Advice to employers on Holiday Pay issues

The problems with holiday pay calculations in Government departments are getting a lot of attention and it is being said the problems could also affect many businesses.

If you are an employer or a payroll operator – don’t panic.

I think the Government has a responsibility to urgently address this and advise all employers and employees how to use the current Act correctly, or fix then Act so it can be used correctly.

If you believe you are paying holiday pay fairly my advice is to continue doing as you are until official clarification is made. So wait and see what comes out of this.

If employees work regular hours over a holiday pay year and earn regular amounts then there shouldn’t be any problem if you have complied with the Act.

The holiday pay rate is the greater of the employee’s current pay rate or their last 12 month average rate. This usually works out fine.

If employees work regular hours over a holiday pay year but earn irregular amounts like overtime for a part of the year or are paid a bonus should also be ok, although holiday pay rates can vary over the course of the year.

Holiday pay 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 Act 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.

If employees take holidays after a relatively low paid 4 weeks they should be paid at their 12 month average which should be ok.

There is another way holidays can be paid, at an agreed rate (agreed between employer and employee).

But there’s also a  bigger problem with how to calculate how much holiday to give people who work variable hours.

People who work regular hours are given four weeks (or more) annual leave. That’s straight forward.

But people who have changed their regular work pattern at some stage through the year need to be dealt with more carefully.

Again those employees working continuously variable hours and days are the biggest headache. Some employees ignore the Act and calculate a holiday pay rate based on earnings. This is probably reasonably fair but non-compliant with the law.

It gets trickier working out how to calculate what 4 weeks holiday equates to. If the employee took all their 4 weeks at the end of each year in one block it isn’t too difficult.

But if they taken a day or two every now and then it can get horrendously difficult.

If the work 4 hours some weeks and 40 hours other weeks and they want to take a few days holiday how is that calculated easily? Many employees struggle with this. If you know a simple solution that complies with the Act please pass it on.

I’ve read the Holiday Pay Act extensively and believe it is fundamentally flawed with regards employees who work irregular hours.

The current Act makes it very difficult for many employees to comply with the Act and pay their employees for their holidays fairly.

It is the Government’s responsibility to provide practical advice on how to deal with this, and if it can’t be done properly with the current law then the Holiday Pay act should be changed.

Holidays Act 2003: