Payments for annual leave during a close down.

The Employment Court has ruled that an employer has no choice, but to pay employees who have been employed for less than 12 months, 8% of their gross earnings at the start of a closedown.

The employee’s service is then treated as starting (for annual leave purposes) on the date the closedown commences, so they are not entitled to any leave for a further 12 months.  The Court has said that employers and employees can agree for leave to be taken in advance. 

Many employers have a closedown period, for example, for seasonal work or over the Christmas holiday period.  The Holidays Act provides that if an employee is not entitled to annual holidays i.e. they have not worked for the full 12 months before the closedown commences, then they must be paid 8% of their gross earnings at the start of the closedown.

If any employee does not have enough leave, then if the employer agrees, they can take leave in advance for the balance of the period, or they will be on leave without pay.

The group of employees who will be most affected by this ruling are those who have earned more leave before the closedown commences than they need for the closedown, but are not yet entitled to that leave because they have not worked for 12 months. 

For example, if a closedown is to last one week, but the employee has earned 3½ weeks of annual leave because they have been employed for almost 12 months, then the employer has no choice under the Act, but to pay them 8% of their gross earnings at the start of the closedown period. They then treat their service for annual leave as having commenced on the date the closedown period commences. The employee will be paid out for the full 3½ weeks of annual leave, even though they are only taking one week of annual leave, and they won’t be entitled to any more annual leave for a further 12 months.

This unintended consequence results in the employee being paid for all of their leave, but missing out on the ability to actually take leave without the employer’s consent.   That leave, when taken, will then be without pay or in advance of the next year’s entitlement, because the employer has already paid for the leave in the 8% they have to pay out at the start of the closedown.

An employer that allows employees to keep leave up their sleeve and to only pay them for the leave used in the closedown is not complying with the Holidays Act.  As the employer in this case found out, the Labour Inspector will take them to Court no matter that they were complying with employees’ wishes and paying (over time) all of the entitlements the employees had at the time the employees wanted to receive them.

However, as the Court has pointed out the Act provides no alternative in this situation.

Alan Knowsley

Employment Lawyer Wellington