 2003 was in force).

Case example: Extending a fixed-term agreement

In Williamson v Victoria Institute (NZ) Ltd (2010), the employee Williamson was employed as an ESOL teacher on a fixed-term employment agreement.

The fixed-term was for three months and the purported reason was "the seasonal and irregular nature of student enrolments".

The pay rate was $25 per hour including $2 as 'pay as you go' holiday pay.

Williamson's employment continued on the same pay rate after the fixed-term expired, at which point the employer offered him two choices - either be employed at the same rate (including holiday pay) for another fixed-term, or on a permanent basis at a lower pay rate of $20 per hour excluding holiday pay.

Rather than accepting either, Williamson requested permanent employment at $25 per hour and challenged the lawfulness of both the fixed-term agreement and the inclusion of holiday pay in the pay rate. The employer's response was to make Williamson redundant on the basis of a lack of student enrolments.

The Employment Relations Authority determined that it was reasonable for Williamson to view the redundancy as merely a pretext for dismissal on other grounds. Only a week before he was made redundant, Williamson had been offered ongoing employment under either a fixed-term or permanent employment agreement, with different pay rates.

It had been open to the company to negotiate a pay rate it could afford at the beginning, but the pay rate was not something that could be controlled by having a succession of fixed-term agreements.

The redundancy was not genuine and Williamson's dismissal was unjustified. The Authority ordered the company to reinstate Williamson under the same terms of employment, but permanent not fixed-term.

He was entitled to lost wages and $4,000 compensation for the unjustified dismissal, plus he would be entitled to four weeks' annual leave from the anniversary of his original employment agreement.

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