The 8% Holiday Pay Myth
Pay-as-you-go Leave – when is it okay?
This morning I was working with a client who had all of their employees receiving their holiday-pay in the same payment as their weekly wage, the thinking being that if they paid an additional 8% of their employee’s wages each week, then they wouldn’t have to bother with all the hassle of keeping a balance of that employee’s annual holidays and coming to arrangements about when those holidays should be taken.
On the surface is appears a simple and effective solution for avoiding the administrative hassle of keeping tabs on annual leave and entitlement, however, for the majority of employment relationships, this is no such solution, because it fails to appreciate what holiday pay is really about under New Zealand law.
The purpose of holiday pay is not to increase the employee’s pay – it is about giving the employee a paid holiday.
Holiday pay is the means to this greater end of giving employees the ability to afford taking a break from their work and to come back to their jobs refreshed.
In the minds of some employers, 8% is a magic figure. The Holidays Act 2003 states that each and every employee must get at least four weeks of holidays each year (provided they have been with their employer for 12 months or more). Four weeks of holidays is 8% of the 52 weeks that every year contains, so it would seem correct to assume that around 8% of an employee’s annualised salary each year will be payment for holidays that they have taken, or are entitled to take.
Here is where it gets complicated… It may not work out to be exactly 8% of their pay.
That is because the amount to be paid for a holiday is calculated at the time the employee takes their holiday and these rates can vary depending on how irregular payments occur within the past 12 months and there can be some quirky results depending on the timing of holidays but this is how the Holiday’s Act 2003 determines it should work.
The headaches are with:
Employees whose work pattern changes significantly over the past twelve months, for example an employee changes from 40 hours a week to 20 hours a week. How to deal with this can take a bit of working out but can be done with the current Act.
Employees whose work pattern changes all the time. The Act makes it very difficult to deal with these employees because the old relatively simple 8% calculation is not supposed to be used except in fairly exception circumstances.
Employees in the continuously variable category, where ‘standard hours’ can’t be determined, should be paid at the greater their last 12 month average and their last 4 week average. This means that if they take holidays just after being paid much more than usual over the previous 4 weeks their holiday pay rate can be abnormally high – correctly according to the Act but it can be nonsensical. Some employees avoid wild fluctuations be using different calculations. In the same way, if an employee take holidays after a relatively low paid 4 weeks they should be paid at their 12 month average. They must always be paid the higher rate.
With that said, there are two types of employees that you can pay on a pay-as-you-go basis at a minimum rate of 8% of their gross earnings if:
the employee is on a genuine fixed-term agreement of less than 12 months, or
the employee works so irregularly that it’s impractical to provide them with four weeks’ annual holidays.
This is because they are never in a job long enough to either accrue holidays over 12 months or need to take a holiday, and 8% is a relatively accurate approximation of the proportion of holiday pay that other employees receive.
If you choose to pay employees on a 8% on a pay-as-you-go basis as opposed to accruing holidays for employees that are not fixed term or have irregular hours, you may find yourself in a wee bit of hot water as the law may not recognise that you have met the employee’s minimum statutory entitlements for a paid holiday.
Whilst they may have received the financial compensation, you never gave them paid time off work, which is the purpose of the holidays legislation as already described above. It is possible that in those circumstances you could be forced to reimburse their holiday pay all over again – regardless of the fact that you consider it already paid.
As an employer, don’t fall into the trap of thinking that 8% is a magic number that solves your holiday pay administration problems.
If your employees are neither irregular, nor on a fixed term of less than 12 months, do not reimburse them for holiday pay with each salary. My best advice is to keep a balance of each employee’s holidays entitlements as they accrue them, and give them a holiday at an agreed time. That way, your employees will have regular rest from their work and likely ensure they are more productive for you in the long run, while you will only have to pay them for their holidays once.
This article, and any information contained on our website is necessarily brief and general in nature, and should not be substituted for professional advice. You should always seek professional advice before taking any action in relation to the matters addressed.