1.1 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.
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 excluding overtime hours,
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.
Where there is a dispute or the parties cannot or do not agree 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 are 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 as an Appendix to this document. 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, they 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 be need to 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 of average weekly earnings (for example an employee could have a notional average hourly rate and ordinary hourly rate).
All of the following calculations count back from the end of the last pay period before the calculation is made.[2]
Ordinary weekly pay will be the greater of:
- the amount of pay that the employee receives
under his or her employment agreement for an ordinary working
week[3] (at the beginning of the annual leave);or
- where (a) can not be determined, then based on
the following calculation:
(Gross earnings for previous 4 weeks pay periods[4] - Gross earnings (conditional))/4
- if a special rate of ordinary weekly pay for the purpose
of calculating annual leave pay is specified in an employment agreement and is
equal to or greater than the amount under (a) or (b) then that amount (otherwise
just use (a) or (b) above).
Average weekly earnings are:
Gross earnings in previous 12 months pay periods/52
Where the entitlement to annual leave has been accrued in hours or days then the calculations above will need to be adjusted to reflect that. The key principle is that any method of calculation is based on average weekly earnings or ordinary weekly pay. This divisor must be consistent with the method of accrual.
For example if the annual leave accrual is 4/52 of ordinary hours worked then the following calculations should apply:
Ordinary hourly pay will be the greater of:
- the amount of pay that the employee receives under his or
her employment agreement for an ordinary hour - including all of the
relevant types of payment (at the beginning of the annual leave);or
- were (a) can not be determined, then based on the
following calculation:
(Gross earnings in previous 4 weeks pay periods - gross earnings (conditional))/Total ordinary hours in the previous 4 weeks pay periods
- if a special rate of ordinary hourly pay for the purpose
of calculating annual leave pay is specified in an employment agreement then
that amount can be used if it would be equal to or greater than the amount under
(a) or (b) (otherwise just use (a) or (b) above).
Average hourly earnings are calculated as follows:
Gross earnings in previous 12 months pay periods/Total ordinary hours in the previous 12 months pay periods
Or if the annual leave accrual is 4/52 of 3 days a week then the following calculations would apply:
Ordinary daily pay will be the greater of:
- the amount of pay that the employee receives under his or
her employment agreement for an ordinary day (at the beginning of the annual
leave);or
- where (a) can not be determined, then based on the
following calculation:
(Gross earnings in previous 4 weeks pay periods - gross earnings (conditional))/12 (i.e.3 days per week * 4)
- if a special rate of ordinary daily pay for the purpose
of calculating annual leave pay is specified in an employment agreement than
that amount can be used if it would be equal to or greater than (a) or (b)
(otherwise just use (a) or (b) above).
Average daily earnings are calculated as follows:
Gross earnings in previous 12 months pay periods/156 (i.e. 3 days per week * 52 weeks per year)
Detailed examples are contained in Appendix 1.
