7 Things You Need to Know About Annual Leave in NZ

Time off from work is essential for helping your employees relax and come back to work feeling refreshed. Heading away on annual leave can offer your staff some much needed time to unwind and destress, which can significantly improve an individual’s mental health. Additionally, people are often more productive and motivated after returning from leave. That is why making sure your employees actually take their annual holiday entitlements is vital to the health of your business.

While many employers want to do the right thing regarding leave, they are often unsure how annual leave is accrued or the rules around staff taking it. Here are seven things you need to know about annual leave in NZ.

Note: this advice is based on a permanent employee and does not cover leave for fixed-term or casual employees

What You Need to Know About How Annual Leave Works in NZ

1.       Amount of Leave

The legally mandated annual leave entitlement each NZ employee gets per year is a minimum of four weeks, accrued at a rate of 8% of their gross earnings. (Where an employees contract provides for more than four weeks per annum, the higher amount applies.) At any particular time, a permanent employee is owed two separate amounts:

• Holiday Pay (sometimes known as Accrued Annual Leave)
  This is the annual leave an employee accrues at a rate of 8% of their gross earnings from their service anniversary (or start date) to their next anniversary.

• Annual Leave due (sometimes known as Entitled Annual Leave)
  This is holiday pay converted to an annual leave equivalent in hours, days or weeks by looking at the employees working pattern at an individual’s service anniversary. 

2.       When can Leave be taken

Technically an employee is not entitled to take their annual leave unless it is Annual Leave Due, meaning that it has converted from Holiday Pay ($) to Annual Leave Due (weeks).  However, many employers will allow their employees to take any annual leave accrued before it becomes due – this is also a beneficial business practice as it reduces the leave liability of the employee.

 Should an employee be permitted to take leave before it is due, this is ‘drawn down’ from the Holiday Pay ($) amount and is often shown as a negative Annual Leave Due (weeks) figure.  When the anniversary date occurs, the Holiday Pay is converted to Annual Leave Due (weeks), and then the advance leave is deducted from the employees Annual Leave Due (weeks) balance.

 Both parties should agree on when leave should be taken.  If it cannot be agreed, the employer may direct the employee to take leave with reasonable notice.

3.       Annual Leave is separate from other leave entitlements

Annual leave entitlements are in addition to other leave entitlements - public holidays, sick leave, bereavement leave, and family violence leave.  There are different rules for each leave type.

4.       You Can Exchange Some Leave for Cash

An employee may request up to one week’s leave per service anniversary be paid out. Employers must legally consider such requests and may grant or decline the request.  However, they cannot ask employees to cash out leave entitlements.     

5.       Employees May Take Two Weeks Off in a Row

Did you know that you are obligated to allow your staff to take at least two weeks of their annual holiday entitlement consecutively? This ensures that people take enough time off at once to take a break and switch off from work fully.

6.       Annual Leave Does Not Expire

Annual leave does not expire. However, as an employer, you can limit how much of their annual leave entitlement employees are allowed to carry over each year. The general idea is that an employee will take all of their leave in the year of entitlement. . This rule is designed to encourage staff to take their leave rather than letting it build up. After all, if employees do not take regular time away from work, it can impact their productivity and the quality of their work.   Large balances are also a liability for a business and can be a considerable cost to pay out all at once when an employee resigns.

7.       Calculating Annual Leave

When an employee takes annual leave, the leave rate may be higher than the normal rate.  This is generally due to the employee working different hours from week to week or if the employee receives additional gross earnings such as commission or bonus payments.

 There are three options for the rate at which annual leave is paid (Ordinary Weekly Pay, Average Weekly Pay or Normal Daily Pay), and the employer must pay at the highest of the possible rates. 

Get Help with Annual Leave Calculations

Stop searching for a magical annual leave calculator – the reality is that each situation is slightly different, and you cannot afford to get it wrong.

Get help by outsourcing your payroll to Core Payroll. Save all the time you spend on staff enquiries about their leave and their pay and get hours of your week back! Our expert advisors can manage your staff’s annual leave, public holiday pay, IRD, KiwiSaver, and more.