Pay-as-you-go holiday pay - Don't pay again later
By Russell Drake
Employers sometimes form employment agreements with their employees which despite the employer’s intentions and even with the employee’s agreement, may be thwarted by legal requirements or prohibitions that they become aware of only too late.
An example of this arose in a recent case where the employer paid an employee his holiday pay on a pay-as-you-go basis. This is where 8% is loaded onto each pay instead of paying holiday pay after the employee becomes entitled to it after 12 months’ continuous service.
In Cross v D Bell Distributors Limited, a truck driver was employed for 15 months, during which period he was paid his holiday pay in his fortnightly pay. He ended his employment and wanted to be paid his holiday pay, but the employer contended that he was not entitled to receive it, given that it had already been paid.
The Holidays Act allows pay-as-you-go arrangements in clearly defined circumstances of certain types of fixed terms agreements, or casual, or irregular employment and with the employee’s agreement. Despite the employer’s protestations that it was justified, it was clear that the employee’s circumstances were outside those where regular payment of holiday pay with his fortnightly pay would have been permissible.
The Act provides that even when holiday pay has been paid each pay day, if the arrangement is not within the permitted circumstances and continues for 12 months or more, then the employee is entitled to what would be their normal holiday pay entitlement after 12 months’ employment.
There are circumstances where an employee may continue to be paid holiday pay on a pay-as-you-go basis beyond 12 months, or where holiday pay already paid under such an arrangement will be deducted from an employee’s entitlement after 12 months. Unfortunately for the employer this was not one of those situations.
In summary, the employer was obliged to pay holiday pay for the entire period of employment even though they thought they had already done so.
The employer was liable for some $8,000 of holiday pay, interest and a penalty of $3,000 for breaching the Holidays Act. This double-dipping might seem unfair, but the Authority member noted that the Act intentionally creates a significant financial disincentive to using pay-as-you-go outside the strictly limited categories provided by the Act.
The moral of this story is that in addition to the well-known “minimum code” of entitlements, such as sick leave or holidays that an employee cannot legally agree to surrender, there are other provisions that strictly control what may be agreed in an employment agreement.
To protect your business against this sort of situation:
- Ensure that your employment agreements are drafted in a legally robust way;
- Ensure that pay-as-you-go holiday pay is applicable to the employee’s circumstances.
If you require any assistance with ensuring that your employment agreements are compliant with current law, or you wish to enquire about fixed-term contracts, please feel free to contact us.
The Employer File is written by Russell Drake, of Russell Drake Consulting Ltd., Specialist Employment Relations Consultants who act exclusively for Employers –see www.russelldrakeconsulting.co.nz or phone 07-838 0018.