In the minds of some employers, 8% is a magic figure.

The thinking goes that if you pay 8% of an employee’s compensation with their wages each week, then you don’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.

It seems to be a magic solution for avoiding the administrative hassle of keeping tabs on annual holidays. Unfortunately, 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.

So where does the 8% figure come from?

WHAT THE HOLIDAYS ACT SAYS

The Holidays Act 2003 decrees that each employee must get at least four weeks of holidays each year, if they have worked for at least 12 months for the same employer.

Four weeks of holidays is 8% of the 52 weeks that every year contains. So every employee expects that around 8% of their salary each year will be payment for holidays that they have taken.

It may not work out to be exactly 8% of their pay, though. That is because the amount to be paid for a holiday is calculated at the time the employee takes their holiday in the following way:

(Last 12 months gross pay prior to taking holiday / 52 weeks) / number of working days in a week for that employee = Average daily pay to be paid for each day of holiday

Sometimes employees get bonuses or one-off payments that inflate their earnings over the previous 52 weeks before going on holiday. That means the actual amount paid for holidays may fluctuate.

But there are two types of employees for whom this calculation cannot be done because they are never in a job long enough to either (1) accrue holidays over 12 months or (2) need to take a holiday. These are employees

• with irregular hours, or
• who are on a fixed term of less than 12 months.

In these cases, employees can be reimbursed for their holiday pay with their wages at the rate of 8% of their gross income – which is an approximation of the proportion of holiday pay that other employees receive.

Let’s look at these two categories of employees to understand why this special rule applies just to them.

Irregular hours

An employee will work irregular hours if they are in a temporary role or in a casual position. They may be called up at a moment’s notice and have no expectation of ongoing work.

This means that there is no guarantee that they will work the 12 months necessary to begin to accrue annual holidays and they will not generally need a break from work because their role is so intermittent. The normal rules around accruing and taking holidays just won’t work for them. So the law says they can receive their holiday pay with their wages at the rate of 8%.

Fixed term of less than 12 months

Again, an employee who is on a fixed term of less than 12 months will not work for the same employer for long enough to meet the minimum of 12 months needed to begin accruing annual holidays. Hence, the law says that they do not have to wait until the end of their fixed term to have the benefit of that pay. It is up to the parties, but the employer has the discretion in this instance to pay an additional 8% of their wages with each pay packet to account for holidays that they will never be able to take while working for that employer.

However, note that if the employee works for longer than 12 months, then this rule will not apply and the employer cannot carry on paying the employee the 8% in addition to their pay. Henceforth, they will have to accrue holidays in the normal way.

WHAT HAPPENS IF I PAY 8% TO OTHER EMPLOYEES?

As an employer, you can get into hot water if you pay an employee 8% of their income in each pay period when they are not one of the two categories of employees above.

In such cases, the law may not recognise that you have met the employee’s minimum statutory entitlements for a paid holiday. They have received the pay perhaps, but 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. For an example of a case where an employer was ordered to reimburse their employee for holiday pay they already thought had been paid, see the determination of the Employment Relations Authority in Crookes v Phoenix Rose Ltd.

CONCLUSION

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. 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.