A cautionary tale: calculating annual leave under the Holidays Act 2003

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A 2020 Employment Court decision contains important lessons about holiday pay for both employers and employees.

Some employers may find they need a holiday themselves after trying to work out what they are obliged to pay their employees under the Holidays Act 2003. Complex and confusing, the current Act has historically left thousands of workers short-changed for annual leave. Consequently, some government departments and employers have received large and unexpected bills for underpayment of annual leave provisions. While successive governments have signaled their intention to overhaul the Act, it hasn’t happened yet.

The 2020 Employment Court decision in Metropolitan Glass & Glazing Ltd v Labour Inspector, Ministry of Business and Innovation and Employment contains some important lessons for employers and employees alike, even though the Court’s decision is in part, subject to an appeal.

The case

The Labour Inspectorate and Metropolitan Glass jointly filed proceedings in the Employment Court after being unable to agree on payments to be included in holiday pay calculations. They sought answers to two questions:

  1. Whether payments made by Metropolitan Glass under a discretionary bonus scheme were part of “gross earnings” and should be included for the purposes of calculating holiday pay in accordance with the Act, and
  2. How annual holidays should be treated during a business’s customary closedown period and whether it was appropriate for Metropolitan Glass to allow certain staff to take leave in advance, as opposed to paying them eight per cent of their gross earnings at the closedown date.

Bonus scheme payments

Metropolitan Glass maintained that its bonus scheme did not form part of the employment agreement, was discretionary in nature and therefore did not constitute gross earnings and could be excluded from any holiday pay calculation.

The Court disagreed, concluding that an employment agreement can be evidenced from “components in more than one place”. The Court found that the bonus scheme was captured under the definition of gross payments in the Act and that the bonus scheme payments should be included when calculating holiday pay.

This decision is now under appeal.

Treatment of annual holidays

The Court in Metropolitan Glass decided that employees who are not entitled to annual holidays at the commencement of a closedown period (i.e. if an employee has not completed 12 months of continuous employment or has used up all of their leave entitlement at the commencement of the closedown):

  • must be paid eight per cent of their gross earnings since the employee commenced employment with the employer, or since the employee last became entitled to annual holidays, less any other relevant amounts paid to the employee, and
  • that their anniversary date (for the purposes of calculating annual leave) must be shifted.

Prior to this decision, the general understanding was that it was open to the employer and employee to agree not to pay eight per cent gross earnings and instead, to treat some or all of the closedown period as annual leave in advance, or unpaid leave, and for the employee to retain his/her anniversary date.

The Court has clarified that this general understanding is incorrect – any agreement between the parties to treat some or all of the closedown period as annual leave in advance or unpaid leave can only be in addition to the payment of eight per cent.

This aspect of the Metropolitan Glass decision is not under appeal and represents the law.

Calculating holiday pay during a business shutdown can be confusing – if you are in doubt, we recommend seeking legal advice.

How can we help?

WRMK Lawyers has Northland’s largest team of employment law specialists. If you need some help or guidance, please give one of us a call or contact your usual WRMK lawyer for advice.

WRMK Lawyers takes all reasonable care to make sure that the information in this article is up-to-date and accurate at today’s date. It is necessarily general information and not intended as legal advice to be relied upon.

Our thanks to David Grindle for writing this article, which was first published in the Northern Advocate on 20 January 2021.

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