3. Principles 1 - Definitions and Annual Leave
Note: This does not cover the exceptions and details e.g. close downs, changes to anniversary date, what constitutes gross earnings, the taking of annual leave in advance, the effect of taking leave without pay, payment when employment ends, ACC, Parental Leave, fixed term contracts etc. These are all covered in the detailed section of the specification.
After the end of each complete 12 months of continuous employment an employee is entitled to not less than 4 weeks paid annual leave. The way that this entitlement is to be met should be agreed between the employer and employee. Any agreement must genuinely reflect the right to receive 4 weeks annual leave per year, based on the employee's working pattern.
Where entitlement to annual leave is clear then there is no requirement for an agreement to be made. However, whenever an employee's work patterns change then an agreement about the transition and conversion of entitlement will need to be reached.
The employer and employee should ideally agree to:
- what genuinely constitutes a working week for the purpose
of the employee's entitlement to annual leave - this can be provided
for in weeks, days or hours (if this is the most convenient way for the
parties); or
- where annual leave is to be
accrued[1] throughout the
entitlement year, what the accrual will be based on (e.g. ordinary hours
including regular overtime hours or ordinary hours excluding regular overtime
hours or fixed number of days per week).
When work patterns change, any agreement should ideally change to reflect the new genuine working week for the employee. This agreement can include how any previously accrued entitlements will be treated e.g. the agreement could be to still provide 4 full weeks annual leave, based on the new working pattern.
If there is a dispute, the Labour Inspector will interpret the agreement between the parties. Where the parties have not agreed on how an employee's annual leave entitlement is to be met, a Labour Inspector is able to determine the matter for the parties. In making such a determination the Labour Inspector will use an accrual method based on 4/52 of time worked, if there is not a clear working week or working pattern.
This means that how annual leave is implemented in your software will depend on the nature of the agreements that the users of your software will have entered into.
Some examples of valid agreements are provided in Appendix 1. They do not cover all of the possible combinations but should illustrate the key points in the range of ways that annual leave provisions can genuinely be agreed upon. The examples provided are:
Example 1: Entitlement is recorded in hours and based on 4/52 of the ordinary hours worked in the year when the entitlement arose - no change to method of calculation when work patterns changed.
Example 2: Parties agree that the annual leave entitlement will be 4 weeks based on the work patterns at the time the leave is taken - no change to method of calculation when work patterns changed.
Example 3: Entitlement is recorded in days and based on 4/52 of an agreed working week expressed in days - change to method of entitlement including conversion of accrued entitlement when work patterns changed.
When the employee takes annual leave, the employer will need to identify the amount of leave being taken in a manner that is consistent with the agreement on how the entitlement will be met.
The entitlement balance will then need to be reduced by a corresponding amount.
Annual leave pay will need to be calculated based on:
- the amount of leave being taken (in weeks or part weeks);
times
- the greater of:
- ordinary weekly pay; or
- average weekly earnings in the 12 months prior to the
holiday.
Where holidays are accrued, the payment should be made to the employee in the unit of accrual, (for example if the employee accrued in hours they should be paid in hours) but always based on the employee's ordinary weekly pay or average weekly earnings (for example an employee could have a notional average hourly rate and ordinary hourly rate).
Where the entitlement to annual leave has been accrued in hours or days then the calculations will need to be adjusted to reflect that. The key principle is that any method of calculation is based on average weekly earnings and ordinary weekly pay. It is also strongly recommended that the divisor for the purposes of calculating average or ordinary weekly pay be consistent with the method of accrual. (For example, if your accrual is based on ordinary hours then ordinary hours should be used in the divisor).
More detail on the calculation of ordinary weekly pay and average weekly earnings is in the Definitions and in Appendix 1.
